NSW cracks down on construction industry – new registration and compliance regime with Building Commissioner ‘auditor-in-chief’ on residential apartments – Practical tips and how to prepare

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By Scott Laycock, Partner, Scott Higgins, Partner, Lucy Hancock, Senior Associate and Camilla Counsel, Associate

From 1 September 2020, the Building Commissioner can finally start to flex the NSW Government’s muscle by commencing audits of developers’ project documentation and work quality on building sites.  Developers with active projects across NSW who have been selected for an audit will soon receive notification letters.  Ratings tools have been developed to identify at-risk sites and operators.  The Commissioner is targeting 200 audits over the next two years focussing on all critical elements of buildings.

All building practitioners who are involved in residential building work should understand the implications of the Design and Building Practitioners Act 2020 (NSW) (DBP Act) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act).

In this article, we summarise the shortcomings which have given rise to the legislation, the major changes and what it means for the industry, in what is arguably now the most comprehensive law reform for the building industry in Australia.

The reforms in a nutshell

  • New powers for the Building Commissioner: The RAB Act, which came into effect on 1 September 2020, has empowered the Building Commissioner to intervene in residential developments during construction phase. From 1 September 2020, the Building Commissioner may issue stop work orders, rectification orders and in some cases prevent the issue of an occupation certificate where serious defects exist.
  • The RAB Act will have serious commercial repercussions for developers as the occupation certificate is often the key step permitting the sale of apartments.
  • Retrospective, non-delegable duty of care: The DBP Act introduced a non-delegable, retrospective duty of care owed to subsequent owners by anyone who carries out residential building work (which is effective from 11 June 2020).
  • The introduction of a statutory duty of care is a significant departure from the status quo and increases potential liability and risk for building practitioners and developers.

It provides owners with a new opportunity to claim against any building practitioner (including builders, architects, engineers, certifiers, suppliers, project managers) which is additional to the statutory warranties owed by developers and builders under the Home Building Act 1989 (NSW) – which have much stricter time limits for bringing an action.

  • Proportionate liability legislation enacted across all states still applies and means that there can be concurrent wrongdoers and the potential for a chain of liability. Given that, for many buildings completed within the last 10 years, the liability did not exist at the time of drafting the relevant contracts, we expect to see an increase in cases where Courts will need to apportion blame across multiple parties.
  • Insurance issues are likely to arise: There will be significant ramifications from the new legislation for insurers in what is already a challenging market (see here[1] for some commentary from MO’s insurance specialists). In particular, insurers will need to take into account the retrospective application of the new duty of care and therefore any work performed over the last 10 years by an insured practitioner to assess the associated risk
  • New registration and certification scheme: The DBP Act increases accountability of building practitioners to the community and specifically to subsequent owners by introducing a new registration and certification scheme. The scheme also includes a new regime for issuing design and as-built compliance declarations and new insurance requirements with strict penalties for non-compliance, including criminal proceedings (effective from 1 July 2021).
  • We expect that the new registration and certification scheme will predominantly apply to residential buildings (in the second reading speech, the Minister suggested at least Class 2 buildings), but it could be expanded to commercial buildings at any time under Regulations (not yet released).
  • All building practitioners, designers and engineers should be preparing themselves for compliance by 1 July 2021 by considering whether they need to be registered, what insurance they will need to take out and how to ensure their contracts, processes and work methods are consistent with the new requirements. At the end of this article we provide some drafting tips to assist clients in this area.

How did we get here?  Combustible cladding and high-profile building evacuations prompts major reform

The construction industry has been the subject of widespread criticism following high profile failures to monitor and prevent the use of non-compliant building products and practices.

Incidents such as the Mascot tower and Opal tower, in Sydney, as well as the Lacrosse fire in Melbourne (which arose in part due to the use of non-compliant ACP cladding) has damaged public confidence in the industry. Research suggests that 97% of all new residential apartment buildings in NSW have at least one defect in multiple locations,[2] calling into question the adequacy of the existing certification process.

The Shergold and Weir report, released in April 2018, found that there was almost no effective regulatory oversight of the commercial building industry by regulators. This issue became particularly pertinent after the discovery that buildings across the country were cladded with non-compliant ACP cladding – and it was Local Councils (not the Secretary), who were empowered to issue rectification orders.

To complicate matters, liability for the cost of rectifying defects has not been clear and owners have had limited avenues to seek reimbursement for the cost of fixing defects. Many developers are special purpose companies set up specifically for construction and disappear once the apartments are sold. Before now, building professionals and developers only owed a direct duty of care to subsequent owners in very limited circumstances and subsequent owners typically had to rely on the statutory warranties under the Home Building Act 1989 (NSW) (HBA) (which are enforceable for only 2 years for minor defects and 6 years for major defects).

As a result, the cost of rectifying defects has frequently fallen on owners rather than the building professionals responsible for the defects.

The DBP Act and the RAB Act represent efforts by the NSW Government to prevent both the frequency and seriousness of defects and improve prospects of recovering loss suffered as a result of defects for consumers.

DBP Act Stage 1: New Duty of Care – effective 11 June 2020

Part 4 of the DBP Act creates a statutory duty owed by people carrying out construction work, to exercise reasonable care to avoid loss caused by defects or construction work. This Part commenced on 10 June 2020.

The duty of care extends to each owner of the land and subsequent owners of the land (including owners corporations). This is a reversal of the common law position articulated by the High Court[3], that builders do not necessarily have a duty of care to subsequent owners to prevent economic loss.[4]

Construction work is defined as: building work (which at this stage is defined as including residential building work within the meaning of the HBA Act); preparation of regulated designs for use in building work; manufacture of a building products used for building work; and supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any construction work. The last limb of the definition means it could conceivably capture developers, project managers and other persons with “substantive control” over residential building work.

At this stage, the duty of care only applies to residential building work (and associated activities within the definition above), with the potential for the yet to be released regulations to expand the application.

Part 4 took effect on 11 June 2020 and operates retrospectively. It applies to any loss which became apparent within the 10 years immediately prior to 11 June 2020. It therefore has the potential to create a new avenue for claims which did not exist at the time the construction work was carried out and completed. It also serves to provide many owners with an opportunity to bring claims even if HBA warranty periods have expired.

Contracting out of the new duty of care is prohibited. Time will tell whether contractual measures to manage liability – such as limitations of liability and time-bars, can apply to the provisions.

Given the prevalence of defects in new residential buildings, there will inevitably be a raft of new claims arising from this legislation and this is already evident in our current matters before the Courts and prospective claims under consideration.

DBP Act Stage 2 – Designers, engineers and building practitioners have new registration, insurance and compliance obligations – effective 1 July 2021

The DBP Act also contains a new regulatory scheme to improve compliance with the BCA, which will take effect from 1 July 2021 and will apply to “building work” as defined in the DBP Act.

The definition of “building work” for the purpose of the DBP Act generally is distinct from the definition for the purpose of the duty of care provisions and includes “construction for a building of a class or type prescribed by the regulations”. As the regulations have not yet been released, it is difficult to determine which class of buildings will be captured – however the second reading speech suggests it will be at least Class 2 buildings (i.e. residential buildings not commercial buildings).

In short, there are new requirements for design practitioners and building practitioners to be registered, to issue compliance declarations in respect of regulated designs prepared by those persons and building work performed by those persons and to be adequately insured.

The definition of registered design practitioner is broad enough to capture any person who designs any aspect of a building (of a type prescribed by the regulations).

The definition of registered building practitioner captures any person who agrees to perform building work, however if more than one person agrees to do building work (as is commonly the case), then the registered building practitioner for the purpose of the DBP Act is the head contractor.

Broadly, the requirements are:

  • Regulated Designs: A registered design practitioner prepares regulated designs for the project.
  • Design Compliance Declarations (DCDs): design practitioners provide a design compliance declaration that the design complies with the BCA and any other requirements prescribed by the regulations. The DCD is to be provided at the same time as the regulated design and whenever the designs are varied.
  • Principal Design Compliance Declarations: If there is a Registered Principal Designer (the person coordinating provision of design compliance declarations), that person must ensure that DCDs have been provided for each regulated design for the building work and provide a declaration as to same. The timing for the principal design compliance declaration is to be confirmed in the regulations.
  • DCDs must be received prior to starting work: A registered building practitioner cannot carry out building work without DCDs.
  • Building Compliance Declarations (BCDs): Registered building practitioners must provide a building compliance declaration that the building work complies with the BCA. The BCDs must be provided to the certifier before or when an application is made for an occupation certificate (OC).
  • Notification of OC application: After applying for an OC, the applicant must notify the registered building practitioner of the application.
  • No OC without DCDs and BCDs: The certifier cannot issue an OC without having received the DCDs and BCDs for the project.
  • As-Builts: 90 days after the OC is issued, the registered building practitioner must lodge ‘relevant documents’ for the building work with the Secretary. A ‘relevant document’ includes each regulated design for which a design compliance declaration has been provided, which reflects the building work carried out.

Registered design practitioners, registered principal design practitioners and registered building practitioners are also required to be adequately insured. The specific insurance requirements will be prescribed by the regulations.

The DPB Act also requires anyone carrying out professional engineering work or specialist work, to be properly authorised and registered and to be adequately insured.

Importantly, for the purposes of enforcing the new provisions, the DBP Act also provides the Department of Customer Service with broad powers to investigate compliance and take disciplinary action in response.

Directors and “persons concerned with the management” of a company which breaches the requirements can be held personally liable where he or she knowingly permitted or authorised the contravention.

Contraventions of provisions of the DBP Act attracts disciplinary action and criminal proceedings (which can be brought in either the Local Court or the Land and Environment Court). For example, providing a compliance declaration known to be false and misleading is an offence which carries a fine of $220,000 (for a company) and a maximum of 2 years imprisonment. The provision of false or misleading declarations that work complies with building standards (where it does not) also has the potential to underpin claims for misleading and deceptive conduct as well as negligence in addition to breach of contract claims.

RAB Act: New powers for Secretary to monitor and enforce compliance – effective 1 September 2021

Complimenting the DBP Act and commencing on 1 September 2020, the RAB Act empowers the Secretary of the Department of Customer Service (the Secretary) to manage developments of residential apartment buildings during the construction phase. The RAB Act does this by requiring developers to provide the Secretary with 6 months’ notice of its intention to apply for an occupation certificate and the Building Commissioner can then audit and inspect the development).  The Secretary, on advice from the Building Commissioner, can issue the following orders to developers.

  • Prohibition orders, prohibiting the issue of an occupation certificate, where either the developer hasn’t met its notification obligations, the Secretary is satisfied there is a serious defect in the building, or an applicable Strata Bond has not be paid.
  • Stop work orders, to stop building works, where the Secretary is of the opinion that the building work is, or is likely to be, carried out in a manner that could result in significant harm or loss to the public or occupiers, or potential occupiers, of the building.
  • Building work rectification orders, requiring a developer to carry out, or refrain from carrying out, building work as specified in the order to eliminate, minimise or remediate an actual or potential serious defect, where the Secretary is of the belief that building work was or is being carried out in a manner that could result in a serious defect.

“Developer” is broadly defined to include persons who contracted, arranged for or caused the building work to be carried out, the owner of the land at the time the work is carried out, the principal contractor, the developer of the strata scheme or other persons defined in the regulations.

“Serious Defect” includes failure to comply with the performance standards of the BCA, defects likely to deny habitability or use of the building for its intended purpose and use of banned building products. It therefore has a very broad application.

The RAB Act applies retrospectively to incomplete developments and developments completed within the last 10 years.

Developers could face civil and criminal sanctions for failure to comply with orders issued by the Secretary. A director and other corporate officer of a company which has contravened the legislation could also be held personally liable where they authorised or permitted the contravention. For example, failure to provide notification of intention to apply for an occupation certificate in accordance with the regime at section 6 attracts a penalty of $110,000 (for a corporation) and $22,000 (for an individual).

Practical steps and drafting tips for owners and building practitioners

  • Owners of residential buildings completed within the last 10 years (as well as new buildings) may now have claims in negligence against building professionals as a result of breach of statutory duty of care to exercise reasonable care to avoid loss caused by defects or construction work and should seek legal advice as to whether claims can be brought or added to existing proceedings.
  • Developers of incomplete developments must give at least 6 months’ notice of completion and the Secretary has the power to block the issue of an occupation certification or issue rectification orders where serious defects exist. For buildings expected to be completed during the initial transitional 6 month period from commencement of the Act, the notification period is shortened to 14 days from commencement.
  • Developers served with orders under the RAB Act by the Secretary should seek legal advice as soon as possible in order to meet timeframes for appeals and responsive show-cause
  • Developers should ensure that their new contracts adequately contemplate the DPB Act and the RAB Act by:
    • Considering appropriate procurement methods in light of the reforms and in particular whether design and construct or construct only models better reflects the intended role and responsibilities of the parties;
    • including an indemnity from loss arising from a breach of the statutory duty of care that is caused by the acts or omissions of contractors and consultants;
    • making the relevant party’s (whether it be the designer or building practitioner) statutory obligations also contractual obligations – things to think about are obligating a contractor to ensure all consultants are appropriately registered and permitted under the DBP Act to prepare regulated designs and provide design compliance declarations;
    • providing developers with adequate recourse against the consultant or contractor in circumstances where the Secretary exercises powers under the RAB Act;
    • requiring contractors to provide the notices required under the RAB Act and respond to orders issued by the Secretary under the RAB Act within the required timeframes; and
    • ensuring compliance with insurance obligations.
  • Contractors and consultants should ensure that their new contracts adequately contemplate the DPB Act and RAB Act by:
    • considering whether you should be registered in accordance with the DPB Act;
    • considering whether you are a “registered design practitioner” or a “registered building practitioner” for the purpose of the DPB Act;
    • once the regulations are released, ensuring that you are adequately insured;
    • assessing and amend procurement procedures and contract negotiations to properly reflect new risk profile;
    • making your role in the project clear in your consultancy agreement or terms and conditions of engagement (i.e. by stating whether you are engaged as a registered design practitioner, principal design practitioner or otherwise);
    • including drafting around the provision of design compliance declarations and to which version of designs those declarations apply, how changes in those regulated designs must be managed and when the declaration will no longer apply (and updating your certifications to reflect same);
    • inclusion of a release from liability in circumstances where the client or a third party uses a regulated design in a way other than as permitted under the DBP Act, the terms of engagement or the declaration, or uses a regulated design that is subject to unauthorised amendments by a third party;
    • making clear the circumstances in which you will not provide a design compliance declaration (i.e. if your design has been amended by a third party and you do not agree to those amendments);
    • developing updated contract administration protocols to ensure requirements of DPB Act and RAB Act are met;
    • for head contractors, ensuring any sub-contracts downstream appropriately reflect obligations up-stream and in respect of the DPB Act, in particular with respect to indemnities for breach of the new duty of care and the provision of DCDs and BCDs in the same form required by the DPB Act.
  • Developers, builders and consultants who have performed residential building work within the last 10 years may be exposed to liability which did not exist at the time work was completed and should discuss any resulting risk issues with insurers.

We will be providing updates as compliance starts to ramp up under the new scheme and as the new regulations are released.  Please contact the authors should you require specific advice.

[1] https://www.millsoakley.com.au/thinking/new-statutory-duty-of-care-for-building-practitioners/

[2] https://www.griffith.edu.au/__data/assets/pdf_file/0030/831279/Examining-Building-Defects-Research-Report.pdf

[3] Brookfield Multiplex v Owner’s Corporation Strata Plan 61288 [2014] HCA 36

[4] Note that it does not apply for the benefit of developers or large commercial entities (Second reading Speech).

 

For further information, please do not hesitate to contact us.

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