Residential Apartment Developers in the Firing Line

One of the most common problems when owners of residential apartments find defects in their buildings is that it’s not immediately obvious who they can chase for rectification or how they can compel the work to happen without protracted legal proceedings. Also, once apartments have sold, the developer has realised its profits and the bank has been paid, there is minimal real incentive for it to do anything about defects.

As part of its sweeping construction industry reform packages, NSW has introduced legislation specifically designed to assist with this scenario.

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 provides several powerful tools to help apartment owners and bodies corporate with both investigating defects and enforcing rectification.

In this article, we’ll take a look at how the new Act works and the circumstances in which it might apply to you.

How Does the Act Achieve Its Goals?

The basic idea of the Act is to give the Secretary of the Department of Customer Services a variety of proactive powers that might prevent defective buildings being occupied or ensure that defects are rectified promptly.

To facilitate that, the Act:

1. Requires developers to provide the Secretary advance notice of expected completion dates for projects;
2. Authorises officers appointed under the Act some investigative powers;
3. Creates offences for non-compliance;
4. Exposes directors and other people in management to potential personal liability if their associated company breaches the Act.

Using those tools and incentives, the Secretary can:

1. Order building work to be rectified;
2. Issue stop work orders;
3. Prevent a strata plan or occupation certificate from being issued for a development.

The completion and occupation of a residential apartment development is a critical element of the process for the developer, so these powers are designed to ensure that developers do everything necessary to ensure apartment buildings are free from serious defects before they are occupied.

The Wide Net – Who’s a Developer?

One of the most startling elements of the new legislation is the sheer scope of who is captured by the definition of “developer”.

As it’s currently defined, a “Developer” is:

1. The owner of the land on which the construction is occurring.
2. The “person responsible for the overall coordination and control of the carrying out of the building work” (i.e., the principal contractor).
3. A person who “facilitates or causes (directly or indirectly) the building work to be carried out”.

This last definition is going to catch a large number of parties who might otherwise have been able to wash their hands of any potential liability to do anything about serious defects, but now will quite possibly be caught.

That might include, for example, controlling holding companies who are the real beneficiaries of any profits, banks who are calling the shots, or the “people behind the companies” in some circumstances.

Which Building Work is Captured by the Obligations?

Only residential apartment building work is caught by this Act.

In building terms, that means the Act applies to a “class 2” building or one which carries a class 2 component under the Building Code of Australia.

The Act is also limited to building work relating to a residential apartment building that is, or was, authorised to commence under the EPA Act.

In real terms though, these requirements will capture many residential apartment buildings around NSW.

What Kinds of Defects Does the Act Cover?

This Act isn’t designed to help you fix small defects like sticking doors or the wrong colour tiles.

It is precisely drafted to deal mainly with “serious” defects. These are:

1. A nonconforming building product under the Building Products (Safety) Act 2017 (an act designed to prevent the use of combustible cladding, although it does have wider application)
2. A defect in the building or a piece of it which doesn’t comply with the:
   1. Approved plans;
   2. Relevant Australian Standard; or
   3. Building Code.
3. Another defect which is serious enough to mean that the building can’t be inhabited, used for its intended purpose, or that the building is vulnerable to collapse or might need to be destroyed in whole or in part.

There is scope to expand this list, but that hasn’t occurred yet.

Even Better… It’s Retrospective

Much like other recent developments in NSW construction law, the Act applies backwards to building work that:

• has been completed since 1 September 2010; or
• was incomplete at the time the Act came into force on 1 September.

How Does the Act Actually Help?

There are three central powers granted to the Secretary under the Act that can be used to prevent unsafe buildings being made available for occupation.

Prohibition Orders

If the Secretary believes that the building is unsafe or non-compliant, an order can be issued preventing the issue of an occupation certificate or registration of a strata plan.

Prohibition orders can also be made if the developer failed to give notice of intended completion (see below) or failed to pay the full required strata bond.

In essence, this would prevent the sales of the apartments going ahead or, at least, prevent people from being able to move in before the defects are remedied.

This applies significant pressure on building developers given the commercial flow-on effect it will have if sales cannot go through.

Stop Work Orders

In some cases, the Secretary can issue an order that the developer cease all work on site.

This might happen if the Secretary believes that the building work is being done in a way that could cause significant “harm or loss” to relevant people or significant property damage.

If the developer keeps working despite a stop work order they can be issued fines up to $330,000 plus another $33,000 for each day the breach continues.

Rectification Orders

If the Secretary believes there is a potential serious defect, an order can be issued requiring the necessary steps to be taken to eliminate, minimise or remediate that defect.

The Secretary can also put conditions on rectification orders specifying what must be done or how it must be done. A reasonable time must be given for the work to be carried out.

Except in emergency situations, however, the Secretary is generally required to give the developer a “show cause” notice and allow a reasonable time for the recipient to respond before issuing such a rectification order.

Again, failure to comply can have the same considerable fines as above.

Can Developers Appeal?

Decisions by the Secretary to take steps under the Act can be appealed. However, unless the Court issues an order saying otherwise, the decision will remain in force despite the appeal being lodged.

Developers do have some other protections under the Act though, to ensure that due process is followed.

What is the Notification Scheme and Why Does It Exist?

For the Secretary to have an opportunity to actually use the powers granted by the Act, an essential piece of the puzzle is the requirement for developers to give notice of anticipated project completion. This ensures that investigations can occur and, in theory, that any defects or issues of non-compliance can be spotted before people start moving into new apartment buildings.

In short, a developer has to give 6-12 months’ notice before applying for an occupation certificate.

The notice needs to state the date that the developer expects to apply for occupation. After issuing, if the developer thinks that will change by more than 60 days, then an amendment notice can also be lodged.

If the building work can be completed within 6 months of commencement, then the notice needs to be given within 30 days of the works commencing.

If more than one person fits under the “developer” definition (which will often be the case given the scope of the definition as discussed above), then it’s sufficient for just one of them to give the notice.

Personal Liability

Directors and some management are deemed to have breached the provisions of the Act if the company itself does.

What Should Developers Be Doing Now?

There are some practical steps you should be taking now to ensure compliance:

1. Understand if you might be a “developer” under this Act – even if most of the time you wouldn’t use that word to describe yourself. If in doubt, get in touch with us and we’ll give you some advice on it.
2. Get your head around the notification requirements. That means:
   1. Review your current contracts and see if notices need to be issued. If you have projects you expect to finish within 6 months, then you should have provided notice by 15 September 2020. If you haven’t get in now and get it done ASAP.
   2. Diarise when anticipated completion notices should likely be given for ongoing projects.
3. Implement a practical process for dealing with any notices issued to you under the new Act. They cannot go ignored as the Secretary has significant powers that can bring your development to a standstill.
4. For contracts going forward, consider specifying who is responsible for compliance with the Act. While you can’t really absolve yourself of responsibility under the Act, you can at least ensure that between you and the other contracting parties everyone knows who is taking responsibility for notification requirements and the like.

If you need help understanding the new Act and how it might apply to you, get in touch and we’d be happy to help.