This article was first published in the AIBS Building Surveyor magazine issue 2/2019
How do we regulate so that buildings get built properly? AND What do we do to protect consumers when buildings are not built properly?
The above two questions are at the heart of recent discussions about the state of Australia’s buildings. Sometimes the discussion flips between the two which can be confusing. Of course, the questions are inextricably linked, in fact if we build buildings properly in the first-place consumers are protected. However, the spotlight has been on existing buildings with major defects so naturally people are asking what happens to the people that own and occupy these buildings?
The first question – How do we make sure buildings are built properly?
The Building Confidence report was commissioned by the Building Ministers’ Forum. In simple terms the Minister’s asked Professor Shergold and I “How do we regulate so that buildings get built properly?”
Our recommendations focused on five key themes which I summarise as follows:
– Making sure the key practitioners that design, build and oversee building work are properly trained and qualified to provide their services. The mechanism for this is registration of all key practitioners consistently across the country.
– Improving the oversight of building practitioners and building work by state and local governments and by private building surveyors with statutory functions. This includes resetting the role of the private building surveyor which is plagued by perceptions of conflict of interest.
– Strengthening the building approvals process to increase independent checking and provide greater transparency and in doing so, pay particular attention to improving the design, installation, certification and ongoing maintenance of fire safety systems in commercial buildings.
– Ensuring records of key documents are kept on a digital platform so that governments can monitor compliance and owners can have access to necessary information to maintain buildings for ongoing safety and compliance.
– Improving the regulation over building products to ensure they are safe, compliant and fit for purpose.
The second question – How do we protect consumers when buildings are not built properly?
Unfortunately, many buildings have not been built properly. In some cases, the safety risks resulting from poor practices have led to evacuation of buildings and/or the need for costly rectification work. So, what consumer protection is provided to owners finding themselves with defective buildings?
The construction of buildings is a business transaction between a property owner/developer and a range of building practitioners. Therefore, if the builder or others involved do the wrong thing, the owner/developer can, in theory at least, require the builder to fix or sue one or more of those responsible seeking compensation.
Governments have enacted various laws which are intended to protect consumers by giving them clear rights to pursue the builder or others involved if there are defects. These include:
– Mandating contract terms– contracts for residential building work are usually required to include terms to protect consumers. These include statutory warranties, that is, promises made by the builder including that they will build in accordance with relevant laws including the NCC. This gives the owner/developer contractual rights to require the builder to fix or compensate.
– Extending statutory warranties – laws extend statutory warranties so that a purchaser of a home or apartment can also have the benefit of the warranties even though they did not have the contract with the builder. This is particularly important for owners that buy off the plan or shortly after a building is finished. The life of the warranties varies across jurisdictions. For example, in some cases, for minor defects the warranties will last for 2 years from when the building was finished and for serious defects the warranties last for 6 years.
– Requiring insurance – governments have made it compulsory for builders and others involved in building work to hold insurance so that if defects occur and legal demands are made, a claim may be able to be made on insurance.
– Bond schemes – NSW has recently introduced a bond scheme. This requires the developer to deposit 2% of the contract value for a high-rise residential building with the government. That money can be used to identify defects and rectify them within 2 years after the building is completed.
– Dispute resolution schemes – governments offer free dispute resolution services to owners. These services appoint inspectors to report on alleged defects and often builders can be directed to fix defects.
– Government funded rectification – recently Victoria tried to facilitate a low interest loans scheme and has now committed to funding rectification of combustible cladding on privately owned buildings.
With all of the above mechanisms there are limits. For example, these laws only apply to homes or residential buildings and the statutory warranties only last for a certain period of time. Governments can only mandate insurance if the insurance market is willing to offer the required insurance product. The insurance market may not do this if they are concerned that the costs of meeting claims are too high.
Since about 2003, insurers said they would not offer warranty insurance to builders for residential buildings more than 3 storeys. This is called builders or homeowners warranty insurance. Therefore, even though statutory warranties apply for the specified period (for example, 2 or 6 years), if the builder cannot fix the defect because they have become insolvent, for buildings over 3 storeys, there is no compulsory insurance available.
For residential buildings and homes up to 3 storeys, compulsory builder’s warranty insurance is in place but there is a cap on how much the insurers will pay, and, where these schemes operate, with the exception of Queensland, the insurance will only respond when the builder dies, disappears or becomes insolvent.
Until recently, insurance held by consultants such as building surveyors, architects and engineers may be available in certain situations provided that the alleged defects were attributable to their negligence. This is called professional indemnity insurance (PII). This area of law is very complicated. Put simply, the ability of an owner to successful sue consultants directly is limited if they did not contract with the consultants, such as when the owner has purchased an apartment. To compound this, insurers have recently decided that they can only offer PII to building surveyors with exclusions meaning the scope of PII cover is limited.
The end result is that for residential buildings over 3 storeys builders do not have insurance and for all buildings, consultants may not be able to be sued or they may have very limited insurance cover. If a builder or consultant is sued and they don’t hold insurance defending the claim may lead to insolvency which means owners probably won’t recover compensation for defective building work.
Another issue is that company laws provide for directors and shareholders of companies to have limited liability. This means that even when a company is at fault, if it can’t pay to defend the claim or meet the compensation it will likely become insolvent. Sometimes companies voluntarily wind themselves up. This is very common in the building industry. Developers often create companies for a project – called special purpose vehicles (SPV). When the building is built, the SPV is wound up and any profits are dispersed. The directors can then commence a fresh company for the next development. This is called ‘phoenix’ activity and it is not always illegal. Builders can sometimes do this as well.
Queensland has quite good laws to try to prevent builders from moving from one company to the next. Some jurisdictions are discussing whether they should regulate developers to prevent them from disappearing with profits before claims can be made. The fact is that these sorts of business practices are common. In fact, some would argue they are acceptable business practices. The Commonwealth has primary responsibility for regulating companies and has recently introduced reforms to address illegal phoenix activity as it is prevalent in many sectors.
To protect owners when buildings are not built properly relies heavily on the insurance industry being willing to participate, company laws which allow people to avoid liability and complex legal decisions about contracts and negligence. All of these things are difficult for governments to improve especially when the spate of defective buildings has become overwhelming. Even if new laws were made to improve protection for consumers, they would probably only apply going forward meaning that there is little that can be done for those owning existing buildings with building defects. Short of governments providing funding assistance or low interest loans to owners, the chances are that in many cases owners will find legal actions too costly and uncertain leaving them to fund rectification themselves.
The insurance industry has said they want governments to get on with taking action to make sure buildings are built properly so that it can be confident that over the longer term, buildings will and have fewer costly defects. This is why they and other industry bodies have called on governments to implement the Building Confidence recommendations quickly and effectively. However, governments are likely to also want to address inadequate consumer protection by changing laws to improve protections for owners despite all of the challenges outlined above.