NSW Building Reforms

Recently, there have been two new acts introduced in NSW that will have a considerable impact on the building and construction industry. Collectively known as ‘the Reforms’, these acts are:

• The Design and Building Practitioners Act 2020 (the DBP).
• The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (the RAB).

The objective of the Reforms is to ensure NSW’s building industry is constructing trustworthy buildings and delivering quality projects to consumers. The Reforms seek to increase the standard of current works, ensuring all work and materials used onsite are compliant with the Building Code of Australia (BCA) and Australian standards.

The purpose behind the push to change the building and construction industry is to ensure the entire team involved in the construction process is both accountable and performing at optimum standard, rather than targeting individual players.

The greatest accountability rests with the Developer (principal) as the individual/entity responsible for delivery of a product to consumers.

The Reforms are to protect homeowners and ensure a quality and safe product. Part of this will see the regulator attending sites to ensure riskier market players are increasing the quality of products and workmanship or exiting the building game altogether. Such action will ensure that financiers and insurers as well as consumers have a renewed level of trust in the NSW building industry.

Overview of the DBP

The DBP represents a quantum shift in the regulation of the construction industry in NSW and is part of the six-pillar plan proposed by the NSW Government in January 2020.

The legislation introduces:

1. Statutory duty of care, owed by people who carry out construction work, to owners of properties and subsequent owners, to exercise reasonable care to avoid pure economic loss by the owner.
2. Scheme for the registration of building designers, builders and engineers.
3. Requirement for building designs to be declared to be compliant with the Building Code of Australia.
4. Requirement for design practitioners to be adequately insured.

The legislation commenced 11 June 2020. Currently, the statutory duty of care sections of the legislation are in effect, while the provisions outlined in 2 – 4 above will commence from 1 July 2021.

The regulations which are yet to be released will contain further detail in relation to the operation of those further provisions.

Building practitioner

There is a broad definition of a ‘building practitioner’ in the legislation as a person who performs building work (construction/alterations/renovations/repair of a building prescribed by the regulations).

There are two definitions of ‘building work’ in the legislation:

1. a broad definition which involves work in or involved in coordinating or supervising construction work for buildings of a class or type to be prescribed by the regulations; and
2. a definition for the work which is subject to the statutory duty of care and which is aligned to residential building work within the meaning of the Home Building Act 1989 (NSW) (the HBA).

We will have further clarity on the definition of ‘building practitioner’ when the regulations are released.

Statutory duty of care

Following the decisions in Woolcock Street Investments Pty Ltd v DDG Pty Ltd [2004] HCA 16 and Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 it has been very difficult for subsequent owners of properties to establish that they have sufficient ‘vulnerability’ to establish that a builder owes them a duty of care and is liable in negligence for the cost of rectifying any latent defects.

Under the DBP, any person who performs construction work has a duty to exercise reasonable care to avoid economic loss caused by defects arising from their construction work on a building. The types of building practitioners who will owe the duty of care will include builders, subcontractors, engineers, architects, building product/material suppliers and manufacturers, project managers and possibly owner-builders.

That duty of care is owed to each owner of the land where the construction work is carried out and to each subsequent owner of the land, including owners corporations and owners of individual lots.

The legislation states that the statutory duty of care is owed as if the duty were a duty established by the common law.

We anticipate that defendants to a breach of statutory duty of care claim will likely raise a defence that:

1. The claim is an apportionable claim pursuant to Part 4 of the Civil Liability Act 2002 (NSW); and
2. Other concurrent wrongdoers caused the loss claimed and liability of the defendants should be capped at a percentage amount taking into account the contribution of the acts and omissions of the other concurrent wrongdoers.

Apportionment claims are more complex to run than claims for a breach of the statutory warranties contained in part 2C of the HBA, although a breach of statutory duty of care action will provide a cause of action for those owners where the limitation period to pursue a statutory warranty has expired.

The statutory duty of care in the DBP is retrospective for a period of 10 years prior to the commencement of the act (i.e. back to 11 June 2010). The act specifies that any economic loss caused by a breach of the duty of care applies if the loss first became apparent within the 10 years immediately prior to the commencement of the act.

Regulated designs

The DBP introduces a process whereby building designs are now regulated and will require building compliance declarations (in the manner and form to be prescribed by the regulations) from designers covering:

1. Compliance with the Building Code of Australia;
2. Compliance with any requirements prescribed by the regulations;
3. Standards, codes or requirements applied in preparing the design;
4. Other matters prescribed by the regulations.

Regulated designs are broad and cover:

1. A design prepared for a building element for building work;
2. A design prepared for a performance solution for building work;
3. A design of a class prescribed by the regulations that is prepared for building work.

We await to see what content will be contained in the regulations in relation to the required declarations.

Building compliance declaration

The legislation establishes a compliance procedure targeted at regulating building work and prohibiting an occupation certificate being issued if the legislative regime is not followed.

Steps include:

1. Written notice being given to each registered building practitioner who did building work of the intention to apply for an occupation certificate;
2. Provision of a building compliance declaration (in relation to the design and works complying with the Building Code of Australia and relevant codes, standards and matters prescribed by the regulations), list of subcontractors, and documentation prescribed by the regulations prior to an application for an occupation certificate;
3. Prohibition on certifiers issuing occupation certificates without the required compliance documentation.

Penalties apply where the act is not complied with. Corporations that contravene the legislation can be penalised and any directors that knowingly authorise or permit a contravention will also be personally liable.

The Secretary of the Department of Customer Service has very broad powers to investigate any breaches of the legislation and enforce the legislation.

Insurance

There is a requirement in the legislation for design practitioners to be indemnified and adequately insured. Until the regulations are released it is unclear what specific levels of insurance are required.

Practitioners in the meantime should take steps to ensure that their insurance policies will cover the new provisions that will come online with the DBP from 1 July 2021.

Summary of some major changes

•   Registration scheme requiring designers to certify designs for specific types of building work. This scheme ensures registered design practitioners comply with building regulations.
•   Builders required to prepare and declare As Built drawings to reflect declared designs.
•   Designers required to lodge plans on NSW ePlanning portal.
•   Engineers and practitioners undertaking other forms of specialist work to be registered.
•   Applicable to class 2 building work that has a construction certificate or complying development certificate after 1 July 2020.

What building practitioners and property owners need to consider

Much of the detail will be contained in the regulations, however, practitioners should take steps now in relation to reviewing procedures to ensure that compliance within the business is robust and measures are put in place which can be employed to adopt the certification procedures (which will be coming online next year).

Building practitioners and property owners need to be aware of the new statutory duty of care and the retrospective nature of the legislation. It is anticipated that this will be employed where statutory warranties have expired and the interaction with Part 4 of the Civil Liability Act 2002 will likely see arguments raised in relation to many of these claims that there should be an apportionment between various responsible building practitioner stakeholders by the court on just terms.

What changes do Strata Managers need to know?

The DPB has created very material changes to defect claims. This is a summary of the changes that are now in effect and how they will affect strata managers and owners corporations.

1. Warranty periods
   1. 1. Under HBA, these are six years for major defects and two years for minor defects, running from the occupation certificate.
      2. Under the DBP, a person who carries out construction work has “a duty to exercise reasonable care” to avoid an owners corporation or an owner suffering economic loss caused by defects.
      3. Owners corporations and owners of lots in a strata scheme can, as subsequent owners of land, sue for economic loss from rectifying defects.
      4. In terms of limitation periods – it is six years from when the owners corporation first becomes aware of the loss or defective work.
2. Does it act retrospectively?
   1. Yes – if the economic loss first became apparent in the 10 years before the commencement of Part 4 of the DBP, so since 11 June 2010.
   2. Also note the 10-year longstop provision under the Environmental Planning & Assessment Act, which prevents claims commencing more than 10 years after the building work was completed (i.e. 10 years after occupation certificate).
   3. The effect is still that an owners corporation can sue for economic loss suffered through defects it became aware of in the last six years.

3. Who can you sue?
   1. Under the HBA, an owner or owners corporation can sue the builder and/or developer.
   2. Under the DBP, there are no claims against the developer.
   3. The DBP allows claims against the engineer, the architect, the supplier/manufacturer of a building product (e.g. cladding) used and a project manager.
4. How do you sue? HBA or DBP or both?
   1. Owners corporations can sue under HBA or DBP, or both.
   2. An owners corporation can still sue for a work order under the HBA – where the builder comes back to rectify – which is the HBA’s “preferred outcome”. However, the developer cannot be sued under the DBP Act.
   3. The appropriate person to sue, under which Act (or both) and in which jurisdiction, depend on the particular circumstances of that case.
   4. Economic loss can be calculated based on money spent or an assessment done by a quantity surveyor, and includes consequential loss (like alternative accommodation).
5. Key takeaways
   1. To be conservative, conduct two audits.
   2. Firstly, check any existing legal proceedings, to see whether economic loss can or should be added to the claim. For example, minor defects may have been out of time, but can now be added under the DBP Act.
   3. Secondly, for any new buildings less than 10 years old (or for repair works done direct for the OC in the last 10 years) check whether any defects became apparent in that building work in the last six years.
   4. You should still focus on HBA if you want to chase developer, or if there is available HOW insurance, or if you seek a work order.

Overview of the RAB

The RAB commenced on 1 September 2020. Broadly speaking the reform is targeted at monitoring works to prevent issues prior to the issuance of an occupation certificate through monitoring the quality of works. It represents a targeted proactive compliance regime.

In overview, the act brings the following reforms to the residential apartment sector of the construction industry:

1. 1. Developers are required to give the Department of Customer Service at least six months’ notice prior to applying for an occupation certificate.
   2. The Building Commissioner, through the Department of Customer Service, will be monitoring developments prior to the issuance of an occupation certificate and has developed a risk matrix assessment tool to identify high risk developers and certifiers that he considers should be monitored.
   3. Occupation certificates may be refused and registration of a strata plan may be prohibited if:
      1. Six months’ notice isn’t provided.
      2. There is a serious defect (defined below) in the building.
      3. A building bond required by the Strata Schemes Management Act 2015 has not been given.
   4. The Building Commissioner has sweeping powers to investigate works including the powers to examine construction plans, specifications and details and order destructive testing of works where deemed necessary.

Serious defects definition

With respect to the RAB, serious defects are defined as:

4. 4. • a building element that does not comply with the requirements of the Building Code of Australia (BCA),
      • a defect in a building product or building element that contributes to defective design, workmanship, or materials, and
      • causes or is likely to cause:
        • inability to inhabit the building or part thereof,
        • destruction of the building or part therefor,
        • a threat of the building or part thereof collapsing, or
      • a defect prescribed as a serious defect by the regulations, or
      • the use of a building product (within the meaning of the Building Products (Safety) Act 2017) that contravenes that Act.

Notification scheme

With respect to the notification scheme:

4. 4. • Developers are required to provide the Secretary of the Department with an expected completion notice 6-12 months prior to the application for a completion certificate – known as a Notification Scheme.
      • The exception to the notification scheme is for short term building works that will be completed within six months. In this instance, notice is to be given to the Secretary within 30 days of commencement of works.
      • Non-compliance with the Notification Scheme carries a penalty of:
        • $110,000 (1,000 penalty units) for a body corporate, and
        • $22,000 (200 penalty units) for any other case.
      • In the event a Developer becomes aware that circumstances have changed and that the expected date for completion in the previous application for an occupation certificate is changed, the Developer must provide the Secretary with a notice of the new expected completion date.
        • The notice of the new completion date must be submitted within seven days of when the Developer becomes aware of the change.
        • Importantly, if the new date is within 60 days of the originally submitted date, no notice is required.
      • Non-compliance with change of date of expected completion carries a penalty of:
        • $55,000 (500 penalty units) for a body corporate, and
        • $11,000 (100 penalty units) for any other case.

Summary of some major changes

4. 4. • In the event serious defects are found onsite, the Building Commissioner may stop the issuance of an occupation certificate if the building bond required under the Strata Schemes Management Act 2015 (SSMA) has not been paid or if the notification scheme has not been complied with. By way of clarification, the notification scheme requires developers give six months’ notice of a proposed application for an occupation certificate.
      • The RAB affords the Building Commissioner power to:
        • Stop works
        • Open up works
        • Call in relevant documentation
        • Undertake testing
        • As noted above, delay the issuance of an occupation certificate.
      • Applicable to class 2 building work completed in the last 6-10 years.
      • Occupation Certificate Audit inspections formally commenced 1 September 2020. OC Audit inspection teams will comprise of construction industry practitioners such as architects, engineers and builders who have been in the industry 15+ years.

Reforms effective from 1 September 2020

4. 4. 1. Starting from 1 September 2020, the OC Audit inspections formally commenced.
      2. The RAB commenced from 1 September 2020. There is a six-month transitional period beginning from 1 September 2020 and during the transitional period developers wishing to apply for an occupation certificate must notify the Secretary of the Department of Customer Services within 14 days (15 September 2020) after the commencement of the RAB.

The six pillars

Though there is scope to argue that the new legislation does not necessarily change industry capability, risk management or culture, the below pillars form part of a quantum shift in the regulation of NSW construction industry.

For a detailed outline of the six pillars, see our e-alert: update https://www.madisonmarcus.com.au/nsw-government-draws-up-6-pillar-plan-is-this-a-concrete-solution/

In a nutshell, the six pillars are as follows:

Pillar 1	OC Audit commencing 1st September 2020.
Pillar 2	Tendering for multi-party ratings information internally and externally which goes to identifying and managing risk.
Pillar 3	Partnership with TAFE NSW to deliver the Construct NSW learning management platform.
Pillar 4	Drafting a term sheet to ensure supplier contracts will face the requirements of the DBP Act and are compliant with the BCA and Australian Standards.
Pillar 5	ePlanning in support of OC audits and strata bonds to build digital capacity.
Pillar 6	Commissioning tactical research with respect to data analysis to deliver impactful change.

Moving forward

If you need advice on the impact of the new legislation and what it means for you, please contact the team at Madison Marcus.