Australia’s building defects crisis: practical tips for dealing with defects

Alarming statistics published in November 2019 lay bare true of extent of Australia’s building defects crisis.

In a study involving 212 buildings, Deakin University’s Nicole Johnston and Griffith University’s Sacha Reid found that 85% of new buildings in the multi-residential sector have at least one defect.

Of the states surveyed, the worst performer was New South Wales, where that average ballooned to 97%. 50% to 60% of defects are also said to be attributable to design issues, or would have been preventable with better design.

Based on these statistics, Australians buying into new buildings can reasonably assume it will have defects. The unanswered question however – one which has the potential to impact owners even further – is how many of those defects are exacerbated by owners corporations (OC) and bodies corporate (BC) as a result of poor issue-management?

In our experience, the answer is many: from limitation periods expiring to relying on the wrong experts. However, there are simple steps that can be taken to tackle the problem early.

1.    Building Health Check – Everyone knows you need to see your dentist at least once a year. Waiting until a cavity emerges leads to panic, pain and, often, lots of unforeseen expenditure.

–      A building is no different. Problems can snowball, and by the time you have tenants complaining about leaky balconies, the cost to rectify the issue AND the resultant damage can be huge. Not to mention the defects the average layperson can’t see.

–      Paying a good, qualified and experienced consultant should be thought of as expenditure in mitigation.

Identifying the problem early can help you plan, budget accordingly, and save you money in the long run. – Treat your building like your teeth. Get a building health check done today as early identification and intervention is key.

2.    Know your rights…and your options

–      There is no one size fits all approach to building defects. “Sue the builder” is often the last resort.

–      How many defects does the OC or BC have? What are they worth/how much will it cost to rectify? Will the builder negotiate or ignore the OC / BC? Should the OC / BC do the repairs and claim the repair costs later? Can owners sue the OC / BC to do the repairs / maintain common property? Is the OC / BC taking steps to mitigate its loss? What jurisdictions are available to seek rectification? Are there any time limitations which the OC / BC should be aware of? If the OC / BC does not do the repairs now, what will your insurer say? – All are valid questions that should be answered as early as possible. Don’t just ask your lawyer about whether you can sue. Think broader, think
strategy and think exposure.

–      Leaving it late can also be a killer. Sure, you have a little time to go before that limitation period expires. But did you know that the builder went into liquidation a year ago and it’s now too late to lodge a proof of debt? A simple ASIC search would have picked that up, had you done it earlier.

–      Choosing a lawyer is also a big deal. All lawyers can tell you when limitation periods expire. But it’s not just about expertise in the law. It’s about industry experience, strategies and thinking broader.

–      For example, lawyers experienced in building defects may be able to tell you how a particular builder will respond to your request that they return to the site to carry out repairs, based on past experience.

Many builders have sparkling reputations and will fix the issues without much resistance. However, similarly some are shell companies created for the sole purpose of the particular development.

Once the development is complete the company is deregistered. Can an OC / BC bring an action against a deregistered company? Experienced lawyers don’t just say ‘no’ but look to developing a strategy which looks broader than the ASIC search. – That kind of knowledge can save the OC / BC much time and money.

3.    Think ahead

–      For committees and strata managers, defects raise new questions each and every day. Many of them unique to the particular strata scheme. – Can the developer block motions to raise levies?

Does the OC / BC need to obtain proxy support ahead of the meeting? How much money should be raised? Can the OC / BC assume everyone will pay that special levy on time? How can the OC / BC reduce the premiums?

–      These issues rear their heads often. The time to ask them is before the OC / BC has to.

–      Committees should also create an action plan. Know what the OC / BC is going to do and when it needs to do it. This type of thinking mitigates stress, and leaves other owners confident that their money is being well spent.

In utilising this three-step approach over 2021-2, Grace Lawyers has helped lead some strata schemes and stakeholders to achieve fantastic results:

·      We acted for four commercial lot owners in a landmark case before the NSW Court of Appeal that confirmed commercial lot owners could recover their share of rectifying common property defects from the developer under contract: Rialto Sports Pty Limited v Cancer Care Associates Pty Limited; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146

·      In 2022, we advised a number of large, layered developments in Queensland consisting of hundreds of residential lots through the rectification of building defects: – With a circa of $5.2M contributions
from the developer (given the builder was placed into administration) without having to commence court proceedings; and

–      with a circa $2.5M contribution from the builder / developer without having to commence court litigation.

·      We acted for a plaintiff owners corporation in a seminal case regarding the scope of the duty of the care under section 37 of the new Design and Building Practitioners Act 2020 (NSW), and whether it extended to developers: The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659

·      In 2021, we acted for a large residential body corporate in Queensland that was approaching the expiry of their limitation period. We urgently commenced proceedings in the Supreme Court and then promptly negotiated a settlement that involved a $1.2M contribution from the builder / developer.

·      In 2022, we acted for a residential body corporate in Queensland that was fast approaching the expiry of its limitation period. We urgently commenced proceedings in the Supreme Court for building defects in the circa of $4.2M.

So, if there is a new strata scheme in your management portfolio: (1) encourage them to do regular (annual) health checks, (2) guide them towards early intervention and to get advice on their rights and options, and (3) plan ahead to keep owners confident and comfortable with the action being taken.