Strata Schemes Management Amendment (Building Defects Scheme) Bill 2018
(Debate on Bill, Legislative Assembly, NSW Parliament)
The Strata Schemes Management Amendment (Building Defects Scheme) Bill 2018 provides the operational details for the much awaited defects bond scheme that began on 1 January 2018. The building defects scheme requires developers to lodge a bond of 2 per cent of the contract price with the Department of Finance, Services and Innovation for buildings of four or more storeys. The bond can then be used by the owners corporation to fix defects. Building defects in apartments are a serious challenge with many multi-level buildings still being built with significant problems. Past reforms have increasingly made it difficult for owners to get redress. Apartments were removed from the coverage of home warranty insurance and statutory warranty deadline, and definition changes have benefited developers over home owners.
I continue to hear from constituents who have had to raise massive special levies to fix or pursue court action over defects. Many property lawyers advise their clients against purchasing off the plan or buying newly constructed apartments because of the likelihood of defects. The Government is planning and approving massive residential development throughout Sydney, including in and adjacent to my electorate over the Sydney Metro stations, at Barangaroo, Darling Harbour, the Sydney Fish Market and Waterloo. We must address the financial risk, perceived and inherent, in buying a new apartment. The building defects scheme provides potential to give home owners much-needed assistance in holding developers to account and getting defects fixed without litigation. Most of the bill includes good changes but I am concerned that some parts will make the process lengthy and costly, with owners corporations forced to undergo countless inspections and prolonged and difficult negotiations. In many cases court action will be a better option. The problem lies with how the bill determines the amount of bond to be released.
Under the legislation the building inspector will be required to conduct an initial report on defects, followed by a final inspection and report on any remaining defects. The final report is then to include a scope of works on what needs to be fixed. Under the scheme the bond is meant to be released based on the final report, but the bill excludes costs from the final report. Instead, the developer and the owners corporation must negotiate on the predicted cost of works and therefore how much bond should be released to cover them. Owners corporations will be forced to hire consultants to conduct new inspections and provide new reports. The cost of this process cannot be recovered from the bond and will be borne by the owners corporation. The developer will also likely demand further inspections by their own experts. If the developer and the owners corporation cannot agree, the Secretary of the Department of Finance, Services and Innovation will decide the cost, with any expenses incurred to make this determination borne equally by the developer and the owners corporation. This process will likely require additional inspections and reports.
Getting access to all apartments required to conduct inspections, particularly in large buildings, can be a significant challenge. If there are too many inspections it will be near impossible to get access every time. People go away, overseas investors have empty apartments and some owners are just not responsive. It is also an unfair impost to force tenants repeatedly to open their homes up to various consultants. If access has not been achieved in some units by any experts, the developer will likely argue against covering the cost for repairs in those units. Developers might purposely request multiple inspections to make pursuing redress untenable so that owners abandon the process. This is a known tactic that gets used under the statutory warranty scheme. Indeed, the process proposed by this bill is similar to pursuing redress in the courts, except the courts provide options for owners corporations to recover costs for any reports they commission.
When the building defects scheme was introduced, Minister Dominello said that "the key to making the process work is to ensure that it is completely self-contained". This would be achieved if the scheme required the inspector's final report to include the estimated cost for the scope of works to fix the defects. The building inspector is appointed by both the owners corporation and the developer and is therefore unbiased and best placed to determine or appoint someone to determine the cost of works. This approach would ensure that release of the bond is based on the final inspector's report, as the legislation intended, not a prolonged process of multiple inspections and reports, followed by negotiations and potentially government intervention.
The building defects scheme is meant to provide owners corporations with an alternative to litigation to get redress for defects in their homes. I foreshadow that I will move amendments in the consideration stage that will make the inspector's final report include costings. This will make the scheme simple and accessible for all. I am disappointed that the Government has indicated it may not support these amendments. They are necessary to make the scheme workable. The claim that the building inspector may not be qualified to cost the scope of works is ridiculous. Where the building inspector does not feel able to do the costing or a part of it, the building inspector can appoint and brief a suitable expert to cost their scope.
The regime already has the building inspector appointing secondary inspectors where needed if something to be addressed is outside the inspector's skillset. Building inspectors are already expected to engage experts to deal with issues that they cannot deal with. It would just be a matter of adding a sentence or two to the existing guideline document to allow a building inspector to also retain a secondary inspector, if needed, for cost estimation, although many building inspectors will cost it themselves. I expect that time will show the barriers that owners corporations face in getting redress for the scheme. I also foreshadow that I will also move an amendment to require a five-year statutory review of the scheme to determine whether it is achieving its objectives.
A home is a massive investment and defects can cause new home owners considerable hardship. I expressed my support for the building defects scheme when it was introduced and had hopes that it would provide real options for apartment owners dealing with homes built with serious problems. In its current form, the bill will make the building defects scheme unnecessarily expensive, time-consuming and disruptive. I call on the House to fix the problems with the bill by supporting my amendments so that the building defects scheme can fulfil its potential to help apartment owners get remedy for building defects in their homes.
Click HERE for full debate on NSW Parliament Website.
Alex Greenwich Amendments:
By leave: I move my amendments Nos 1 to 5 on C2018‑101C in globo:
No. 1: Final report to include estimate
Page 3, Schedule 1. Insert after line 34: Section 201 Final report
Insert at the end of section 201 (2) (d): and (e) include an estimate of the costs of rectifying the defective building work identified in the report.
No. 2: Realisation of building bond
Page 4, Schedule 1  (proposed section 209 (1) (d)), lines 26 and 27. Omit all words on those lines.
No. 3: Realisation of building bond
Page 4, Schedule 1  (proposed section 209 (1A)), lines 30–32. Omit all words on those lines.
(1A)The amount that may be claimed or realised for payment under subsection (1) (a) is the amount secured by the building bond or the estimate included in the final report of the costs of rectifying the defective building work concerned (whichever is the lesser).
No. 4: Realisation of building bond
Page 4, Schedule 1  (proposed section 209 (2A), line 36. Omit "or (d)".
No. 5: Realisation of building bond
Page 5, Schedule 1  (proposed section 209A), lines 9–26. Omit all words on those lines.
The Building Defects Scheme aims to provide owners and developers with a quick, affordable and workable process to remedy defects in new apartments. This requires it to be self-contained. As a member who represents the electorate with the largest number of apartment communities, I have heard many stories of owners corporations having to deal with homes built with significant defects. They have told me of the drawn‑out and expensive processes that they have had to endure to try to get redress for faulty work and the tactics developers have used to discourage them from pursuing their rights.
It is those stories that have motivated the Government to introduce the Building Defects Scheme so that owners could have an alternative, efficient and fair process by which to obtain redress. It is disappointing that the Government has opted for a scheme that supports lengthy negotiations, alternative consultants and Government intervention to resolve disputes. The proposed process in the bill requires owners corporations and developers to negotiate how much of the bond must be released to meet the cost of fixing the defects, which will force strata communities to undergo countless inspections and spend funds on multiple reports. There will be a serious risk of them not getting their full entitlement from the bond if access for inspections in all affected units is not achieved by consultants who have been commissioned by the owners corporation, the developer or the secretary. As drafted, the bill will prevent the Building Defects Scheme from providing a real alternative to litigation, with both options flooding owners and occupiers with endless inspections and reports.
My amendments would remove the need for the owners corporation to negotiate with the developer on the cost of works to fix defects. The amount of the bond to be released would instead be based on the amount the independent building inspector identifies as needed to carry out the works. The amendments would require the building inspector to include costs for the scope of works in the final report. The building inspector would have the final say. The building inspector is jointly appointed by the owners corporation and the developer, and therefore is not biased towards either. The independent building inspector also is required to conduct inspections for the final report to identify remaining defects and establish what works are needed to fix them anyway, which means additional disruptive inspections would not be required.
The claim that the building inspector may not be qualified to cost the scope of works is ridiculous. When the building inspector does not feel able to do the costing or part of it, the building inspector can appoint and brief a suitable expert to cost their scope. The regime already has the building inspector appointing secondary inspectors when needed, if something to be addressed is outside the inspector's skill set, but the inspectors already are expected to engage experts to deal with particular issues that they cannot deal with. It would just be a matter of adding a sentence or two to the existing guideline document to allow a building inspector to also retain a secondary inspector, if needed, for cost estimation, although many inspectors will cost it themselves.
Dispute resolution is not the answer and only undermines the scheme. Owners corporations have been calling for a new option that avoids drawn‑out processes of repeated inspections and reports, followed by difficult negotiations. To get to the point of dispute resolution by the secretary, owners have incurred large costs and major disruptions. The building inspector is best placed to determine the amount of the bond that should be released to the owners corporation. The amendments would make the Building Defects Scheme an effective and modern tool for helping apartment owners with defective homes and has the support of the Owners Corporation Network. I commend the amendments to the House.
See debate on amendments HERE.
Alex Greenwich Amendments:
I move my amendment No. 1 on sheet C2018-102A:
No. 1: Review of Part 11
Page 11, Schedule 1. Insert after line 31:
Insert after section 215:
215A Review of Part
The Minister is to review this Part to determine whether the policy objectives of this Part remain valid and whether the terms of this Part remain appropriate for securing those objectives.
(2) The review is to be undertaken as soon as possible after 1 January 2024.
(3 )A report on the outcome of the review is to be tabled in each House of Parliament no later than 1 January 2025.
I share Strata Community Australia's concerns that the process to determine the amount of the bond to be released to fix defects under this bill will result in drawn-out negotiations, erosion of funds for consultants, ongoing disruption from multiple inspections and potentially unfair determinations. The Government does not agree with my concerns and did not support my amendment to make the Building Defects Scheme a self-contained streamlined process. Notwithstanding, I am sure that we can all agree that if these concerns are realised we will need to amend the scheme. Therefore, my amendment would introduce a five‑year statutory review of the building defects to ensure that problems are picked up and addressed.
The aim of the scheme is to help owners corporations get redress for building defects but it is complex and there are concerns it could be ineffective. It is appropriate to review the scheme in five years to ensure it achieves its aims. In five years we will know how the scheme has worked for buildings that are currently under construction. The amendment has the support of the Owners Corporation Network. I ask the House to support this amendment so that the Building Defects Scheme is reviewed after five years and so that we know if it is providing apartment owners with an effective option to getting redress for homes built with defects and if it can address any problems. This is a no‑brainer for such an intricate scheme.