Scratching The Surface: A Reply to Building Stronger Foundations

The “next step” announced by the state government on 26 June 2019 does not seem to have advanced much from the reform package announced 19 February 2019, despite having been re-elected on 23 March 2019 and the 3 months since, which has also seen Mascot Towers evacuation to follow Opal Tower. The delay appears to have been more due to a change of Ministers and the government rearranging portfolios after the election than because the reform package was being further developed in any meaningful detailed way.

The package is focused on the design stage of building, introducing a statutory duty for those designers and builders, and creating a Building Commissioner, rather than dealing with some more fundamental issues. It seems to be fiddling on the edges of the real issues. Notwithstanding other recent changes the announcement calls attention to, (based on my 20 years of experience in the area) this will not make the changes necessary to deal properly with the defects crisis facing NSW. It is a crisis. Opal Tower and Mascot Towers are the tip of the iceberg as many in the industry have said. Structural flaws and cracks are serious, but far less common than water leaks and fire safety defects. These issues with the building industry have been known about for years and have not been properly addressed. Even when put in the spotlight, like by the country’s flammable cladding crisis which has been an issue since at least 2014, governments around Australia continue to fail to deal with resolution quickly and effectively.

Registration of building practitioners

The package calls for registering building practitioners such as engineers. Victoria is also seeking to plug this hole with the announcement of the Professional Engineers Registration Bill 2019 in April. To the extent to which the registration of these practitioners removes rogue operators and ensures insurance in place then that can only be seen as a positive step. But, once again, the empirical data suggests that rogue designers are far from the cause of the current crisis.

Plan & specification declarations

The package focuses on building designers declaring plans comply, and builders declaring they have built to plans. This already occurs under the present certification system. Design is not usually the main cause of building defects, poor quality construction is. The government’s own Interim Report into Opal Tower found the apparent issue was the work not following the plans and that bot being identified during the work. Buildings can be built according to plans and still have extensive defects. The current building certification scheme introduced in 1998 relies heavily on sub-contractors and consultants issuing compliance certificates for the quality and compliance of work. Private certifiers are entitled and understandably rely on these certificates for work they have not inspected or cannot inspect (given they are not on site all the time, and perform only limited inspections as required by law). Those compliance certificates are not covered by the proposed changes, the issuers of those certificates are not going to have additional oversight or be required to be insured, and they will not owe the proposed statutory duty of care to owners. They need to be included in these steps to have any positive effect on building quality.

Role of private certifiers

The announcement seems to credit private certifiers with playing a greater role and exercising greater scrutiny over projects than is required or occurs under the current scheme. Private certifiers are not project managers or superintendents. They are not the old “clerk of works” that used to monitor work sites. Far from it. If the government wants them to fulfil that role, then it should do that. It would be better off requiring the incoming 2% strata defects bond scheme be spent on such a resumed system, in my view. Bringing back the clerk of works system is something raised following Opal Tower (see https://aca.org.au/article/bring-back-the-clerk-of-works).

It is also worth noting Clause 162A(5) of the Environmental Planning & Assessment Regulation (https://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/nsw/consol_reg/epaar2000480/s162a.html). A private certifier in NSW only needs to inspect 30% of fire rated construction and 10% of membranes. Nicole Johnstone from Deakin University and Sacha Reid of Griffith University released a paper recently, “An Examination of Building Defects in Residential Multi-Owned Developments”, which found most common defects included water leaks and fire safety. Waterproofing and fire safety are two of the most underqualified and unregulated trades. There would appear to be a link, which the package does nothing to address. These specialities need to be as highly regarded and qualified as the traditional trades of electricians, plumbers and carpenters.

Need for Insurance

Requiring builders to declare works comply with plans, beyond already often being required or done already, ignores that builder necessarily rely on specialist trades and consultants to do large parts of work and certify to the builder that work was done properly. It becomes a house of cards, or rather certificates relying on each other. Making the builder liable for such a declaration also means nothing without insurance, if the builder becomes insolvent to avoid or as the result of any Judgement against it for damages. Most builders currently do not hold and are not required to hold insurance that would cover such a claim against them.

Requiring insurance for the building designers and practitioners as proposed assumes insurance can be easily obtained. The current insurance crisis facing the private certification industry across Australia, caused by the flammable cladding crisis, shows this cannot be assured. Insurers are understandably reluctant to insure an industry where the risk of claims is currently concerningly high. Insurers insure against the risk of, not for certain, problems.

It is also worth noting that high rise units in NSW have not been required to have home warranty insurance since 2003. The government currently underwrites home warranty insurance for houses and low rise units. It regulates the building and certification system in NSW, yet seems unwilling to insure high rise units due to excessive risks and costs in doing so. It did so up to 1997, successfully.

Statutory Duty of Care

The introduction of a statutory duty is laudable, and will fill some of the gaps in consumer protection that have emerged due to court decisions in recent years. However, this package does not deal with a number of flaws and loopholes in the statutory warranty regime, which is the current and best protection for owners, some of which go back to 2010.

Developers can partially avoid this by splitting the engagement of the builder and the ownership of the land, such as Ecove being engaged by Sydney Olympic Park Authority for Opal Tower.

Sub-contractors were confirmed as liable under the statutory warranties in 2015 changes, but a court decision soon after created real problems with owners corporations relying on this due to the statutory warranties being handed down through a concept of succession of title.

Only recently a court decision found leasehold stratas, which are rare but exist usually for government land, missed out on the statutory warranties again due to this succession of title flaw.

Fixing these problems would greatly strengthen consumer protection, fixing flaws present for years. They are not mentioned in the package. These statutory warranties would be preferable for owners to suing the same persons under any statutory duty of care.

“$2 companies” & “phoenixing”

One of the biggest issues for holding builders and developers liable, where they do not have insurance, is they are usually “$2 companies” or “special purpose vehicles” that become insolvent soon after projects are finished and that limit liability to the company which may have little or no assets to meet a Judgement. Victoria has recently flagged changing the law to ensure such companies are held liable for cladding defects in that state (https://www.afr.com/real-estate/commercial/victoria-to-commit-funding-for-cladding-fix-20190625-p5210z). However, this would not be easily done, and changes affecting company law like this would have to involve the federal government.

 Proposed Building Commissioner

The Building Commissioner will provide a senior bureaucrat with a focus on the industry, but unless that person has the additional funding, the will to be proactive, and political support to regulate an area that is a crucial part of the state economy, I cannot see it changing much. Previous Minister Matt Kean less than a year ago cut $52 million from revenue for regulation of the building industry, to reduce business costs to the industry in the form of licence fees (https://www.finance.nsw.gov.au/about-us/media-releases/tradies-save-52-million-thanks-better-business-reforms). That buys plenty of regulation and oversight in an industry that clearly needs more, not less. And which this package promises.

Building Products (Safety) Act 2017

The recent announcement indicates that the government “introduced a comprehensive building product safety scheme through the development of the Building Products (Safety) Act 2017”, essentially to deal with the current flammable cladding crisis. That Act was based heavily on similar Queensland legislation, but it is worth noting that provisions providing a “chain of responsibility” placing duties on building product supply chain participants was not replicated in NSW. So NSW’s scheme is not as comprehensive as Queensland’s, although presumably those product designers, manufacturers, importers, suppliers and installers who operate in both states and already comply in Queensland could now easily comply with the same requirements in NSW.

Conclusion

The current problems facing the building industry in NSW have 22 years of history, since the current home warranty scheme was introduced and an amendment act to the Home Building Act on average every 2 years. That is ignoring the changes to the planning and private certification scheme.

There are no simple solutions to these problems. The government faces a challenge to provide those solutions. These problems will not go away. To the contrary, the government is dealing with a crisis 22 years in the making.

Paul Jurdeczka, 2 July 2019