Amendments to home building laws
Major amendments to the home building laws in NSW were brought about by the passing of the Home Building Amendment Act 2014 and the Home Building Regulation 2014. Having been a source of concern for all stakeholders in the property industry, we take stock of some the major amendments below, in particular considering some of the vexing issues the amendments will raise for parties to home building disputes going forward. The majority of the amendments commenced operation on 15 January 2015. The remaining amendments, predominantly dealing with changes to contracting requirements, commenced on 1 March 2015.
Operation of the amendments
The application of the amendments is generally retrospective, however a number of key exceptions apply under the transitional provisions. Of note, the amendments do not apply to legal proceedings that were commenced or home warranty insurance claims that were made prior to the commencement of the amendments.
As the amendments were flagged for a considerable period of time prior to their commencement it may be the case that claimant owners and owners corporations will have carefully considered whether they would be better or worse off commencing proceedings or making insurance claims under the old or new regime and will have taken appropriate action accordingly. However, claimants who now find themselves disadvantaged because they took action prior to the amendments coming into operation when they would have been better off under the new regime (or not taking action at all) may need to consider the options that remain open to them. This may include withdrawing and recommencing proceedings or making a further insurance claim where possible to take the benefit of the amendments. On the other hand, builders, developers and insurers will need to consider the points they will be able to take under the regime that is applicable to any claims made against them.
Changes to the date of “completion” for buildings in strata schemes
The new section 3C of the Home Building Act 1989 (“HBA”) deems the date of “completion” of a “building” in a strata scheme to be the date of the issuance of an occupation certificate that allows use or occupation of the building. Consequently, if there are separate buildings within a strata scheme then there can be multiple completion dates for different parts of the scheme. This is relevant as limitation periods under the HBA for commencing legal proceedings and for notifying and claiming on home warranty insurance run from the date of completion of the relevant work.
Whilst this amendment should provide greater certainty as to the dates that limitation periods expire, a number of considerations arise, including the following:
- Owners corporations should seek to ascertain at an early stage whether there are multiple occupation certificates issued in respect of the work in their strata schemes so that they can identify the relevant periods for making claims in respect of their common property.
- Builders and developers may seek to have multiple occupation certificates issued in respect of different parts of a strata scheme in order to reduce their risk. They will also now have a clear date for knowing when they are “off-risk” in respect of different parts of a particular project.
- It is unclear whether separate stages of a single building in a strata scheme that are each the subject of interim-occupation certificates are “separate buildings” for the purpose of section 3C.
- The cascading definition in section 3B of the HBA continues to govern the date of “completion” for work other than that with which section 3C is concerned. In some circumstances, the application of section 3C will be more generous than section 3B. As a result, owners corporations that commenced proceedings or made insurance claims under the pre-amendment regime may have inadvertently time-barred part or all of their claim(s). In those cases advice should be sought as to whether it is possible to take the benefit of the amended legislation by commencing further proceedings or making further insurance claims.
Change from “structural defect” to “major defect”
Prior to the amendments, residential building work undertaken under contracts from 1 February 2012 were subject to a 6 year limitation period for “structural defects” and a 2 year limitation period for any other defects from the date of completion of the relevant work. Whilst there are some exceptions, these limitation periods apply in respect of both taking breach of statutory warranty proceedings against contractors and developers and notifying loss or claiming under insurance contracts.
The amendments replace the structural defect concept with a new “major defect” provision that is enshrined in section 18E of the HBA. Whilst the definition of what constitutes a major defect is substantially similar to the previous definition of structural defect there are a number of important differences.
On the one hand, the threshold requirement for what kind of risks a major defect must pose in order to be classified as such has arguably been raised by reason of the removal of the previous threshold that required a defect to result or likely result in “physical damage”.
On the other hand, the threshold requirement that a major defect be “in a major element” of a building is arguably lower than the pre-amendment legislative requirement that required a structural defect to be in a “structural element”. Notably a “fire safety system” and “waterproofing” are now deemed to be major elements whereas they were previously not deemed to be structural elements. As an example of this, if one considers the numerous statutory fire safety measures contained within clause 166 of the Environmental Planning and Assessment Regulation 2000 (many of which are implemented in most buildings), there are now strong arguments that most, if not all, of those fire safety measures are deemed major elements. Conversely, under the pre-amendment legislation there were strong arguments that they would not have been structural elements. The significance of this deeming provision should not be lost, particularly because fire safety and waterproofing defects often pose a risk to health and safety, have the potential to cause further damage and are often costly to rectify.
These changes apply to any legal proceedings for breach of statutory warranty against a builder or developer commenced after 15 January 2015. The changes also apply to all claims on “last resort” contracts of home warranty insurance which had not been made before 15 January 2015.
Preference for rectification works
New section 48MA of the HBA introduces a principle that the preferred outcome in proceedings alleging defective residential building work is rectification of the defective works by the responsible party. Section 48O of the HBA has always provided a power to the Tribunal to make an order for rectification of defects by a party to legal proceedings. However amendments to sub-section 48O(2) make it clear that the Tribunal may now make such an order even if neither party seeks it.
Whilst the amendments evince an intention of having the Tribunal facilitate the undertaking of rectification works, there is considerable uncertainty as to how rectification work orders will operate in practice. Some of the relevant considerations include the following:
- It is likely that parties will now need to serve evidence as to whether rectification orders should be made as a matter of course, irrespective of whether they wish to apply for or oppose such orders. Whilst it is unclear what matters the Tribunal might have regard to when considering making a rectification order, some of the relevant matters may include the degree of confidence that the owner has in the contractor, the relationship between the parties, the history of any litigation, the capability of the contractor to legally and financially do the work and details of any previous failed attempts by the contractor to do rectification work.
- It is also unclear what terms and conditions might be placed on such orders. For instance, it would be expected that such orders would generally at least specify a relevant scope of works, and perhaps detail the degree of supervision or certification by a third party expert. Parties should ensure that they seek appropriate ancillary orders that protect their interests.
- Parties will need to consider what submissions they will need to make to the Tribunal in regards to whether legal proceedings should remain on foot during the time with which any orders for rectification are complied with by a rectifying contractor. One major consideration in this regard is whether proceedings disposed of by way of a rectification order are able to simply be relisted if the works are not undertaken in compliance with the orders or if new proceedings need to be commenced. If it is the latter then there may be issues with commencing the further proceedings within the relevant time period.
- As a rectification order does not “trigger” a contract of “last resort” insurance, contractors may be able to extend the time for undertaking rectification work under an order with the result that the owner is out of time to claim on their home warranty insurance contract in the event that it is “triggered” (such as by the insolvency of the builder). Existing section 103BC of the HBA provides that insurance contracts issued prior to 1 July 2010 do not provide insurance cover in any circumstance unless a claim is made on the contract of insurance within 10 years of completion of the work. Where an owner is no longer able to claim on their insurance then the litigation profile of the owner (knowing that if the contractor becomes insolvent they will be left with no recourse) changes dramatically. Accordingly, parties should consider the strategic litigation issues that arise from this amendment.
- The addition of sub-section 92(5) of the HBA now makes it clear that rectification will not need to be the subject of further home warranty insurance where the original work was insured. In those circumstances the rectification work is taken to be covered by the original contract of insurance. Notwithstanding, there is a real question as to whether defects in such further work will be able to be the subject of in-time notification (an element required for indemnity) under the original insurance given that it will often be the case that rectification work will occur after the time for notifying under the contract of insurance has expired. Additionally it does not appear that sub-section 92(5) has any operation in respect of rectification work where the contractor was not originally insured. Accordingly, it may be that rectification work in those circumstances will require a new contract of home warranty insurance where the value of the rectification work is over the threshold amount (currently $20,000).
- Whilst the above analysis is in regards to contractors returning to do rectification work, it is unclear whether the provision will be able to be relied upon by a developer or possibly even an insurer in legal proceedings in the Tribunal.
These amendments will apply to all proceedings commenced from 15 January 2015 but not to proceedings commenced prior to that date.
Other changes to home warranty insurance
The major change affecting home warranty insurance is the change from “structural defect” to “major defect” considered above. However, other changes that are also relevant include:
- Home warranty insurance will be re-styled “insurance under the Home Building Compensation Fund”.
- Under policies issued from 15 January 2015, there will be an ability to make a claim outside the period of insurance for “non-completion” losses, provided the loss is notified, the enforcement of the statutory warranties is “diligently pursued” and the policy is ultimately claimed on within 10 years of completion.
- Insurance will not be required for new owner-builder work (although if the owner-builder engages a contractor, that contractor may need to have insurance).
Changes that will only apply to new building contracts
The following amendments only apply to new building contracts entered into after the commencement of the relevant amendment:
1. A further defence to a claim for breach of a statutory warranty has been provided for in the amended section 18F of the HBA.
The expanded defence allows a contractor to defend a claim for breach of statutory warranty on the basis that the contractor reasonably relied on instructions given by a “relevant professional” (which includes a person that holds himself or herself out as an architect, engineer or surveyor) who was acting for the person for whom the work was done. For the defence to be made out the professional needs to be independent of the contractor and the relevant instructions need to be evidenced in writing.
The defence provides a basis for contractors reducing their liability going forwards. This can be done by them ensuring that their work is the subject of written instructions provided by a relevant professional at all steps. It is currently unclear how the concept of “instructions” will be interpreted (whether for instance it may be possible for a contractor to assert they relied on approved construction plans or specifications provided by an architect acting for an owner). In any event, where the defence is raised then there is likely to be dispute as to whether the contractor has acted reasonably in relying on those instructions.
The provision applies for works undertaken under contracts entered into from 15 January 2015.
2. There is now a statutory duty for owners to mitigate their loss in respect of a breach of the statutory warranties.
That duty includes an obligation on the owner to make reasonable efforts to notify the relevant contractor (and, it appears, developers where applicable) within 6 months of awareness. There is also a further duty now imposed on owners to not unreasonably refuse access to a person that is in breach of the statutory warranty to rectify the breach. It is unclear if the provision requires that an owner allow a contractor or developer to arrange for a third-party to undertake the rectification work on their behalf.
Failure to fulfil these duties may result in a reduction of damages or an adverse costs outcome in any proceedings. However, it should be noted that a duty to mitigate loss and damage has always been imposed by common law and on one view the new statutory duties impose no further obligation on an owner than the owner was subjected to previously. However, it will be of interest to see if the courts and Tribunal extend the scope of the common law duty in light of the new provision, particularly when taken in conjunction with section 48MA discussed above, which provides for a preference for rectification.
The provision applies for works undertaken under contracts entered into from 1 March 2015.
3. As of 1 March 2015, the warranty in sub-section 18B(a) has changed from a warranty that the work will be “performed in a proper and workmanlike manner” to a warranty that the work will be “done with due care and skill”.
It appears at least arguable that this provision has reduced the protection afforded to owners as contractors may now be able to argue that they acted with due care and skill by engaging competent sub-contractors, whereas previously the contractor was required to secure an outcome in ensuring the work was done in a proper and workmanlike manner.
Further to this, a new sub-section 18B(2) makes it clear that work undertaken by sub-contractors is work that is subject to the statutory warranties. Consequently, it appears clear that owners may now look to sub-contractors for compensation or rectification in relation to defective works. There is some authority for the proposition that this was the case prior to the amendments and as a result we do not expect it to change the landscape of building defect litigation in any significant way.
4. A number of the prescribed monetary thresholds have also changed. Those amendments are set out below:
- The definition of “residential building work” (and therefore protection offered by the statutory warranties or home warranty insurance coverage) was previously excluded where the value of the work did not exceed $1,000. From 15 January 2015 this amount has now been raised to $5,000. Consequently, from 15 January 2015 contracts to do work under the value of $5,000 no longer require a written contract under the HBA.
- “Small job” contracts (which require only the detail set out in section 7AAA of the HBA) were previously required where the value of the work was between $1,000 – $5,000. As of 1 March 2015 that range has moved to $5,000 – $20,000.
- Detailed home building contracts complying with section 7 of the HBA were previously required where the value of the work exceeded $5,000. As of 1 March 2015 such contracts are only required where the value of the work exceeds $20,000.
As can be seen there are a multitude of changes to the home building laws in NSW brought about by the amendments to the HBA. Many of the implications of those changes are yet to be seen and we will need to await interpretation from the courts and the Tribunal as to how the new provisions will operate in the post-amendment environment.
The information provided in publications of Chambers Russell Lawyers is commentary and general information. This information is not legal advice and should not be relied upon as such. It is our recommendation that formal legal advice be obtained that is specifically relevant to your matter.
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