Australia: Changes to home building in NSW have implications for builders, developers, owners and owners corporations

Last Updated: 1 November 2011
Article by Julian Mellick

In brief – the Home Building Amendment Act commenced in NSW on 25 October 2011

The Home Building Amendment Act 2011 (NSW) was introduced into Parliament on 12 October 2011 and commenced on 25 October 2011. Some parts, however, have delayed commencement and are likely to come into effect from 1 February 2012 (according to the Department of Fair Trading).

Four key impacts now in effect

Developers: the owner of land on which a developer does residential building work is now deemed to be a developer. There are limited exceptions.

Insurance: there are new timeframes and requirements for notifying losses and making claims under home owners warranty (HOW) insurance.

Proportionate liability: liability for breach of statutory warranty claims under the Home Building Act can no longer be apportioned to other concurrent wrongdoers.

Bank guarantees: a 10-year limit on HOW claims should facilitate the release of builders' bank guarantees by insurers.

Two key impacts to take effect in the next few months

Warranties: statutory warranty periods for home building work will be reduced to six years for structural defects and two years for other defects (down from the seven years currently allowed), plus an additional six months if the breach of warranty becomes apparent within the last six months of the warranty period.

Contracting: the threshold for written home building contracts will be increased from $1,000 to $5,000, a new written "short form" contract has been introduced for work between $1,000 and $5,000 and the threshold for home owners warranty insurance and cooling-off will be increased from $12,000 to $20,000.

A broader definition of "developers"

As of 25 October 2011, any owner is deemed to be a developer if residential building work is done on their land and they do or will own four or more of the existing or proposed dwellings (or all of them in the case of retirement accommodation specially designed for the disabled).

This change has retrospective effect except in relation to litigation commenced prior to 25 October 2011.

Owners caught by this change will acquire obligations and liabilities in relation to insurance, unlicensed contracting and statutory warranties, including being liable for breaches by other parties.

Unfortunately, this may have a critical impact on any owner of land who is or will be involved in a project delivery or other joint venture agreement under which someone other than the owner develops the land on the owner's behalf.

The relevant amendment explicitly states:

"This makes the owner of the land a developer even if the work is actually done on behalf of another person (for example, on behalf of a party to a joint venture agreement with the owner for the development of the land). The other person on whose behalf the work is actually done is also a developer in relation to the work."

Insurance changes for owners and owners corporations

As of 25 October 2011, owners and owners corporations (OCs) need to make claims within the period of insurance, generally six years for structural defects and two years for other defects, plus an additional six months if the loss becomes apparent within the last six months of the insurance period. Time generally starts running from the date the relevant work is completed.

For "last resort" policies, there is a six month grace period where a claim is not made during that period of insurance because an insured event occurs late (i.e. within six months of the end of the policy or later). It usually applies only where the insurer has been appropriately notified of the loss during the period of insurance and the relevant owner, owners or owners corporation have diligently pursued the builder to recover the loss.

For "first resort" policies, there is a six month grace period if the loss was properly notified during the required claim period but not claimed by 25 October 2011.

Owners and OCs also need to bear in mind the changes to insurance notifications. Previously, a notification of one defect could be sufficient to recover related defects. That might no longer be the case. Accordingly, owners and OCs should be especially careful to identify their losses and defects accurately and comprehensively in their insurance claims.

Proportionate liability no longer applicable to breach of statutory warranty claims

The proportionate liability provisions of the Civil Liability Act 2002 (NSW) no longer apply to claims for breach of statutory warranty under the Home Building Act 1989 (NSW).

Typically, this means that builders and developers who are sued by owners or OCs can no longer apportion liability to subcontractors and consultants. They may need to fall back upon third party cross-claims and statutory claims for contribution (where available), including under the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).

The change does not apply to litigation commenced before 25 October 2011.

Builders' bank guarantees and insurance companies

There is some good news for builders.

Insurers have been known to refuse to release bank guarantees provided by builders as security against their HOW insurance policies, even once the period of insurance has expired. This is justified on the basis that a HOW claim could be made outside the period of insurance.

However, in addition to the tighter insurance requirements identified above, there is now a 10-year "long stop" limit on claims against HOW insurance policies issued before 1 July 2010.

As a result of each of these measures, insurers now should be more inclined to release bank guarantees in a timely manner.

Statutory warranty periods reduced for home building work

The ostensible purpose of the statutory warranty changes is to encourage home owners to take action to address defective work in a timely manner and avoid difficulties in establishing the cause of defects caused by the passage of time.

The shorter statutory warranty periods will only apply to contracts for residential building work entered into once the amendment commences. This could happen soon given how quickly other parts of the Act have been implemented.

A failure to commence proceedings within these periods will normally result in them being barred.

What the new warranty periods mean for owners and OCs

There are also new rules for determining when the warranty period commences. This can vary depending upon whether the relevant works were completed, whether the contract was terminated and whether the building contract defines completion. Often, owners and OCs will not have this information. As a result, the start date (and the end date) of the warranty period can be uncertain.

Further uncertainty arises because different warranty periods will apply to structural and non-structural defects. At the moment, structural defects are generally only those that are likely to cause physical damage or prevent the continued practical use of any part of the building (including weatherproofing and any component of the external walls or roof). However the Department of Fair Trading is considering whether to narrow this definition.

Because of this uncertainty, the safest course is for owners and OCs to obtain legal advice on the cut-off date as early as possible. That way, proceedings can be commenced in time. However, if the warranty deadline is missed, it may still be possible to make a claim on a different basis (for example, tort, contract or consumer protection legislation).

What the new warranty periods mean for builders and developers

Builders and developers, on the other hand, need to be alive to the possibility of relying upon the changes to defeat statutory warranty claims made outside of the new timeframes.

They should not assume, however, that they will be absolved from all liability once the timeframes expire. Defects claims can be made on other bases in which case they may have longer timeframes.

Lower value contracting to be simplified

Some changes which are still to come into effect promise to simplify lower value contracting.

There will be an increase in the threshold from $12,000 to $20,000 for when home owners warranty insurance and a 5-day cooling-off period for residential building work are required.

The threshold for when written home building contracts are required will be increased from $1,000 to $5,000.

There will be a new written short form contract requirement for work between $1,000 and $5,000.

Other home building insurance changes

The NSW Fair Trading and the NSW Self Insurance Corporation can now share information with one another. It is not clear what effect this may have, but it may influence applications for home owners warranty insurance.

In the future, the $500 excess for HOW insurance claims will be reduced to $250.

The minimum HOW insurance cover will increase from $300,000 to $340,000.

The loophole which allowed a related body corporate of a developer or contractor to be a beneficiary under HOW insurance will also be closed.

Contractors now have greater rights in disputes

Owners and owners corporations have for some time been able to notify the NSW Department of Fair Trading about disputes with contractors. Now contractors have the same right.

The intention is that this will avoid the need for litigation. It may in some circumstances. However, this remains to be seen.

Notification may lead to an inspector issuing a work order which a contractor will have to comply with. Further, even if the inspector finds that an item is not defective, that would not prevent an owner or owners corporation commencing proceedings to obtain an alternative finding.

For more information about construction and engineering, major projects, infrastructure and risk, please see the website of Colin Biggers & Paisley or contact Julian Mellick at jcm@cbp.com.au

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Julian Mellick
 
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