Australia: Flammable cladding in high rise? Following Grenfell, time to revisit these issues for new buyers and existing owners

Last Updated: 25 July 2017
Article by Patricia Monemvasitis and Ben Robertson

Fire spreads rapidly, regulatory change does not.

The tragic and catastrophic fire at the Grenfell 24 storey apartment building in West London involving composite cladding has given owners and tenants in high rise apartment buildings pause for thought: Is my building at risk?

Buyers of new apartments may well ask: Will my new apartment be at risk?

Action Plans for New Buyers and Owners In At Risk Schemes

Action items for new buyers:

  1. There is a risk that non-compliant building materials may used in off the plan projects. Expert legal advice should be sought to ensure appropriate warranties are negotiated into the purchase contract to avoid this risk. Where the developer does not provide a warranty that it will not use non-compliant building materials, careful consideration of the risk of proceeding with the purchase is essential.
  2. Post completion, owners corporation insurance policies should be examined carefully and updated to consider the impact on insurance coverage if non-compliant cladding has been used or non-compliant fire safety systems are installed.
  3. Statutory warranty periods must be managed carefully to avoid an owners corporation missing an opportunity to commence proceedings within the relevant warranty period. Legal advice should be sought at an early stage to mitigate this risk.

Action items for existing schemes:

  1. Consider seeking legal advice and engaging an expert in fire safety to check whether composite cladding is compliant. Non-compliant composite cladding looks exactly the same as compliant composite cladding to the naked eye and only testing by an expert can determine if non-compliant cladding has been installed. The NSW State Government has not been as pro-active in this respect as their Victorian counterparts and owners corporations need to consider taking this step.
  2. Seek urgent advice regarding action against possible responsible parties such as developer, builder, architect in relation to any non-compliant building materials used and/or specified, particularly given the statutory warranty periods which apply, as discussed below.
  3. Owners in at risk buildings will need to address issues with any known non-compliant building materials when preparing properties for sale and instructing on sale contracts to ensure their contract is unconditional and does not expose them to any liability.
  4. Adhere to points 2 and 3 above which are advised for new owners.

The Australian Context

2014 Lacrosse Fire

In the Australian context we have recently seen a major cladding fire in 2014 at the Lacrosse Apartments in Melbourne (involving a non-compliant imported product which looks exactly the same as the compliant Australian made product). Fortunately there was no loss of life in that fire in circumstances where the internal sprinkler system performed above its specification.

Owners in the Lacrosse Apartments have been left with a large bill to replace non-compliant cladding of $8.6M, in addition to $6.5M in costs to rectify fire damage to the building – with 470 owners that equates to sizable special levies to cover those costs.

Facing an order to replace the non-compliant cladding, the owners and the builders of the Lacrosse Apartments appealed to the Victoria Building Appeals Board submitting that an alternative solution (which included the installation of water sprinklers) should be adopted in preference to removing the combustible cladding. The Building Appeals Board rejected that alternative solution proposal and determined that the combustible cladding must be removed.

Fire Defects Can Remain Latent For Years Before Discovery

Fire defects are one of the major problems in new apartments that can be hidden for years despite annual fire checks and are often only uncovered when an owners corporation changes fire audit providers and the new providers notice no fire collars, fire dampers or other required safety mechanisms.

2012 Fatality Involving Non-Compliant Internal Sprinklers

The failure of the regulatory system in NSW with respect to fire defects was seen in the death of Connie Zhang in 2012, where a building didn't have compliant internal sprinklers. The building had been certified by a private certifier, however, Council and the developer had been involved in stand off regarding additional works for years before the fire.

The coroner at the inquest into the death of Ms Zhang commented that

"[i]n my view, it is likely that the various orders and checks and annual fire safety statements were regarded by all involved as a form of regulatory homework rather than as a tool for improving the actual safety of residents in the buildings".

Among the coroner's recommendations in September 2015, were that a statutory regime be implemented for the accreditation and auditing of certifiers that can undertake annual fire safety checks and to issue annual fire safety statements. The latest draft regulation dealing with fire safety proposes accreditation for fire safety certifiers, but the lethargic pace of regulatory reforms can be seen in circumstances where we are almost into the third quarter of 2017 and the draft regulation is still under consideration.

Audits For At Risk High Rise? – No State Government Response in NSW

Victoria has been very pro-active in auditing city high rise following the Lacrosse fire. It is concerning that the audit found that 51% of buildings had non-compliant materials. After a risk assessment two buildings were high risk and required emergency works.

NSW has been very slow to react to the Lacrosse fire, with no call for an audit of high rise buildings and very slow regulatory reform.

Some Local Councils, such as Lake Macquarie Council have taken steps to conduct an audit of cladding, however, to date there has been no NSW State Government action taken to audit at risk buildings with the same expediency as their Victorian counterparts.

The Grenfell fire may be a wake up call to the legislators on regulatory reform. To date, there has been little or no discussion about identifying non-compliant cladding in existing buildings in NSW and how to best manage those risks.

Retrospective Amendments To Statutory Warranty Periods And You

Buildings Built Under Contracts From 1 February 2012

After retrospective amendments writing back the types of building defects that are covered by statutory warranty periods were introduced into the Home Building Act 1989 through 2014 amending legislation, any defect in the fire safety system potentially only attracts a two year warranty period (from an occupation certificate being issued) unless the defect is catastrophic and causes or is likely to cause demolition/destruction of the building (or part of the building) or inability to use the building (or part of the building) for its intended purpose. If the defect is catastrophic it will fall within a six year warranty period, otherwise a 2 year warranty period applies.

With time running from an interim occupation certificate there may be very little time left on a warranty period after an owner moves in for the owners corporation to investigate defects and take appropriate action.

Buildings Built Under Contracts prior to 1 February 2012

For buildings built under contracts prior to 1 February 2012 the statutory warranty period is seven years. We note that it is possible that developers and builders may have sought to limit their liability by taking advantage of changes to the Home Building Act 1989 that saw statutory warranty periods reduced for contracts entered into from 1 February 2012. Caution should be applied, therefore, for any buildings where there is a suspicion that a building may have been built under two contracts, one prior to 1 February 2012, and one post 1 February 2012.

High Court Closes Door On Negligence Actions

Following the High Court decision in Brookfield Multiplex (Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36) it is now very difficult to sue a builder in negligence and for owners to demonstrate that they have the requisite vulnerability to economic loss caused by lack of reasonable care by the builder. In particular owners have recourse to a statutory warranty regime and may take additional steps to protect themselves such as by negotiating defects liability period into purchase contracts.

Accordingly, owners may find that they do not have a negligence action against a builder and it is important prior to the end of the relevant statutory warranty period to investigate building defects, make a Home Owners Warranty Insurance notification/claim (as applicable), and diligently pursue any responsible builder and/or developer with respect to any breach of a statutory warranty (including commencing proceedings if necessary).

Summary

While the NSW authorities formulate policy through stakeholder consultation and draft regulations designed to improve high rise build quality going forward, owners corporations and owners of commercial high rise buildings should consider acting now to mitigate the risks associated with non-compliant cladding in high rise buildings.

Considering purchasing an apartment in a high rise apartment, either off the plan or from existing stock? You should consider seeking legal advice to formulate a strategy to mitigate the risks associated with any non-compliant building materials used in the construction of the apartment tower.

We can assist in advising buyers and sellers of apartments to mitigate any risks associated with non-compliant cladding. For owners of apartments we can assist in the instruction of an appropriate fire safety consultant and provide strategic advice in relation to your rights as against third parties in the event that defects in the fire safety systems in your building are discovered.

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
Patricia Monemvasitis
Ben Robertson
 
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