The draft Security of Payment Regulation: a missed opportunity to protect resident owners?

NSW's security of payment legislation has been subject to a new tranche of amendments following the Murray Report released on 31 December 2017. The amendments to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act), whilst passed on 21 November 2018, have not yet commenced.

Those amendments will delete the current residential exemption under section 7(2)(b) of the Act, which was presumed to leave the heavy lifting for a residential exemption to a class of contracts prescribed by the Regulation. The amendments also introduced the concept of an owner occupier construction contract, defined in the same terms as the former section 7(2)(b) and broadened the exempt residential construction contract to contracts 'connected with' (that is, not just contracts for residential building work) an owner occupier construction contract – likely to be the next source of controversy in this space.

NSW Fair Trading is currently seeking feedback on the proposed amendments to the Regulation which sits alongside the Act and has circulated the Building and Construction Industry Security of Payment Amendment Regulation 2019 (the Draft Regulation). The deadline for submissions is 21 June 2019.

Resident owner exemption

The current exemption under section 7(2)(b) of the Act provides that the Act does not apply to a construction contract for the carrying out of residential building work (within the meaning of the Home Building Act 1989) on such part of any premises as the party for whom the work is carried out resides in or proposes to reside in.

As is apparent from the disputes ventilated before the courts, that the application of the exemption has been contentious, both in terms of to whom and what it applied and how it is applied. Multi-unit developments have presented a particular difficulty:

In Shorten, a couple had entered into a contract for the construction of 10 residential units. The couple intended to reside in one unit. The couple submitted that the exemption under the Act applied, and as a consequence the payment claim issued by the Builder pursuant to the Act was void.

The Court noted that the "Parliament needed to decide" whether the exemption applied to this type of construction contract however held that because the couple did not intend to reside in the whole of the premises, the contract did not fall within the exemption.

In making its decision, the Court applied a broad approach to the exemption and held that either the contract is within the ambit of the exemption or it is not, irrespective of the fact that the couple intended to reside in arguably 'part' of the premises.

In Oppedisano, the property contained four separate single occupancy units. The owner resided in one unit and the members of his family resided in the other units. The owner argued that the exemption applied because he was residing in one of the units.

The Court noted that "Section 7(2)(b) of the Act is not entirely clear in its drafting" and that nothing turned on the Regulations, however nonetheless affirmed the decision of Shorten and held that because there are multiple units on the site, the exemption could not exclude the contract (or part of it) from application of the Act.

Other cases have dealt with the exemption in the situation of holiday houses and owners corporations as principals.

The not so new concept – 'owner occupier construction contract'

The Draft Regulation confirms that owner occupier construction contracts would be a class of contract exempt from the Act.

It would further exclude a claimant's rights to make payment withholding requests against a principal contractor under Division 2A of Part 3 of the Act for owner occupier construction contracts. This, as well as the broadening of the exemption to contracts 'connected with' an owner occupier construction contract, will be the next area of controversy in this space.

It does seem like a missed opportunity to clarify some of the issues which the Courts have grappled with and flagged for consideration by the legislature, particularly where there is an expressed intention that what is powerful legislation with draconian consequences, not apply to home owners as non industry participants.

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