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Changes to NSW building and construction laws - impact on financiers and borrowers

Banking & Finance, Property & Development
construction Sydney crane
Following the 2017 Grenfell Tower tragedy, the Australian Building Ministers’ Forum commissioned an inquiry into the building and construction industry with the goal of enhancing public trust, resulting in the release of the Building Confidence Report.

In response to the Report, the NSW Government recently passed the Design and Building Practitioners Act 2020 (“DBPA”) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (“RABA”).

These new laws, which take effect on a staged basis over the next 12 months, represent significant changes to the building industry. The RABA applies to multi dwelling residential buildings (unless specifically excluded by regulations which are yet to be released). The DBPA (other than the statutory duty of care referred to below) applies to building work relating to a ‘class of building’ that is yet to be prescribed by the regulations. It remains to be seen what residential and/or non-residential building work this will apply to.

These changes may have serious impacts, not only on builders, but also on developers and lenders.

Important changes

The RABA will be effective from 1 September 2020.  The DBPA will not come into force until 1 July 2021, other than the extended statutory duty of care referred to below which became effective from 11 June 2020. Some significant changes include:

Statutory extended duty of care

Under the DBPA, there is a new extended statutory duty of care by builders, designers, manufacturers, project managers and others who carry out ‘construction work’, to “exercise reasonable care to avoid economic loss caused by defects".  This duty extends to cover each ‘owner’ of the land associated with the works and each future owner (including owners corporations and enforcing lenders).  The term ‘owner’ for the purposes of the duty of care in the DBPA is broadly defined.

In addition to current and future projects, the duty also has retrospective application and can apply to building work done up to 10 years prior to 11 June 2020. Claims brought under this new legislation will be able to be brought even after the expiration of the statutory warranty limitation periods under the Home Building Act.  Insurers will also need to take this into account. This statutory extended duty of care is under Part 4 of the DBPA.

The definition of ‘construction work’ under Part 4 is defined broadly to include (amongst other things) “supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work…”. There is a potential risk that this could capture developers, financiers and/or receivers who have substantive control over the carrying out of the work, depending on the level of their involvement in the work being carried out.  It is also conceivable that an enforcing financier may have the benefit of this duty of care as an ‘owner’ of land.  

Prior notice required of intention to apply for an Occupation Certificate

From 1 September 2020, a developer must give the Department of Customer Service at least 6 months’ but not more than 12 months’ prior notice of intention to apply for an occupation certificate for a residential apartment building. If a developer expects to apply for an occupation certificate between 1 September 2020 and 1 March 2021, such notice must be given by 14 September 2020. Penalties can apply for failure to provide such notice.

The notice period allows the Department to inspect the building prior to the Occupation Certificate being issued to deal with serious defects.  If an inspection reveals a ‘serious defect’, the Secretary of the Department may issue a ‘prohibition order’ preventing the issue of the occupation certificate and registration of a strata plan. 

A prohibition order will remain in effect until complied with, it expires or is revoked.  Developers may appeal a prohibition order by applying to the Land and Environment Court within 30 days of the notice of the order. Failure to comply with this requirement may have serious consequences including potential to delay registration of strata plans and settlement of off-the-plan sale contacts, as well as triggering facility agreement defaults related to this and relevant construction milestones.

Stop work orders and building work rectification orders

From 1 September 2020 under the RABA, the Secretary may issue to developers Stop Work Orders (that can remain in force for up to 12 months) or building work rectification orders relating to non-compliant works and serious defects.  Significant penalties apply to breaches of such orders.   

If an order is made, it may delay practical completion, the issue of occupation certificates and, where relevant, the registration of strata plans beyond the sunset date in pre-sale contracts (and the financier’s sunset date or other project milestone dates in facility agreements). Such delays may entitle purchasers to rescind their contracts and lenders to trigger borrower facility events of default.

The term “developer” is broadly defined and extends to a person who (amongst other things) “contracted or arranged for, or facilitated or otherwise caused, (whether directly or indirectly) the building work to be carried out…”.  It is conceivable, depending on the circumstances, that a financier could be considered a ‘developer’ for the purposes of this Act.

Stop Work Orders (that can remain in force for up to 12 months) can also be issued under the DBPA where the Authority is of the opinion that there are non-compliant works or contravention of the Act that could result in significant harm or loss to the public or occupiers to which the work relates or significant damage to property. These can be given to either or both a person carrying out the work and the owner of the land on which the work is being carried out.

Registration database and enhanced powers

Under the DBPA, registration will be required for designers, engineers and building practitioners (including those who carry out maintenance works) from 1 July 2021. The Authority has wide ranging powers to request information, issue ‘show cause’ notices, take disciplinary action, impose penalties and suspend/cancel registrations.

The Authority is in the process of creating a public database described as a ‘Trustworthy Index’ for a building or ‘Property DNA’ which will contain information about building industry participants “enabling private insurers, consumers or regulators to assess the future risk rating for a building.” Financiers may also find this information useful as part of their commercial due diligence.  A rating system is also being developed to rate developers, builders and certifiers.

Compliance Declarations - Building Code

From 1 July 2021, under the DBPA, compliance declarations will also be required to be obtained from design and building practitioners (who must be adequately insured, as contemplated by future regulations) prior to the issue of an occupation certificate.  Statutory penalties will apply for non-compliance.

Personal liability of directors and others

Once the Acts become fully effective, they will impose personal liability on directors (and others concerned in the management) of companies which contravene the legislation where they “knowingly authorised or permitted the contravention”.

It remains to be seen how lenders and borrowers will react to and manage the increased risks.  Increased due diligence of building counterparties including past projects and satisfactory insurance coverage are recommended. Lenders may need additional facility development milestones and information reporting to minimise the risk of delays in issuing occupation certificates.

Other states and territories are working through new legislation to give effect to the recommendations of the Building Confidence Report.  Each jurisdiction is at a different stage of this process.

Find out more

If you have any questions about the information contained in this bulletin, please don’t hesitate to make contact with one of us.

Please note the above does not constitute legal advice and is not intended to be a comprehensive summary of the subject matter nor a consideration of associated issues that may arise, including in connection with construction contracts. This is intended for general information purposes only and if you require specific legal advice in relation to the above please contact us.

 

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