NSW construction law reforms are coming thick and fast – An overview of recent changes

Sep 2020 | Construction & Engineering

New South Wales’ progressive implementation of its ‘six-pillar reform program’ for the local construction industry continues, with numerous significant changes introduced in recent months.

Most recently, the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) now requires notice of an intention to apply for an occupation certificate, and gives the Department of Customer Service broad investigative and remedial powers in relation to ‘serious defects’ in residential apartment buildings.

A new retrospective duty of care has been introduced by the Design and Building Practitioners Act 2020 (NSW) (DBP Act), whilst the practitioner registration, compliance certificate and insurance requirements imposed by the same Act will come into force on 1 July 2021.

The ‘Construct NSW’ agenda is directed at restoring public confidence in the construction industry, particularly in relation to multi-storey apartment buildings. This article provides an overview of the most recent legislative changes.

Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW)

The RAB Act commenced operation on 1 September 2020 and presently applies only to ‘residential apartment buildings’¹ which are defined² as a class 2 building, or any building containing a class 2 component³. Accordingly, residential or mixed-use buildings will be subject to the new laws.

Developers are defined broadly in the RAB Act, and include:

the person who contracted or arranged for, or facilitated or otherwise caused, (whether directly or indirectly) the building work to be carried out;
the owner of the land on which the building work is carried out;
the developer of the relevant strata scheme; and
the principal contractor within the meaning of the Environmental Planning and Assessment Act 1979 (NSW) (i.e. the person responsible for the overall co-ordination and control of the carrying out of the building work⁴).

Expected completion notices

Developers are required to give to the Secretary of the Department of Customer Service (Secretary) an ‘expected completion notice’ that sets out the date that the developer expects to apply for the occupation certificate for the works. The notice must be given between six and 12 months before that expected date. If the building work will take less than six months, notice is required within 30 days of the commencement of the building work.

Transitional provisions apply⁵ to projects where an occupation certificate is intended to be applied for between 1 September 2020 and 28 February 2021. In such cases, an expected completion notice is required to be lodged by 15 September 2020.⁶

Expected completion amendment notice

If the expected date of application for the occupation certificate changes by more than 60 days, an expected completion amendment notice must be given to the Secretary within seven days of the developer becoming aware of the relevant change of circumstances.⁷

Enforcement

The failure to provide the required notices is an offence and a basis for the Secretary to make a ‘prohibition order’ preventing the issue of an occupation certificate or registration of the relevant strata plan. Only one ‘developer’ is required to give the expected completion notice.⁸

The completion notices are intended to work in conjunction with the Occupation Certificate Audit program, and to allow time for a review of the building design and contract documents. Depending upon that review, a physical inspection may be undertaken to assess the key building elements of structure, waterproofing, fire rating systems, building services and external enclosures.

If a ‘serious defect’ is identified, or the Secretary considers that the building work could result in significant harm or loss to persons or significant damage to property, the Secretary may issue:

a ‘prohibition order’;
a ‘stop work order’; or
a ‘building work rectification order’.

If a developer fails to comply with a ‘building work rectification order’, the Secretary is empowered to perform the work itself and recover the associated costs from the developer as a statutory debt.⁹ Additionally, the Secretary has power to issue a compliance costs notice requiring the developer to pay the reasonable costs and expenses incurred by the Secretary in exercising its powers under the Act where a ‘building work rectification order’ has been issued¹⁰.

Serious defects?

The RAB Act defines¹¹ a ‘serious defect’ very broadly, as including a defect in:

a ‘building element’¹² that is attributable to a failure to comply with the performance requirements of the BCA, the relevant Australian Standard, the approved plans or the Building Products (Safety) Act 2017 (NSW); or
a ‘building element’ or a ‘building product’¹³ that is attributable to defective design, defective or faulty workmanship or defective materials and which causes or is likely to cause:
- the inability to inhabit or use all or any part of the building for its intended purpose; or
- the destruction or threat of collapse of all or any part of the building.

Retrospective application

The RAB Act has an express retrospective application. The powers and functions conferred by the Act extend¹⁴ to buildings which:

are still under construction; or
were completed within the 10 years before the power or function is exercised.

As a result, buildings of up to 10 years old can now be the subject of complaint under the RAB Act. Homeowners, residents and individual strata and community lot owners are able to report building defects or make a complaint to NSW Fair Trading. Any ‘serious defect’ identified may result in the issue of a building work rectification order, enforcement and prosecution action.

Contractual considerations

Contracts between developers and contractors must be reviewed to ensure compliance with the new requirements of the RAB Act. Contractual provisions should be made to allocate responsibility for lodging expected completion notices and for time and cost consequences of any project delays which may arise from prohibition orders, stop work orders and building work rectification orders issued by the Secretary. Contracts should set out strict notice requirements in the event of any action taken or foreshadowed by the Secretary, including any requests by the Secretary for information, access to site or enforceable undertakings. Although the Secretary’s concerns are directed at ‘serious defects’, that term is broadly defined, and will include a wide range of building issues including deficient or non-conforming building products.

Design and Building Practitioners Act 2020 (NSW)

The DBP Act received assent on 11 June 2020 and is set to drastically reshape the legal landscape for the construction industry in New South Wales. Whilst many of the DBP Act’s provisions do not commence until 1 July 2021, the legislation immediately created a new and retrospective statutory duty of care intended to overcome the common law limitations identified by the High Court’s 2014 decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288.¹⁵

New Duty of Care

The DBP Act extends¹⁶ the common law duty of care owed by anyone who ‘carries out construction work’ within the meaning of the Act. The duty of care applies retrospectively, but only where the economic loss caused by the breach of duty first became apparent after 11 June 2010.¹⁷ The duty of care is non-delegable.¹⁸ Contracting out is prohibited,¹⁹ although contracts entered before 11 June 2020 (and not amended since that date) are not affected.²⁰

Nature of the duty?

The duty requires the exercise of reasonable care to avoid economic loss caused by defects in or related to the relevant building and arising from the construction work.²¹ The duty is owed in respect of ‘construction work’, which may be clarified by subsequent regulation, however the term expressly includes ‘residential building work’ within the meaning of the Home Building Act 1989 (NSW) (HBA).²² The duty of care is additional to the duties, statutory warranties and other obligations imposed by the common law or under the HBA or other legislation.²³ The duty is however subject to the apportionment provisions of the Civil Liability Act 2002.²⁴

Who owes the duty?

‘Construction work’ is broadly defined,²⁵ meaning that the new duty of care is owed by any person:

carrying out building work;
preparing regulated designs and other designs for building work;
manufacturing or supplying a building product used for building work; or
supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any of the above.

This will include builders, project supervisors and managers, designers and product manufacturers and suppliers.

The duty operates regardless of the existence of any contractual relationship between the parties. The duty is taken to be a duty owed under the common law, for the purposes of assessing damages flowing from any breach.²⁶

Who is protected?

The duty of care is owed to each owner of the land on which the construction work is carried out,²⁷ including owners corporations, individual title holders and, most importantly, all subsequent owners.²⁸

Clearly prompted by the topical concerns stemming from structural defects in Sydney’s Opal Tower and Mascot Towers, the DBP Act explicitly extends the benefit of the new duty of care to owners corporations and associations that bear responsibility for rectification, even where those entities were not in existence when the construction work was performed.²⁹

Limitation periods

Building practitioners and their insurers will need to be mindful of the various limitation periods potentially applicable to construction work which has been carried out:

six years for claims in tort or contract, under the Limitation Act 1969 (NSW);³⁰
six years / two years for major / minor defects respectively, under the HBA;³¹
10 years under the extended duty of care imposed by the DBP Act; and
10 years from the issue of the occupation certificate, under the Environmental Planning and Assessment Act 1979 (NSW).³²

The applicable limitations will be further complicated by the deferred accrual of causes of action in respect of latent defects until they become manifest or are otherwise discoverable with reasonable diligence.

Pending provisions – regulation of designs, practitioners, compliance declarations

The DBP Act also creates a comprehensive new system for regulating design and building work by imposing registration, insurance and compliance declaration requirements on designers, engineers, builders and other specialist practitioners. These requirements will come into force on 1 July 2021, with regulations yet to be promulgated to clarify the scope of the new obligations imposed on the industry. Of most interest will be the insurance requirements required of building practitioners and the scope of the ‘building work’ to which the new compliance regime will be directed.

Strata Schemes Management Act 2015 (NSW)

Amendments to the Strata Scheme Management Act 2015 (NSW) (SSMA) came into effect from 1 July 2020, with the much-delayed commencement of the Building Defects Scheme provisions.³³ Part 11 of the SSMA has been amended to include the new Division 3A (Investigation and Enforcement Powers) which introduces broad powers allowing the Department of Finance, Services and Innovation and Fair Trading investigators to investigate, monitor and enforce compliance with that part of the SSMA.

Building bonds

Developers’ obligations in relation to building bond security have been significantly extended:

developers are now required to submit the 2% bond before applying for an occupation certificate (previously the bond could be submitted just before the occupation certificate issued);³⁴
the building bond must now mature between two and a half and three years after the date of the occupation certificate (increased from between two and three years);³⁵
the 2% bond is now calculated by reference to all amounts payable under the applicable building contract regardless of when those amounts become payable (instead of only amounts paid as at the date of issue of the occupation certificate);³⁶
if the developer and the builder are related entities, or where there is no written building contract, a certified cost report from a qualified quantity surveyor is required to calculate the bond amount;³⁷ and
penalties have been significantly increased, with the maximum fine for failing to pay a building bond rising from 200 to 10,000 penalty units³⁸and a new offence created for knowingly misleading the Secretary in relation to a contract price or the amount required to be secured by a building bond.³⁹

Building inspectors

The regime for appointing building inspectors under the SSMA is also now stricter:

it remains the case that only members of strata inspection panels maintained by authorised professional associations are eligible for appointment as inspectors;
however, strata inspector panels must now be established for particular kinds of building work, with inspectors needing to be appropriately qualified in that kind of building work before appointment to a panel;
authorised professional associations must now maintain registers (available free to the public) containing details of panel members, which may include members’ relevant project experience; and
developers must now provide full details of a proposed building inspector⁴⁰ (including information contained in the relevant panel register) to owners corporations at least 14 days before any general meeting considering the appointment.

Release of building bond

The amended legislation places more emphasis on the Secretary’s power to release a building bond if the interim report does not identify any defective building work and the Secretary thinks it appropriate. That change is reflected in the Secretary’s prescribed form of final report⁴¹ which confirms that the final inspection is intended to verify only whether the defective building work identified in the interim report has been rectified, and is not to raise any new defective work.⁴²

More specific provision has also been made to allow a developer and owners corporation to agree on the amount to be claimed from a building bond to meet the costs of rectifying defective building work.⁴³

Unless the building bond is released early following a clear interim report, the time for the Secretary to claim or realise a building bond to fund required rectification costs is now the later of:

two years after the date of completion of building work; or
90 days⁴⁴ after the final report is given to the Secretary by the building inspector.

From 1 September 2020, developers must lodge the 2% strata bond via the NSW Planning Portal (instead of the SBBIS [Strata Building Bond and Inspections Scheme] portal).

Contractual considerations

In light of the legislative changes, contracts should be drafted to promote and encourage cooperation between developers and contractors and should incentivise the pro-active identification and rectification of defects.

Clear evidence should be maintained of defects rectified under the contract, for provision to the inspector and to assist in excluding issues arising from unrelated causes such as wear and tear, failure to maintain or works performed by other builders after practical completion.

Legitimate defects should be identified and rectified well before the first SSMA inspection, so that a clear interim report can be obtained and an application for early release of the building bond pursued.

Contracts should also clearly set out the builder’s obligation to rectify identified SSMA defects (noting that the SSMA only imposes those obligations on a developer) and for appropriate additional security to be maintained during the SSMA process.

.....

¹ Section 6.
² Ibid; subject to any exclusions from the definition which may be prescribed by future Regulation.
³ The National Construction Code provides that Class 2 buildings are apartment buildings.
⁴ Environmental Planning and Assessment Act 1979 (NSW) s 1.4.
⁵ Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) sch 1, pt 2.
⁶ Ibid ss 7-9 otherwise applying with necessary modifications.
⁷ Ibid s 8.
⁸ Ibid s 7(6).
⁹ Ibid s 42.
¹⁰ Ibid s 51.
¹¹ Ibid s 3.
¹² Ibid as defined in the Design and Building Practitioners Act 2020 (NSW), and including any element of a building that is later prescribed by the regulations.
¹³ Ibid within the meaning of the Building Products (Safety) Act 2017 (NSW).
¹⁴ Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) s 6(1).
¹⁵ (2014) 254 CLR 185.
¹⁶ Design and Building Practitioners Act 2020 (NSW) s 37.
¹⁷ i.e. 10 years before the commencement of the DBP Act.
¹⁸ Design and Building Practitioners Act 2020 (NSW) s 39.
¹⁹ Ibid s 40.
²⁰ Ibid s 40(2).
²¹ Ibid s 37.
²² Ibid s 36(1).
²³ Ibid s 41(1).
²⁴ Ibid s 41(3).
²⁵ Ibid s 36(1).
²⁶ Ibid s 37(3).
²⁷ Ibid s 37(2).
²⁸ Ibid s 37.
²⁹ Ibid s 38.
³⁰ Limitation Act 1969 (NSW) s 14(1).
³¹ Home Building Act 1989 (NSW) s 18E.
³² Environmental Planning and Assessment Act 1979 (NSW) s 109ZK.
³³ Strata Schemes Management Amendment (Building Defects Scheme) Act 2018 (NSW); Strata Schemes Management Amendment (Building Defects Scheme) Regulation 2020 (NSW).
³⁴Strata Schemes Management Act 2015 (NSW) s 207.
³⁵ Strata Schemes Management Regulation 2016 (SSMR) cl 51.
³⁶ Ibid cl 50.
³⁷ Ibid cls 50(2)-(3); conversely, the Contract Price may be determined by the Civil and Administrative Tribunal or Supreme Court on application in the matter.
³⁸ Strata Schemes Management Act 2015 (NSW) s 207.
³⁹ Ibid s 207A.
⁴⁰ Form 2A.
⁴¹ Strata Schemes Management Act 2015 (NSW) s 201(2).
⁴² Building Inspectors Information Manual.
⁴³ Strata Schemes Management Act 2015 (NSW) s 209(1A).
⁴⁴ Ibid s 290(3). Increased from the previous 60 days.