In brief - Sweeping changes to affect future, current and completed building work
Reforms to NSW residential building laws will affect builders, subcontractors, tradespeople, owners, owners corporations, property investors, developers and owner-builders.
Legislation receives royal assent but commencement date still a mystery
The Home Building Amendment Bill 2014 was passed by NSW parliament on 28 May 2014 and received royal assent on 5 June 2014, the last step before commencement of the NSW Home Building Act. The date of commencement has not yet been announced. Unfortunately no one knows exactly when this will be, because parliament ignored the Legislative Review Committee and refused to give forewarning of the start date.
(Update: For the latest updates and commencement information, refer to our most recent article Home building law reforms in NSW imminent.)
What kind of building work is covered by the changes?
The changes apply to residential building work, specialist work, contracts to do work and contracts for insurance, as well as losses, liabilities, claims and disputes occurring before the start of the amendment, except for a few exceptions. The changes do not apply where the start of proceedings, an insurance claim, or (for the purpose of determining if a newly introduced offence has been committed) conduct occurred before the commencement of the amendment.
Where a contract is entered into before the changes commence, the new requirements for the form of contracts will not apply; nor will the new duties of persons having the benefit of statutory warranties (regarding mitigation, notification and allowing access to rectify). Since most of the changes will have retrospective effect, they will affect work you are doing now and even work you have finished. All the more reason to understand how this affects you.
Changes affecting builders, subcontractors and tradespeople
Jail for unlicensed or uninsured work
Builders, subbies and tradies who hire unlicensed persons, do any unlicensed work, or offer to do any unlicensed work can now be fined $55,000 and jailed for 12 months for a second offence (the first offence also attracts a penalty of up to $110,000). It is no defence that you did not know that they were unlicensed or that they told you that they were licensed, unless you did everything reasonable to prevent the contravention. At a minimum this would include performing a licence check with the NSW Department of Fair Trading.
Don’t forget that the range of work requiring licensing is broad and includes:
Building work: building work (general), erection of pre-fabricated metal-framed home additions and structures, kitchen, bathroom and laundry renovation, swimming pool building and structural landscaping.
Trade work: bricklaying, carpentry, concreting (general), decorating, excavating, fencing, glazing, joinery, landscaping (general), metal fabrication, painting, plastering (dry), plastering (solid/wet), roof plumbing, roof slating, roof tiling, stonemasonry, swimming pool repairs and servicing, tiling (wall and floor), underpinning/piering and waterproofing.
Minor trade work: bitumen surfacing, ducting and mechanical ventilation, kitchen or bathroom bench installation, paving, shade/sail systems, shower screen enclosures and splash backs.
Minor maintenance/cleaning: pressure washing/graffiti removal/brick cleaning, resurfacing bathroom tiles baths and repairs (non-structural).
Specialist work: air-conditioning, draining, electrical wiring, fixed electrical equipment (disconnection and reconnection), gasfitting, gasfitting (advanced liquefied petroleum), gasfitting (liquefied petroleum), plumbing (including sanitary plumbing and water plumbing), refrigeration and water plumbing (includes urban irrigation and fire protection), urban irrigation (includes fire sprinkler systems and fire protection systems).
Anyone doing this work needs to have a contractor license that expressly authorises the specific work to be carried out (e.g. it must state “bricklaying” or “waterproofing”). If it doesn’t, it is an automatic breach, both for the person doing the work and the builder, contractor or subcontractor who engaged them.
Make sure your procurement systems include a licence check and periodic review, particularly if a licence is due to expire during the project. Even statutory liability coverage in a D&O insurance policy will not protect you from jail time.
Penalties for failure to obtain insurance
The same stiff penalties apply where there is a second failure to obtain any required Home Owners Warranty Insurance (now referred to by the less catchy name “insurance under the Home Building Compensation Fund”). This is required for all residential building work where the contract price (or if the contract price is not known, the reasonable market cost of the labour and materials) is over $20,000 (including GST).
There are a few exceptions to the above requirements – such as where the reasonable market cost of the labour and materials involved in the work is not over $1,000 (including GST), or where the work is demolition work - but they are very limited.
New test for major defects
There will generally be fewer defects which attract the six year warranty period (now called “major defects” rather than “structural defects”). This is because the new test looks at whether the defect is in a load-bearing component of the building that is essential to the stability of the building or any part of it (including things such as foundations, floors, walls, roofs, columns and beams) or in a fire safety or waterproofing element; and secondly, whether the defect causes, or is likely to cause, part of the building to be unusable or destroyed/collapsed.
This is tighter than the old test both in terms of the location requirement (defects in part of the external walls or roof of the building currently satisfy the location requirement but won’t under the new test) and in terms of the severity requirement (defects that cause or are likely to cause physical damage to part of a building currently satisfy the severity requirement but won’t under the new test).
One practical consequence is that wall/floor cracking and façade issues will be much less likely to attract the six year warranty period. This is good news because they are two of the most common claims brought against builders.
It isn’t all positive for builders though. Fire safety defects and internal waterproofing now expressly satisfy the location requirements for a major defect. These are both common issues. Builders will now need to be extra vigilant with tradespeople who are doing these works. A recurring issue here is fire dampers. Remember, just because the works have been certified by a private certifier does not mean that you are off the hook - they still need to have been done correctly.
Focus on rectification of defects
There is a clear shift towards resolving disputes by allowing developers, builders and tradespeople back to rectify defective works. This is evident in three initiatives:
- When a breach of the statutory warranty becomes (or should have become) apparent, owners must make reasonable efforts to notify the responsible person (i.e. a developer, builder and/or tradesperson) within six months. Owners then have a duty to allow reasonable access for rectification. They also have a duty to mitigate or minimise the damage caused by the defect.
- Courts and tribunals are now required to prefer rectification over other orders (such as monetary compensation). They have new powers to set out stages for rectification work and/or a date for compliance. They can even order rectification if the owner doesn’t want it and demands money.
- A separate contract of insurance is not required in relation to the rectification work where the first policy is still in effect (this won’t always be the case because of the end date of the policy) and where the rectification is being done by the same person as the original work (again this won’t always be the case). This has some cost benefits for builders, since you will not have to pay for insurance when doing rectification work, but it will not apply in every case.
Generally these changes are a win for builders who want to be able to mitigate rectification costs by performing works themselves. There is of course the usual downside to doing so in terms of ongoing liability.
New contract requirements
Check your standard residential building contracts and update them if necessary because there are new requirements.
Progress/milestone payments: Only two types of progress payments are allowed and they need to be clearly specified in your contract.
If you want to claim payment as stages are achieved, then the contract needs to state the work that comprises each stage in clear and plain language and the amount or percentage payable for achievement of that stage.
Alternatively, if you want to claim payment as costs are incurred (e.g. labour and materials plus margin), then the contract needs to state whether payment will occur at fixed intervals or on an “as invoiced” basis. It also needs to explain that a claim for payment will be supported by such invoices, receipts or other documents as may be reasonably necessary to support the claim.
Your contract can authorise multiple approaches if you wish. However, if your contract provides for a different progress payment regime to these two types, or if you try to make a progress payment which isn’t authorised by the contract, then you could be liable for a $110,000 fine. Luckily, there are a few exceptions. It will not apply to contracts under $20,000 (including GST) and many subcontracts.
Termination: Your contract needs to include a statement that the contract may be terminated in the circumstances provided by the general law and that this does not prevent the parties agreeing to additional circumstances in which the contract may be terminated. Forget this and the fine can be $8,800. Again, there are a few exceptions so this requirement won’t apply to many subcontracts.
Deposits: The maximum deposit is now 10% no matter what the contract price (up from the current 5% when the contract price is more than $20,000). You will need to amend your existing contracts to take advantage of this change.
Standards: Existing contracts contain mandatory clauses requiring works to be performed in a “proper and workmanlike manner”. The terminology has changed and the clause now needs to refer to “due care and skill”. This modernises the Act's terminology to make it more consistent with the Australian Consumer Law, but is unlikely to affect the standard of work. It does, however, mean that standard contracts need to be amended to refer to the new terminology, otherwise you could be fined.
Other contractual requirements: There is now an $8,800 fine for failing to comply with contractual requirements set out in the existing regulations (e.g. concerning checklists and clauses dealing with plans, specifications, variations and quality of construction). Again there are some exceptions, so this will not apply to most subcontracts.
New defences to breach of statutory warranty claims
There is a new defence to a breach of statutory warranty claim.
It arises where you reasonably relied upon the written instructions of an independent professional acting for the person for whom the work was contracted. For example, a builder can say it relied upon the owner’s or developer's professional, or a subcontractor could say it relied upon the contractor's or builder’s professional.
To make the most of this defence, you need to keep good records of the instruction and the way in which you relied upon it. Then, whenever responding to a defects claim, check whether the defect arises from an instruction of a third party consultant (architect, engineer, Greenstar consultant etc) and if it does, be sure to rely upon that as a ground of defence.
Bear in mind that there is an existing ground of defence where an owner or owners corporation gives you instructions which go against your advice. In that case you will also have a defence to a claim in relation to resultant defects. Just make sure you give the advice in writing before you perform the work (this is a new requirement under the amendments).
Mandatory notification of insolvency, winding up or deregistration
If you hold a contractor licence, you must notify the Commissioner for Fair Trading of your insolvency, winding up or deregistration within seven days, otherwise directors and management may be liable. This new “executive liability offence” carries a potential $110,000 penalty as well as criminal sanctions.
Contractor licences, supervisor certificates and tradesperson certificates
There are a few changes to the licensing process. A key one is that a person can be disqualified from holding a licence or certificate if they are not a “fit and proper person”, for example, if they have been the subject of an unreasonably large number of complaints, cautions, penalty notices, home warranty insurance claims or other actions under the Act, the Australian Consumer Law or other relevant legislation.
There are some changes to when statutory warranty periods start to run. These will be relevant to builders, subcontractors and tradespeople defending statutory warranty claims, since they will determine when a claim is timed out. Generally they will now run from the date of issuance of the relevant occupation certificate. Further details about this change are set out below under the heading “Changes affecting owners, owners corporations and property investors”.
Painters and other exceptions
Internal paintwork, if undertaken as a stand-alone project, is excluded for the first time from the definition of “residential building work”. Most of the other exclusions will also continue to apply. For example, tiling and demolition work is excluded. So is work that involves the installation or maintenance of any fixed apparatus such as a lift, an escalator, an inclinator or a garage door.
Also excluded is project management where it involves the supervision only of residential building work by an architect or a person who has a contractor license to do that work (or who supervises someone who has). Another lesser known exclusion is work which is prohibited under another Act without the person having authority. Arguably this would cause architectural work to be excluded.
Where work falls within an exclusion, the usual residential building requirements will not apply. That means there is no liability for home building statutory warranties, no mandatory contract terms, no Home Building Compensation Fund (HBCF) insurance and no bar preventing you from making Security of Payment Act claims. However, you still have to be aware of requirements under Australian Consumer Law and the other sources of liability.
Subcontractors responsible for statutory warranties
The Act now makes it explicit that subcontractors are also responsible for statutory warranties (not just builders and contractors). This does not mean that subcontractors will be liable to the owners or developers – they are still only be liable to the person they directly contract with. Although this merely reflects the existing law, it serves as a useful reminder.
Changes affecting property developers and owners who engage developers to do work on their land
Don’t forget that you are deemed to be a “developer” if residential building work was (or is) done on your land and you own (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). It won’t help that you might have a sophisticated project delivery or other joint venture agreement for someone else to develop the land.
Stiffer penalties for unlicensed work
Like builders, developers who hire unlicensed persons can now incur a fine of up to $55,000 and 12 months' imprisonment for a second offence. The Legislation Review Committee was concerned that this was disproportionate, but it is the law.
Double check that you have rock-solid systems for checking licences of anyone you engage. Insurance will not help with jail time and your premium is likely to go up significantly.
Developers selling houses and units used for commercial purposes (which are excluded from the definition of a “dwelling” in the Act) must now include a warning in any contract for the sale of the relevant land that the property does not have the protection of the Act. The penalty for failing to do so is up to $110,000.
Defect liability and rectification
Developers are also affected by many of the changes impacting builders. For example, keep in mind, particularly when considering your defence strategy that:
- The new test for a “major defect" should decrease your exposure to warranty claims by owners and purchasers, by decreasing the number of defects that fall within the six-year limitation period.
- The new rules for determining the start of warranty periods will affect your available defences to statutory warranty claims.
- The new/amended defences arising from reliance on an instruction will benefit you but you need to keep records of any relevant instructions which were relied upon (even if only relied upon by the builder/subcontractor) or which were contrary to advice (even if advice of the builder/subcontractor rather than you). It would be prudent to amend your building contracts to require the builder to give you copies of any such records that they have.
- The trend towards allowing rectification should give you greater control in relation to rectification costs (albeit with an overhang in relation to continued liability for rectification works).
Changes affecting owners, owners corporations, property investors and strata managers
Statutory warranty periods for building defects
As mentioned above, a defect will no longer attract a six year statutory warranty period if it merely causes physical damage to a building or is located in part of the external walls or roof of the building (as is the case in many traditional façade and wall/floor cracking defects). Similarly, although internal/external waterproofing and fire safety are now more likely to attract the longer six year warranty period, this will not be the case where they do not result in part of the building being unusable or destroyed.
Accordingly, it is critical that owners and owners corporations perform a thorough investigation before two years are up. If in doubt about whether a major defect exists, you should commence proceedings before the two year mark, otherwise you run the risk of your claim being barred. Office bearers' insurance will not always protect executive committee members who fail to do this, particularly if they wilfully disregarded their obligations.
Defect notification and mitigation
As mentioned above, owners and owners corporations have three new duties. You must notify the developer, builder or tradesperson within six months of the date you become, or should have become, aware of any defect or breach. You must mitigate your loss arising from the defect or breach. And you must allow access for rectification (there are some loopholes to get around this if you are totally against it).
These duties should not be taken lightly. A court can take any failure of these duties into account in proceedings concerning a breach of statutory warranty. This could reduce any compensation. For owners who have investment properties (whether tenanted or vacant), it becomes particularly important to have solid processes for checking for defects every six months, notifying the developer, builder or tradesperson promptly if anything is found and mitigating any resultant loss (including to any tenant’s property).
On the upside, NSW Civil and Administrative Tribunal rectification orders have more bite. A failure to comply can result in a breach of licence. Builders will be keen to avoid this, particularly given the more stringent licensing requirements.
Completion dates for building work
There are new rules for determining when a building is completed. These apply when the building is in a strata scheme and requires an occupation certificate to be issued that authorises the occupation and use of the whole of the building. This extends beyond residential buildings to some swimming pools, tennis courts and detached garages. In relation to these buildings, the date of completion will generally be the date of issue of the occupation certificate.
This is problematic because “occupation certificate” is not defined to exclude an “interim occupation certificate”. As a result, you may have less time to make a claim than you think, because, for example, the two and six year warranty and insurance periods may run from an earlier date than the date on a final occupation certificate which you have.
To mitigate this, you should make all available enquiries as soon as possible in order to determine when any occupation certificate was first issued (including by searching council records) and keep careful track of when limitations periods expire. If in doubt, claim early.
Another trap occurs where multiple buildings are constructed under the same contract. In that case, the date of completion is determined as if there were a separate contract for each building, so each building will have a separate completion date.
Access to home warranty insurance
Access to home warranty insurance should generally become easier. Insurance will be available where a builder's or tradesperson's licence is suspended. It will be available where work is done by a partnership and one member becomes insolvent. It will be available where a delayed claim is made for non-completion of work (provided certain conditions are complied with).
There will also be a register of insurance particulars that can be accessed by beneficiaries or potential purchasers of property (maintained by the Chief Executive of the Office of Finance and Services). It will include details of the builder, the site, any successful claims on the insurance and the amount of those claims.
One downside for owners is that it will be harder to access insurance when a builder has disappeared. Previously a NSW district court case determined that a search of NSW was sufficient. The changes now require a search across Australia before an insurance payment will be made.
Instructions as defence
If a builder or tradesperson reasonably relies on the written instructions of an independent professional acting for you and as a result is in breach of a statutory warranty, they will have a defence to a claim that you make in relation to that breach. Ensure that your third party consultants (architects, engineers, Greenstar consultants etc) either do not instruct builders or tradespeople, or if they do, they are liable for those instructions.
The same applies where you give instructions contrary to the builder’s or tradesperson's written advice - they will have a defence if they are consequently in breach of a statutory warranty. Do not ignore this or you will not have recourse for resultant defects.
This causes a problem if you are a subsequent purchaser or owners corporation which did not commission the work. If you identify a defect, you will not know if the builder will have a defence that it relied upon a relevant instruction. It would be prudent for subsequent purchasers to request copies of any such instructions from whoever they are purchasing from (as a requisition prior to exchange if possible) and for owners corporations to request copies of any such instructions from the builder or developer (prior to the first owners corporation meeting if possible).
Painters and other exceptions
Owners and owners corporations which are getting internal paintwork done will not be able to rely upon the protections in the Home Building Act. This is a new exception, but the same applies to the existing exceptions such as for tiling, carpeting, demolition, some project management and architectural services. If you are engaging someone to do this kind of work, you will need to make sure your contract has adequate provisions dealing with warranties, plans, specifications, variations and the quality of construction.
You will also need to watch out for Security of Payment Act claims – if you don’t comply with the legislative requirements for a payment schedule, you could end up facing default judgment with no entitlement to put on a defence.
Changes affecting owner-builders
Owner-builders are affected by a range of changes that broaden the application of existing provisions and introduce new requirements and restrictions.
For example, you will have to undertake safety training, including obtaining a construction induction "white card" card under the Work Health and Safety Act 2011, which generally requires about seven hours of training. This is a worthwhile initiative given the importance of work health and safety on construction sites.
Another change is that owner-builders cannot obtain home warranty insurance and need to insert a warranty in their contracts for sale stating this.
What should you do?
Work your way through our tips and traps above. Check that your systems, processes and contracts cater for these changes. Ensure that you are ready by 15 January 2015.