Builders to Benefit from Home Building Reforms

David Bannerman

In a Nutshell

The Home Building Amendment Bill 2014 passed by the NSW Government contains:

(a)    a number of significant reforms that will benefit builders; and

(b)    additional obligations of which you need to be aware.

After the bill has received Royal Assent from the Governor it will commence on a day to be appointed by proclamation.

Seven Key Beneficial Reforms

1.    Warranties covered by a 6 year warranty period will change with a shift from a “structural defect” to a warranty for a “major defect” in a “major element”, which in lay terms is basically a severe defect.  As a result, a great number of defects that were previously covered by 6 year warranty periods will only be covered for 2 years.  However, severe defects in waterproofing and fire-safety systems will now be covered by a 6 year warranty period. This change will have retrospective effect unless proceedings have been commenced, or a home warranty insurance claim has been made.

2.    Subcontractors will be liable for the same statutory warranties as builders, with those warranties also implied into subcontractors’ contracts. This change will have effect for new contracts after the amendments are proclaimed.

3.    Builders will not be liable where a building defect is due to an owner’s consultant’s defective designs or specifications where the owner’s consultant is independent of the builder as set out in the amended legislation.  This change will have effect for new contracts after the amendments are proclaimed.

4.    The maximum deposit payable by an owner will increase from 5% to 10% for residential building contracts over $20,000.  This change will apply to all new contracts entered into after the amendments are proclaimed.

5.    Owners must notify builders and subcontractors of a building defect within 6 months.  Any delay that results in rectification costs being increased may cause a court or tribunal to award a reduced amount.  This change will apply to all new contracts entered into after the amendments are proclaimed.

6.    Owners must not unreasonably refuse access to a builder to rectify a building defect.  This requirement will apply to all new contracts after the amendments are proclaimed.

7.    Rectification will be the preferred outcome in a building dispute claim and a tribunal or court will have a standing directive to make a rectification order over an order for compensation where reasonable.  This change will have effect for any proceedings that are commenced after the amending legislation is proclaimed.
Six Steps to Prepare for the Beneficial Reforms and the Additional Obligations

Six Steps to Prepare for the Beneficial Reforms and the Additional Obligations

1.    Where commercially feasible and as applicable to your circumstances, consider changing pre-construction workflow processes to delay entering into contracts, or alternatively entering into split contracts, to take advantage of new benefits that apply to contracts entered into after the amendments are passed.
 
2.    Review your standard form contracts to ensure that for contracts entered into after the amending legislation is proclaimed:

(a)    The new progress payment provisions (as discussed below) are satisfied.  If not, the maximum fine is $110,000 for corporations or $22,000 for individuals.

(b)    The statutory warranty contract clause contains the wording “Due Care and Skill” instead of “Proper and Workmanlike Manner”.

(c)    Contracts include a statement that the contract may be terminated as provided by the general law however the parties may agree to additional termination provisions.

(c)    Contracts include a statement that the contract may be terminated as provided by the general law however the parties may agree to additional termination provisions.

3.    Review workflow systems and amend contracts that are used to ensure that 10% deposits are obtained from owners.

4.    Builders who are or have been subject to bankruptcy, deregistration of their company or a winding-up of their company will have 7 days from the proclamation of the amending legislation to notify Fair Trading.  Take steps now to ensure that notification periods are met.  For a breach the maximum fine is $110,000 for a corporation or $22,000 for individuals.

5.    Executives who fail to establish appropriate systems to allow notification to Fair Trading within 7 days of a bankruptcy, deregistration or winding up face fines of up to $22,000.  Attention should be given to reviewing compliance audits, training, work systems and corporate culture.

6.    Executives’ D&O Insurance policies should be reviewed to address whether there is coverage for an executive liability offence.  Consider consulting your insurance broker to explore whether it is commercial to obtain coverage for an executive liability offence.

Additional Obligations Introduced by the Amendments

Licensing

If licences are due for renewal consider that after the amendments are passed:

(a)    A builder might not be able to get a licence if:

(i)    The builder has been the subject of an unreasonable number of complaints, cautions, penalty notices or insurance claims;

(ii)    The builder that has been a director or manager of a company that in the last three years has had a number of complaints, cautions, penalty notices or insurance claims made against it;

(iii)    A close associate with influence over the builder is not a fit and proper person to hold a licence; or

(iv)    Within 12 months before the date of the application the builder was a director, partner, or manager of an organisation that was disqualified from holding a licence.

(b)    There will be exclusion periods of three years if:

(i)    a builder goes into bankruptcy or the builder’s company goes into external administration;
 
(ii)    there is a risk that the builder won’t be able to complete contracts; and

(iii)    all reasonable steps weren’t taken to avoid the bankruptcy or external administration.

Progress Payments

A progress payment may only be demanded if it is:
 
(a)    A specified amount or percentage of the contract price payable following completion of a specified stage of work that has been described in clear and plain language; or

(b)    Payment for labour and materials for work already performed, or costs already incurred, (margin may be added) with the claim supported by invoices, receipts or documentation at intervals fixed by the contract or on an “as invoiced” basis.

If the progress payment requirements aren’t met then the builder may be subject to a fine: maximum $110,000 for a corporation or $22,000 for an individual.

The new progress payment requirements will not apply to residential building work performed under a construction contract to which the Building and Construction Industry Security of Payment Act 1999 applies.

Home Warranty Insurance

A contract of insurance that is in force in relation to residential building work will also extend to any rectification works performed by the builder. 

Completion of Construction

The completion date for new strata buildings will occur when an occupation certificate is issued for the whole building.  For non-strata residential building work the current regime (which will remain unchanged) provides that completion occurs as defined in the building contract, or upon “practical completion”.   Accordingly, the new provisions will see builders and subcontractors involved in strata work having statutory warranty periods that start later than for non-strata residential building work.

Penalties for Repeat Offenders

Builders found to repeatedly perform unlicensed work may be subject to a maximum fine of $55,000 or up to 12 months prison, or both.
 
Builders found to repeatedly perform work without home warranty insurance in place may be subject to a maximum fine of $55,000 or up to 12 months prison, or both.

 

***The information contained in this article is general information only and not legal advice. The currency, accuracy and completeness of this article (and its contents) should be checked by obtaining independent legal advice before you take any action or otherwise rely upon its contents in any way.

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