Apartment Building Defects: Who Foots the Bill?

The Obligation to Repair and Maintain Common Property

Section 46 of the Owners Corporation Act 2006 (the OC Act) provides that an owners corporation is obliged to repair and maintain common property as well as chattels, fixtures, fittings and services related to the common property or its enjoyment.

The obligation to repair and maintain common property includes undertaking necessary works to rectify defective building works. The failure by the owners corporation to carry out repairs including rectification works can expose an owners corporation to any damages or financial loss claims by affected private lot owners. Whilst the responsibility of repairing and maintaining an apartment building rests with the owners corporation, the costs of these works are ultimately borne by the private lot owners.

Maintenance on a building is not uncommon and often inexpensive when shared between the private lot owners. Many apartment owners are however under the misapprehension that the costs detailed in the maintenance plan produced each year are the only costs they will be required to contribute to the owners corporation in respect of repair and maintenance. This is incorrect. A maintenance plan must only cover major capital items for repair and replacement over the next 10 years.

Major capital items under the OC Act typically cover items that are anticipated to fail due to age of the building such as:

• Replacing a lift due to wear and tear;
• Replacing an air conditioning or heating plant;
• Common property structures like the roof, stairways, balustrades, and window frames;
• Common property services, such as shared water, gas and sewerage pipes;
• Common property assets, such as fences, pools, and water tanks.

Funding Apartment Building Rectification Works

Under the OC Act, when a substantial building issue emerges within the common property, the owners corporation holds the authority to impose additional charges known as extraordinary fees. These fees are necessitated by exceptional expenditures, like rectifying structural defects or addressing combustible cladding. Due to their exceptional nature, anticipating or budgeting for these extraordinary fees is nearly impossible, making it challenging to identify their potential imposition in advance.

If the rectification works are required due to defective building works the owners corporation may have legal recourse against a building practitioner , however, as repairs are urgent and attempts to recover from relevant parties often takes extended periods of time, the owners corporation may be left to foot the bill in the immediate future. Particularly if the owners corporation cannot maintain its insurance requirements until the building defect has been addressed.

Frustratingly, if the responsible building practitioners are insolvent or didn’t have adequate insurance, the owners corporation (and private lot owners) may never recover costs of rectifying the defective building works, and the private lot owners ultimately will be responsible to meet these costs. But wait, there’s more! Any claim against a builder under the Domestic Building Contracts Act 1995 (DBCA) must be brought within 10 years of the date of the certificate of occupancy or certificate of final inspection being issued.

In response to these issues, the Victorian Government has established Cladding Safety Victoria (CSV) and a $600 million fund to assist in offsetting the costs of cladding rectification work. Owners corporations are encouraged to urgently have buildings inspected and liaise with CSV should cladding be found to be combustible. As at July 2023, 365 buildings in Victoria had been approved for rectification funding with CSV, with works completed on 250 buildings.

What Steps Should an Owners Corporation Take When a Defect Arises?

Owners corporation managers should make necessary enquiries and ascertain whether the defective works are to common property and whether the owners corporation is obliged under section 46 of the OC Act to repair the common property.

If rectification works are required to the common property the owners corporation manager should make prompt enquiries as to whether the building works were undertaken in the last 10 years. If yes, the owners corporation can consider taking steps to recover from the builder.

The dispute / claim between the builder and owners corporation would be characterised as a building dispute pursuant to section 54 of the DBCA, as it’s a dispute between a property owner and a building practitioner. The Victorian Civil Administrative Tribunal (VCAT) has exclusive jurisdiction in relation to domestic building disputes and any proceedings are required to be issued at VCAT. Prior to issuing at VCAT the DBCA now requires parties to go through conciliation, through the Domestic Building Dispute Resolution Victoria (DBDRV). Learn more about VCAT and building disputes .

When considering making a claim against the builder the Owners Corporation should consider:

1. Initiating a claim at the DBDRV;
2. Engaging a Building Consultant to prepare a report as to the defective works and cost the rectification works;
3. Issue a Letter of Demand to the Builder with a copy of supportive expert reports requesting steps to rectify defects.

These three steps can be done concurrently as the DBDRV will take some time to review any application. In the meantime, the owners corporation can start to attempt to resolve matters with the builder directly.

How an Owners Corporation Issues Legal Proceedings at VCAT

If a dispute doesn’t resolve at DBDRV then the owners corporation will need to issue a legal proceeding at VCAT, where the owners corporation would be required to:

1. commission further reports and/or obtain quotes from relevant trades for the cost of remediation, plus pursue the builder for costs of rectifications;
2. strike a special levy to meet the relevant expert costs, additional management fees, legal fees and other expenses not covered by the budget last approved;
3. pass a special resolution to commence legal proceedings against the builder for rectification, should it be necessary. In order to obtain the resolution, the owners corporation would need at least 50% of the total lots on the Plan to return a vote in favour of the proposition and then have no more than 25% of the returned votes to be cast against it for the resolution to pass.

If the builder is insolvent, the owners corporation should seek advice as to any claim the lot owners can make on the Victorian Managed Insurance Authority (VMIA), and whether domestic building warranty insurance has been issued for the works and covers the issues.

If the building works are over 10 years old the owners corporation should take steps to levy further fees to meet the cost of rectification.

Case Study: Lacrosse Apartments, Combustible Cladding and the Relevant Parties Responsible

In 2019, the landmark VCAT decision in the case between the Lacrosse Owners Corporation and LU Simon Builders, VCAT Judge Woodward considered who would ultimately be responsible for losses suffered by the owners corporation and private lot owners resulting from the cladding fires at the Lacrosse Tower in Melbourne in 2014. There were 211 applicants (the owners corporation and the private lot owners), and eight respondents:

• the builder (LU Simon);
• the building surveyor (Stasi Galanos) and the surveyor’s employer (Gardner Group);
• the architects (Elenberg Fraser);
• the fire engineer (Thomas Nicolas);
• the occupier of the apartment where the fire started;
• the tenant of the apartment where the fire started; and
• the superintendent under the building contract.

The owners corporation and private lot owners claimed damages against the builder for the cost of replacing non-compliant cladding, damaged property, loss of rental income, accommodation costs, additional insurance premiums and "anticipated future losses".

In the 200 plus page decision handed down by Judge Woodward, LU Simon was ordered to pay in excess of $5.7million to the owners corporation and the individual private lot owners. Judge Woodward found that LU Simon was primarily liable to pay damages to the owners, as it had breached the warranties implied under the DBCA, in particular the warranties of suitability of materials, compliance with the law and fitness for purpose. Judge Woodward ordered some of the respondents reimburse LU Simon in respect of that amount as concurrent wrongdoers in proportions as follows:

1. the building surveyor - Gardner Group: 33%
2. the architects - Elenberg Fraser: 25%
3. the fire engineer - Thomas Nicolas: 39%
4. the tenant of the apartment: 3%

In apportioning the liability VCAT found:

• The architects Elenberg Fraser had failed to remedy defects in its design by allowing substantial use of aluminium composite panels (that were ultimately found to be highly flammable) on the building. The use of these was found to be non-compliant with the Building Code of Australia and not fit for purpose;
• The building surveyor Gardner Group, breached its agreement with LU Simon by failing to exercise due care when it issued a building permit in 2011 for those architect plans;
• The fire engineer, Thomas Nicolas, failed to identify and advise the builder that the material proposed for use on the building did not comply with the building code.

An appeal was filed by the consultants which was handed down in March 2021.

The Court of Appeal upheld VCAT’s decision and found that the builder (LU Simon) was not negligent under the Wrongs Act 1958 (as argued by the consultants) despite finding that it had in fact breached its implied warranties under the DBCA. The Court held that there was no error in determining that LU Simon’s breach of warranty claims were not apportionable as the builder was not found to have failed to take reasonable care.

In May 2021 the Court of Appeal later reallocated responsibility as between the building surveyor (30%) and fire engineer (42%).

Key Takeaways from the Lacrosse Building Dispute

1. Whilst Judge Woodward stressed that this judgement considered contractual matters between the parties and shouldn’t be seen as precedent for owners corporation matters, it does provide clarity as to who can be held responsible for flammable cladding (and more generally, defective builds).

A builder will be primarily responsible to an owners corporation for breaches of the implied warranties under section 8 of the DBCA, however a builder can seek reimbursement from other building practitioners such as surveyors, architects and engineers.

2. There was a deliberate strategy of the owners corporation and the individual private lot owners whereby they didn’t make a claim in negligence against LU Simons and only relied on breaches of the section 8 warranties, in order to avoid LU Simon being entitled to reduce its liability to the owners corporation and the individual private lot owners for proportionate liability purposes.

Talk to Our Building Dispute Lawyers About VCAT, Owners Corporation Issues and More

Whether you’re a domestic or commercial builder, owners corporation manager or a lot owner, get in touch with one of our experienced owners corporation and building dispute lawyers if you’re having issues in the building game. We can give you concrete advice on how to get your issues rectified in the most efficient way.

Kathryn Finemore

Director
kathryn.finemore@thebluerock.com.au

Annabel Clarke

Senior Associate
annabel.clarke@thebluerock.com.au