KEY
TAKEAWAYS

The ACT government is considering holding developers liable for residential building defects.

The ACT government has indicated that these reforms could be based on NSW’s developer reforms which hold developers liable for defects.

This may be concerning news for ACT property developers since NSW’s developer regulations imposing liability on developers for defects are rather broad and harsh.

AUTHORS

13 November 2023

When purchasers of off-the-plan developments discover building defects, usually it is the builder who risks liability to the owners corporation. Developers, despite their increasing involvement in the construction stage of development, do not share this risk since they are not subject to the same statutory warranties as builders. However, this may change as early as next year as the ACT reviews its regulatory framework for developers.

In this litigation update, Moulis Legal associate Ben Game reviews the ACT’s proposed reforms and considers how developers can mitigate their potential liability.

 

ACT Government review of developer regulations

The ACT Government is now finalising its review of developer regulations for implementation in 2024. One of its stated objectives is ‘bringing developers into the regulatory chain of accountability for building work.’ The ACT Government’s focus on this area reflects that developers have become far more intricately involved in decision making during the construction phase of development, yet are not subject to the same regulations and liability for defects as builders, such as the statutory warranties under the Building Act 2004. Further, unlike builders, ACT property developers cannot be made subject to government rectification orders.

So, what is in store for ACT property developers next year? The ACT Government’s Discussion Paper acknowledges the need for developer regulations to reflect community expectations for building quality and accountability, and makes comparison to how NSW’s regulatory scheme holds developers liable for building defects. The paper notes in particular that the government is considering extending builder’s statutory warranties to include developers, as has long been the case in NSW. Applying these warranties to developers as well as builders had previously been recommended by the ACT’s 2020 Inquiry into Building Quality. If adopted in the ACT, developers could become liable to pay compensation for residential building defects.

However, if the ACT is minded to emulate NSW’s more recent reforms, ACT property developers could also soon owe a duty of care to owners corporations, including retrospective and even personal liability for building defects. This would be in addition to any statutory warranty obligations. The NSW Design and Building Practitioners Act 2020 (DBP Act) imposes a statutory duty of care on builders who carry out building work, and on those who supervise, coordinate, project manage or otherwise have substantive control over building work.

This can include developers, depending on the nature and extent of their influence over construction. The duty requires such persons to exercise reasonable care to avoid economic loss caused by defects. Similar to statutory warranties, the duty is owed to each owner of the land as well as subsequent owners and cannot be delegated or excluded by contract. ACT property developers will be alarmed to learn that the duty of care applies retrospectively to economic losses that materialised within the ten years preceding the DBP Act.

NSW has also passed the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) which requires developers of residential apartment buildings to notify the government 6 to 12 months before they apply for a building occupation certificate. This allows the government time to investigate serious building defects, issue stop work orders and order rectification prior to the issue of an occupation certificate. In the event of non-compliance, the RAB Act imposes severe penalties not only on developer corporations but also their directors and other persons involved in their management who knowingly authorised or permitted the contravention.

 

How could ACT property developers become liable under the new scheme?

If reforms similar to that seen in NSW are adopted in the ACT, a recent decision by the NSW Supreme Court considering the DBP Act’s statutory duty of care could illustrate the potential for ACT property developers to become liable for building defects.

In Owners – Strata Plan No 84674 v Pafburn Pty Ltd, a North Sydney owners corporation brought proceedings under the DBP Act against both their complex’s builder, Pafburn Pty Ltd (Pafburn), and their developer, Madarina Pty Ltd (Madarina), in relation to alleged building defects.

The owners corporation alleged that Pafburn and Madarina had breached their duty of care owed under the DBP Act. In Madarina’s case, the owners corporation alleged that its supervision and control over Pafburn’s construction work meant it held a duty of care to prevent economic loss to the owners corporation, such loss in this case resulting from Pafburn’s allegedly defective building works.

In response, Pafburn and Madarina sought summary dismissal of the claim prior to its hearing on the basis that while Madarina’s supervision of Pafburn gave it the ability to control construction, Madarina had not in fact exercised its control over construction. Thus, the defendants argued, Madarina did not have the requisite level of substantive control which would otherwise give rise to the aforementioned duty of care to the owners corporation under the DBP Act.

The case thus required the court to consider the degree of control a developer may have over construction before it can be found to owe a duty of care to an owners corporation under the DBP Act. The court interpreted the DBP Act’s wording and found that whether a developer in fact exercised control over construction was not relevant; the duty could arise from the developer’s mere ability to exercise substantive control over the carrying out of the building work.

On this basis, the court found that since Madarina’s sole director was also Pafburn’s nominated supervisor for Pafburn’s contractor license, there was an arguable case that Madarina had the requisite degree of control over construction to give rise to a duty of care to the owners corporation. Accordingly, the court declined to dismiss the case against Madarina and the proceedings resumed.

Although the case has not yet proceeded to hearing, the court’s ruling shows that if the ACT does adopt a copycat duty of care for developers, the scope of developer liability could be broad. Even those developers who choose to minimise their involvement in construction could find themselves liable based on their ability to influence decisions made during construction. Potentially, ACT property developers will need to seek advice on their building contracts to clearly delineate the extent of their role in construction. It could also become legally hazardous for a developer’s directors or other officeholders to hold positions of influence in the builder.

 

Takeaways

The ACT Government is due to implement its regulatory reforms in 2024, and if its focus on NSW’s model is any indication, ACT property developers could face broad and multifaceted liability for residential building defects. The regulatory shift towards developer liability, including potential retrospective and even personal liability, reflects their deepening involvement in construction and years of high insolvencies among builders, which have often left aggrieved owners without a defendant to sue. It is no surprise then that ACT regulators have sought to introduce developers into the regulatory chain of accountability for housing quality. What form that accountability takes, and whether NSW’s model is adopted, will be known soon.