Major reforms change the face of the home building act
Michael Morrissey and Hamish Geddes
Nexus Law Group
Residential builders, developers and property owners can expect a major shake-up to the industry.
Significant amendments to the Home Building Act 1989 (NSW)(‘Act’) recently passed unamended through NSW Parliament. The amendments are yet to be proclaimed, but will impact on all parties in the industry. Significantly, the changes swing the Act back towards providing greater protection for builders, and will require owners to act promptly when concerns around defects arise.
The amendments shift the way in which builders and home owners should approach potential disputes and the distribution of liabilities for residential building works defects. The key amendments and their anticipated effects are detailed below.
“Structural Defect” now “Major Defect”
The definition of “Structural Defect” under 18E has been amended to “Major Defect”. A Major Defect will cause, or likely cause, “the inability to inhabit or use the building from its intended use…the destruction of the building or any part of the building, or a threat of collapse of the building any part of the building”.
This, in some respects, is a broadening of the previous definition as a Major Defect will include all internal or external load bearing components to the building, fire safety systems and waterproofing.
The new amendment allows Home Owners to claim only for “Major Defects” after the 2 year period for non-structural works has lapsed.
Defence on reliance on instructions
The Act has included in s18F further protections to builders and principal contractors to claims for breaches of statutory warranties.
Under s18F(1)(b) it will now be possible to rely on the instructions provided by relevant professionals engaged by the owner – for example, plans provided by engineers, architects and designers – as a complete defence against that defect claim.
This settles an issue that has long plagued builders and contractors where a claim is made against them for what is essentially a design defect. However, it raises the prospect of further claims on residential projects being directed to design professionals.
Statutory warranties applying to subcontractors
In addition to the 18F amendments, new subsection 18B(2) states that the statutory warranties now extend to subcontractors. If the home owner or owners corporation makes a claim for a defect for which the subcontractor is liable, the principal and builder, may be able to rely upon this section.
Obligations to notify and mitigate
The amendments also include obligations on owners to mitigate their loss and notify the builder and/or developer of claims. Under s18BA, an owner – including subsequent owners – will have a duty to attempt to mitigate the loss arising from any defect. The owner will also be expected to notify the builder of an alleged defect within 6 months of becoming aware of the issue and allow reasonable access to inspect, and rectify the same. Failures to do so can be now taken into account by the Tribunal.
An emphasis on rectification
The amendments shift the emphasis in proceedings towards rectification. Under the changes to Part 3A of the Act, rectification will be the preferred outcome of proceedings. This is of considerable benefit to the principal or builder as it allows them to return and rectify any actual defects at their internal cost, which is generally considerably less than an external contractor or an award of damages made by the Court or Tribunal.
Alternatively, if the builder refuses to return to rectify when access is granted this will likely result in either an award of damages or rectification plus costs, or potentially both.
Due care and skill
The amendment also replaces the previous wording of standard of work required, which has been amended from ‘in a proper and workmanlike manner’ to ‘done with due care and skill’. It is unclear as to how the Court and Tribunal will differentiate between the two standards.
Additional amendments include that the contract must name the party to do the work, insurance extends to the rectification of the works, an increase of the maximum deposit amount to 10% and changes the insurance regime.
While we consider in the long term, the amendments will have a positive effect on the residential construction industry and hopefully lead a shift towards more practical and pragmatic dispute resolution processes being adopted, the short term impact is problematic.
We anticipate seeing an immediate jump in defect claims under the Act in an attempt to have the claims underway before the proclamation date. Considering the robust conditions currently being experienced in the construction industry throughout the Hunter, it is likely that many of these new amendments will be tested over the coming months.
The major changes to the Home Building Act:
· Refining defects and the standard of which defects are assessed · Requiring owners to promptly notify builders when they consider there is a defect
· Requiring owners and builders to both take reasonable steps to mitigate any losses
· Designers potentially being in the firing line for building defect claims
· An emphasis on rectification, not monetary orders, as the preferred way to resolve disputes