2020 saw significant changes introduced in the NSW building and construction industry as part of the NSW government's response to the Shergold Weir Report. The NSW government introduced a number of substantial pieces of legislation aimed at overhauling the industry through regulation and accountability. The increased regulation was implemented in the context of several highly publicised building failures, particularly in the residential apartment sector.
The Design and Building Practitioners Act 2020 (NSW) (D&BP Act) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) were introduced as part of the NSW government's six pillars of reform, designed to protect consumers from poor building and construction practices and restore public confidence in the NSW building and construction industry.
The NSW government announced that these changes were about ensuring that "developers can no longer turn a blind eye to the work done by practitioners contracted for a project" and that "occupants of buildings (felt) safe and secure within their walls".1
Design and Building Practitioners Act 2020 (NSW)
The D&BP Act took effect on 11 June 2020, with draft Regulations released in late November 2020 with submissions due 11 January 2021. Not all of the D&BP Act is currently in force, with the majority of the Act not due to commence until 1 July 2021.
The D&BP Act introduced a number of new regulatory requirements including:
- a new duty of care – a duty of care is owed to landowners by people carrying out "construction work" to exercise reasonable care to avoid economic loss caused by defects
- a register of practitioners – the D&BP Act imposes a comprehensive registration regime, requiring designers, engineers, and all people who contract to do building work to be named on a publicly available register of registered practitioners
- compliance declarations – design and building practitioners must provide declarations as to whether building work complies with the requirements of the Building Code of Australia (BCA) before an occupation certificate (OC) is issued
- compulsory insurance – any person who gives a compliance declaration must be adequately insured
- disciplinary oversight – the Act gives the Secretary of the Department of Customer Service (Secretary) power to take disciplinary action against a registered practitioner, including imposing fines or suspending registration
- information gathering and enforcement powers – the Act introduces powers of investigation for authorised officers and enforcement powers which include the ability to issue stop work orders where works are done in breach of the Act.
Duty of care
Significantly, the duty of care introduced by the D&BP Act is non-delegable and retroactive, meaning that owners and subsequent owners of land may claim for a breach of statutory duty where:
- the loss first became apparent within the 10 years immediately before the commencement of the section; or
- the loss first becomes apparent on or after the commencement of the section.
The retroactive effect of the duty of care is also likely to present issues for persons who are required to obtain adequate insurance under the D&BP Act. Insurers will now need to take into account any work the practitioner has completed in the last 10 years to appreciate the scope of their exposure.
The draft Regulations were highly anticipated as the D&BP Act provided that the classes of buildings, which limited the meaning of "building work" to which the D&BP Act applies, would be prescribed in the Regulations. This was problematic given that the duty of care provisions of the D&BP Act have been in force since June 2020.
Based on the second reading speech on the D&BP Act, it had been speculated that the duty of care would apply to construction work in a building that is a Class 1, 2, 3 and 10.
The D&BP Act itself is less than clear. On one reading of the Act (relying on the definition of "building" in section 36(2) of Part 4), the duty of care applies to all building classes. On an alternate reading of the D&BP Act (relying on the definition of "building work" in section 4 and the extension of the duty to residential building work in section 36), the duty currently applies to residential building work only (not limited by the building class), with the classes of buildings to which the D&BP Act otherwise applies to be prescribed in the Regulations.
What is now clear from the draft Regulations is that, despite the second reading speech, it is proposed that the compliance and disciplinary provisions of the D&BP Act will be limited to building work carried out on Class 2 residential apartment buildings and buildings that contain a Class 2 part. However, there are some exclusions. The most notable of which is work which comprises an exempt development, work carried out under development control orders and maintenance work on fire safety systems and other services.
However, the draft Regulations have not resolved the question of interpretation between the section 36 and section 4 approach regarding which building class the duty of care applies to. What is beyond doubt is that the draft Regulations would have the duty of care apply to building work carried out in Class 2 buildings, which the D&BP Act already extends to residential building work more broadly.
The D&BP Act also creates a scheme for the registration of "registered practitioners" including:
- registered design practitioners
- registered principal design practitioners
- registered professional engineers
- registered specialist practitioners; or
- registered building practitioners.
The D&BP Act provides that a person is to make an application for registration, which is to be determined by the Secretary, who may grant or refuse the application. The Secretary may refuse to register a person where, for example, the Secretary opines that the applicant does not have the appropriate qualifications, skills, knowledge or experience, or where the person "is not a suitable person to carry out the work" the subject of the application.
This broad definition (of a registered practitioner) means that many industry players will be caught by the registration regime and will be brought within the scope of the D&BP Act. As such, the Secretary will carry a significant administrative burden to develop a registration procedure, process those registration applications, and develop and publish those registrations on an online register that may be freely accessible by the public.
The D&BP Act empowers the Secretary to take disciplinary action against a registered practitioner in various circumstances, including:
- where the practitioner has engaged in conduct that has fallen short of the standard of competence, diligence and integrity that a member of the public is entitled to expect of a reasonably competent practitioner
- the practitioner has failed to comply with a condition of the registration
- the practitioner has wilfully disregarded matters to which the practitioner is required to have regard to; or
- other grounds prescribed by the regulations.
The scope of the powers afforded to the Secretary to take disciplinary action are significant. For example, if the Secretary is satisfied that a ground for disciplinary action against a practitioner has been established, the Secretary may (among other things):
- caution or reprimand the practitioner
- make a determination that requires the practitioner to pay, as a penalty, an amount not exceeding $220,000 (for a body corporate) or $110,000 (in any other case) to the Secretary within a specified time
- impose a condition on the practitioner's registration, including requiring the practitioner to undertake specified education or training
- suspend or cancel the practitioner's registration, or
- disqualify the practitioner, either temporarily or permanently, from being registered under the Act.
Information gathering and enforcement powers
The D&BP Act further empowers "authorised officers" appointed by the Secretary to:
- require a person to provide information and/or records
- direct a person to answer questions and record those answers
- enter business premises without the need for a search warrant
- when on premises, examine or inspect, take samples, conduct tests, take photographs, copy records, seize property, open up or demolish a building or structure, or do anything else authorised by the Regulations.
The D&BP Act also gives the Secretary the power to issue a stop work order if the Secretary opines that the work is or is likely to be in contravention of the Act, and the contravention could result in significant harm or loss to the public, occupiers or potential occupiers of the building to which the work relates.
However, a stop work order issued under the Act only lasts for a maximum period of 12 months from the date on which the order takes effect.
Breach of a stop work order carries a maximum penalty of up to $330,000 and up to $33,000 per day in the case of a continuing offence for body corporates, and $110,000 and up to $11,000 each day for individuals.
Residential Apartment Buildings (Compliance and Enforcement Powers) Act (NSW) 2020
The RAB Act commenced on 1 September 2020 and applies only to Class 2 buildings within the BCA (including any building that contains a Class 2 component under the BCA).
The RAB Act regulates the circumstances in which an OC will be made, introducing a compulsory scheme which empowers the Building Commissioner to investigate defects in the final stages of residential apartment building projects and to refuse to issue an OC for any non-compliance.
The scheme operates as follows:
- the RAB Act requires developers to notify the Secretary of when construction is to complete and when an application for an OC will be made
- the Building Commissioner is an authorised officer and has broad powers to investigate potential defect(s)
- if the Building Commissioner identifies a potential defect, the Secretary may take various enforcement actions that require the developer to rectify the defect(s)
- if the developer fails to comply with any orders issued by the Secretary or fails to give notice of an application for an OC, the Secretary may issue a prohibition order that prevents an OC from being issued for the project
- a developer would need to appeal the prohibition order within 30 days, or otherwise comply with the terms of the order so that the prohibition order can be lifted and an OC can be issued. Given the serious consequences from any of these orders, 30 days is not a long time. Developers, landowners, and financiers alike will need to be cognisant of this and seek urgent legal advice once an order is made.
Failure to comply with the terms of a prohibition order may result in an OC never being issued for the development and sales will, therefore, not be completed.
While the power to prohibit the issuing of OCs is unprecedented, the justification proffered for this power is that it "is the ultimate signal to the developer that they must resolve any non-compliance or face never having the building sold or occupied".
A prohibition order may be given where:
- a developer fails to provide the expected completion notice or expected completion amendment notice, or does so outside of the required timeframe
- the Secretary is satisfied that a "serious defect" in the building exists; and/or
- any building bond required under section 207 of the Strata Act has not been given to the Secretary.
The potential impact on developers
Settlements of off-the-plan sales typically do not occur until after an OC is issued or a strata scheme is registered. In those circumstances, the RAB Act has the potential to hit the traditional developer hard as it stops cash flow from sales by restricting the issue of OCs.
It will be interesting to see how the potential threat to settlement might change the contracting and financing behaviour of developers and whether it may encourage, for example:
- quality control by independent consultants during the building process, engaged by developers or even by financiers; or
- developers to link final payments or returns of retentions to the issue of OCs, with this practice being reflected down the chain.
The regulator's task ahead
The government's sole focus is on protecting people buying off-the-plan apartments. There is no doubt that the RAB Act creates a strict and somewhat radical regime that places the Secretary (and the Building Commissioner) at the helm.
As a result, there is sure to be a significant administrative and compliance burden imposed both on developers who will need to create robust internal project management processes to ensure compliance with the Act, but also the Secretary and the Building Commissioner who bear the brunt of the compliance and enforcement burden.
For the RAB Act to achieve its desired outcome of revolutionising the NSW building and construction industry, the Secretary and the Building Commissioner will need to be sufficiently resourced to carry out their functions efficiently and effectively.
After all, by preventing the issue of OCs, they have placed themselves in the uncomfortable position of being between a developer and its financiers and purchasers, which will likely be a hostile environment if a dispute arises over the quality of construction of a residential apartment building.
Implications of the D&BP Act and the RAB Act for government
Other than the agencies involved in the direct administration of this scheme, councils and other agencies which are more broadly involved in the NSW property industry will need to understand the basic schema of each Act, the supply chain and other impacts of their introduction, particularly in the context of the importance of the building industry in the NSW economy.
While it is not the ordinary business of government to construct or develop Class 2 buildings, exceptions can arise. For example, it is claimed that the Sydney Park Olympic Authority (by owning the land) is, under the definitions in the Home Building Act, a developer and thereby liable for defects in the Opal Tower building.
Other than as accidental or incidental developer, other potential exposures (under the D&BP Act or having regard to the Civil Liability Act) may arise where government agencies are involved in design work or related activities, such as the NSW Government Architect or Public Works Advisory.
Subject to future directions for the scope of the D&BP Act, in particular, should there be a broadening of the building classes to which it relates towards those contemplated in the second reading speech, the NSW government, in its (substantial) capacity as an owner of built assets, may be a significant beneficiary of the increased accountability involved in the new regimes.
1 econd Reading Speech by Mr Kevin Anderson (Tamworth-Minister for Better Regulation and Innovation) dated 2 June 2020, Legislative Assembly Hansard, 2 June 2020, page 4.
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