NSW turns up heat on developers of residential apartment buildings

A widening definition of 'developer' 12 min read

As part of the NSW Government's broader building industry reforms¹, the recent Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (the Act) provides for the proactive investigation and rectification of serious defects in residential apartment buildings by the Secretary of the Department of Customer Services (the Secretary). The Act achieves this through empowering the Secretary to issue to developers:

• prohibition orders to block the issue of an occupation certificate (or strata plan);
• stop work orders; and
• building work rectification orders (with the ability to recover costs associated with such orders).

To support the Secretary, the Act also provides for:

• authorised officers to be granted broad investigative powers;
• developers to provide advance notice of expected completion dates;
• creation of offences for non-compliance with orders issued under the Act; and
• developers' directors, and others with management control, being potentially exposed to personal liability for corporate contraventions of the Act.

Key takeaways

• Commencement: The Act is due to commence 1 September 2020. Developers and other relevant industry participants should take necessary steps now to prepare for the new regime.
• Wide application: Industry participants should be alert to the possibility they are caught by the wide definition of 'developer', which includes any person who arranges for, facilitates or otherwise causes (directly or indirectly) residential apartment building work to be carried out. It also includes owners of the land on which the building work occurs and principal contractors as defined in the Environmental Planning and Assessment Act 1979 (NSW) (EPA Act).
  In addition to residential apartment buildings, the regime will also capture mixed-use developments which include a residential component, and apply to currently incomplete developments and developments completed within the previous 10 years.
• Notification scheme: Developers are obliged to provide the Secretary with an expected completion notice 6-12 months prior to applying for an occupation certificate. If this date changes, an expected completion amendment notice must be given. However, for buildings expected to be completed during the initial transitional 6 month period from commencement of the Act, the notification period is shortened to 14 days from commencement.

Wide application

Who is a 'developer'?

'Developer' is very broadly defined. In addition to entities who contract or arrange for the building work to be carried out, the Act also captures:

• A person who facilitates or causes (directly or indirectly) the building work to be carried out: a person who contracted or arranged for the building work to be carried out, or who 'facilitated or otherwise caused' (whether directly or indirectly) the building work is a developer. 
• The owner of the land: where the building work involves the construction of a building, the owner of the land at the time of the construction is a developer.
• The principal contractor: a principal contractor under s1.4 of the EPA Act – 'the person responsible for the overall coordination and control of the carrying out of the building work' – is a developer.

The breadth of the definition may be reduced or expanded by regulation. No such regulation has been made at the time of writing.

What 'building work' is caught?

Currently, the Act applies only to building work in respect of a residential apartment building, being a 'class 2' building or building containing a 'class 2' component within the meaning of the Building Code of Australia. This means the Act extends to the entirety of mixed-use buildings which include a residential apartment component.

While the regulations may eventually provide for extension to another class of building, or to exclude smaller residential apartment buildings, no such regulation has been made at this time.

Further, the Act only applies to building work in respect of a residential apartment building that is or was authorised to commence in accordance with a construction certificate or complying development certificate issued under the EPA Act.

Building work includes any physical activity involved in the erection of a building. The definition also captures direct and supervisory construction tasks involved in the construction or alteration of a building (or one of its parts), and any work involved in repairs, renovations or protective treatments.

What is a 'serious defect'?

'Serious defect' refers to:

• Non-compliant building element: a defect in a building element² due to non-compliance with the performance requirements of the Building Code of Australia, any relevant Australian Standard or the relevant approved plans³;
• Defective building element or building product: a defect in a building product or a building element that is attributable to defective design, defective or faulty workmanship or defective materials, which causes or is likely to cause the inability to inhabit or use the building or part of the building for its intended purpose, or the destruction of the building or any part of the building, or a threat of collapse of the building or any part of the building;
• Non-conforming building product: the use of a building product (within the meaning of the Building Products (Safety) Act 2017 (NSW) (BPSA)⁴) in contravention of the BPSA; or
• Prescribed defect: a defect prescribed by regulation to be a serious defect⁵.

Does it apply retrospectively?

Yes. The Act will apply to existing residential apartment building work that is incomplete or has been completed within the previous 10 years.

Enforcement powers

Prohibition orders

When can a prohibition order be issued?

The Secretary may issue an order prohibiting the issue of an occupational certificate and, if relevant, the registration of a strata plan for a strata scheme (prohibition order) where:

• Non-compliance with the developer's notification obligations: a developer fails to provide the required notice to the Secretary of when it expects to apply for an occupational certificate. This notification scheme is discussed in detail below;
• Serious defect in the building: the Secretary is satisfied there is a serious defect in the building; or
• Non-payment of a full strata bond (where applicable): any applicable building bond required under s207 of the Strata Schemes Management Act 2015 (NSW) has not been given to the Secretary.

What is the impact of a prohibition order?

An occupation certificate issued in contravention of a prohibition order is invalid.

Without an occupational certificate, purchasers cannot lawfully occupy premises and developers cannot complete sales and obtain remaining funds. Granting the Secretary the power to issue a prohibition order therefore applies commercial pressure on developers to take steps to ensure serious defects are avoided and to comply with their notice obligations under the Act.

What protections are available to developers?

A developer can appeal against the prohibition order to the Land and Environment Court within 30 days of notice of the order.[1] However, the lodging of an appeal does not stay the operation of the prohibition order, unless the court otherwise orders.

Stop work orders

When can a stop work order be issued?

A stop work order, requiring the developer to ensure the building work stops, can be ordered if the Secretary is of the opinion that the building work is, or is likely to be, carried out in a manner that could result in significant harm or loss to the public or occupiers, or potential occupiers, of the building or significant damage to property.

A stop work order can remain in force for up to 12 months unless the terms of the order specify an earlier date, or the order is otherwise revoked by the Secretary.

What is the impact of a stop work order?

Breach of a stop work order is a serious offence resulting in penalties for corporations of up to $330,000 with an additional $33,000 for each day the offence continues.

The Secretary can also apply to the Land and Environment Court for an order to remedy or restrain the breach of any order.

What protections are available to developers?

Similar to prohibition orders, developers have the right to appeal against a stop work order to the Land and Environment Court within 30 days of the order. However, the appeal will not operate to stay action on the order unless the court otherwise directs.

Building work rectification orders

When can a building work rectification order be issued?

A building work rectification order requires a developer to carry out, or refrain from carrying out, building work as specified in the order to eliminate, minimise or remediate an actual or potential serious defect.

The Secretary can issue such order when of the belief that building work was or is being carried out in a manner that could result in a serious defect. The order may be subject to conditions; specify standards which the building work is required to meet; or indicate the nature of building work which would satisfy the standard required.

What is the impact of a building work rectification order?

Non-compliance with a building work rectification order exposes a developer to the same penalties as for non-compliance with stop-work orders discussed above.

In addition, if a developer fails to comply with the order, the Secretary may do anything that is necessary or convenient to give effect to the terms of the order (including carrying out rectification works) and may recover its costs (including all associated costs) in any court as a debt due by the developer.

Further, where a building work rectification order is issued, the Secretary may also issue a 'compliance cost notice' on the developer requiring the developer to pay the reasonable costs incurred by the Secretary in connection with the preparation (including lead-up investigations) of, monitoring action and investigating compliance with, such order.

What protections are available to developers?

The Act includes the following protections:

• 'Show cause' notice process: except where the Secretary considers there is an emergency or serious risk to public safety, prior to issuing a building work rectification order, the Secretary must first provide notice of its intention to issue such order and allow the recipient a reasonable period of time in the circumstances to make written representations with respect to the proposed order. The Secretary is required to consider any representations made.
• Reasonable compliance period: a building work rectification order must specify a reasonable period for compliance, unless the Secretary believes there is a serious risk to health or safety or an emergency.
• Statutory right of access: the Secretary may order an occupier to permit the developer access to carry out specified works and the occupier must not, without reasonable excuse, refuse or fail to comply. If the occupier refuses, the developer does not commit an offence under the Act for failure to comply with the requirements imposed on it.
• Excused from EPA approvals: a developer is not required to obtain consent or approval under the EPA Act to carry out works in response to a building work rectification order.
• Appeal rights: the developer may also appeal to the Land and Environment Court against the order within 30 days after the order is given (subject to any extension granted by the court) and the court has wide powers in relation to orders it may make in determining such appeal. As with the other orders of the Secretary outlined above, an appeal does not stay the operation of the building work rectification order.

Notification scheme

Important to achieving the reform goal of reducing serious defects in residential buildings, is for the Secretary to have sufficient time to investigate building works for serious defects prior to their occupation. Accordingly, the Act provides a scheme for early notification of anticipated completion. Under this scheme, a developer is required to submit the following notices to the Secretary:

• Expected completion notice: a developer must provide 6 – 12 months' notice before the developer applies for an occupation certificate, setting out the expected date of application for the certificate. An exception applies for short-term building works to be completed within six months, for which notice must be given within 30 days of commencement of the works. The maximum penalty for non-compliance is $110,000 for a body corporate or $22,000 in any other case.
• Expected completion amendment notice: if a developer becomes aware of circumstances such that their expected date of application for an occupation certificate differs from the date stated in an expected completion notice, the developer must provide the Secretary with notice of the new expected date within seven days of becoming aware of those circumstances. If the new date falls within 60 days of the originally stated date, no notice is required. The maximum penalty for non-compliance is $55,000 for a body corporate or $11,000 in any other case.

Non-compliance with the notification scheme is also a basis for the Secretary to issue a prohibition order.

However, where there are multiple developers for a residential building, it is sufficient if one developer provides the required notice.

Personal liability of directors and management

Directors, and persons concerned in the management of, a company which contravenes the Act are also taken to have contravened the Act if they knowingly authorised or permitted the contravention.

Legislative Review

A review of the impacts of the reforms under the Act is to be conducted after 30 March 2022. Issues for consideration at that time include whether there should be an independent NSW Building Commission.

Commencement and transitional period

The Act commences on 1 September 2020.

However, there is an initial six-month transitional period impacting:

• Notification scheme: if a developer wishes to apply for an occupational certificate during the transitional period, the expected completion notice must be provided to the Secretary within 14 days of commencement of the Act.
• Meaning of 'building element': outside of the transitional period, 'building element' is defined by reference to s6 of the Design and Building Practitioners Act 2020 (NSW). During the transitional period, 'building element' is defined entirely within the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) as including fire safety systems, waterproofing, internal or external load-bearing components of a building, building enclosures and services (mechanical, plumbing or electrical) or other things as prescribed by regulations.

Actions you can take now

Developers of residential apartment buildings should:

• Review any existing or proposed works to determine whether proposed dates for applications for occupational certificates fall within the six-month transitional period and, if so, ensure relevant notices under the notification scheme are prepared well in advance so as not to miss the 14 day window.
• Review existing projects for potential serious defects, and consider taking steps now to resolve them, in order to minimise such defects being investigated by the Secretary.
• Consider the need for additional contractual mechanisms in their dealings with building contractors and consultants to minimise the occurrence of any serious defects and ensure appropriate risk allocation for rectifying such defects and compliance with the new legislative reforms.