Combustible Cladding Remediation

Court affirms State’s right of subrogation to recover cost from builder and directors. Victorian Building Act construed broadly to recognise Owners Corporation is acting for and on behalf of individual lot owners when receiving financial assistance for cladding rectification.

The Victorian Court of Appeal has ruled that the State of Victoria can recover funds it paid for the replacement of combustible cladding in buildings in Victoria under its Cladding Safety Victoria  program, if the funding was paid to an Owners Corporation, but the cladding was owned by individual lot owners.

In the State of Victoria (Department of Transport and Planning) v LU Simon Builders Pty Ltd & Ors. [2025] VSCA 52, a case stated from the County Court of Victoria, L U Simon challenged the State’s right to recover the cost of removing combustible cladding from the Atlantis Towers building in Spencer Street Melbourne, The State’s claim was made against it as  the builder of the towers and two of its directors.

The State’s claim was brought under amendments to the Building Act 1993, section 137F(1) which permitted the State to provide financial assistance to the owners of a building  for cladding rectification and be subrogated to the rights of the owners of the building, and claim those costs from third parties, described as “any persons” (including corporations) liable for the installation of that combustible cladding.

The relevant provisions in place at the time the agreement was entered into and payment made provides.

Subrogation

1. This section applies if,   

2. (a) after the commencement of this Division the Authority  pays an amount to an owner of a building (the payee ) by way of financial assistance in relation to cladding rectification work on the building; or.
   b) before the commencement of this Division, an amount was paid by or on behalf of the Crown in right of the State of Victoria to an owner of a building (the payee) by way of financial assistance in relation to cladding rectification work on the building.

3. At the relevant time  the Crown is subrogated to all the rights and remedies of the payee against any person in relation to the installation or use of any non compliant or non-conforming external wall cladding product, or other building work, that required the cladding rectification work to be undertaken.
4. If a right or remedy to which the Crown is subrogated under this section is exercisable against an entity that is not an individual, it is enforceable jointly and severally against the entity and the people who were its officers at the time the act or omission that gave rise to the right or remedy Owners Corporation.

The Authority under the Act was the Victorian Building Authority. The State established these funding arrangements to provide financial assistance to owners of buildings with combustible cladding, who were not otherwise able to remove and replace the cladding with their own funds.  

The State entered into funding agreements with building owners for the cost of the remediation. The State sought to recover funds advanced from those liable for the installation of the cladding byway of subrogated claims. So far as we are aware, direct claims have been made against corporate builders and their directors although those parties may seek to join other builder consultants involved in a building project. 

The implications of the subrogation rights under the Act so far

The Victorian Court of Appeal Court in Naqebullah v State of Victoria [2024] VSCA 307 had previously held that these provisions had retrospective application, i.e. it applied to building projects before the legislation was enacted. Further, whilst section 137F (4) provided that a claim against an officer of a corporation could only succeed where the officer had “knowledge or consented” to the installation of the combustible cladding by the relevant entity, usually the builder, knowledge or consent was given a broad construction  in that a director’s knowledge was found on the facts to need only be  knowledge of the use or installation of cladding which gave rise to a liability in the builder for the installation of non-compliant cladding , not that it was at the time known by a director  to be non-compliant or to be combustible. 

This is an important distinction for those in the building industry who may face claims. In most cases when the cladding was installed persons did know that the cladding was non-compliant or combustible and unsuitable for use on buildings.  There was widespread use of this type of cladding on buildings and acceptance in the building that the cladding did comply with the Building Code of Australia (BCA). Many building professionals would say that it was only after the BCA was amended following the Lacrosse building fire did it become accepted within the building industry that the cladding was combustible and was non-compliant.  

The presence of combustible cladding of buildings in Victoria is considered a significant public safety issue, particularly following the Lacrosse building fire in Victoria and the Grenfell building fie in London, UK. Following an audit by the Victorian Building Authority hundreds of buildings in Victoria were identified as having combustible cladding.  Building orders were issued against building owners requiring the removal of the cladding. Such orders imposed a significant financial burden on owners.

In the LU Simon proceeding Cladding Safety Victoria as representative of the State entered into an agreement with the relevant Owners Corporation to fund the cost of the removal and replace of the cladding. Under section 137F (1), the State sought to recover those costs from LU Simon and two of its directors.

During the principal litigation it was realised that only a small proportion   of the external cladding was owned but the Owners Corporation, and the balance was owned by individual lot owners. LU Simon argued the State’s agreement and the obligation to pay the owners of the cladding was with the Owners Corporation, not the lot owners. It argued as the State had not given financial assistance to the “owners”, of the cladding and that the provisions of the section had not been satisfied and as such no rights of subrogation applied.LU Simon invited the court to apply conventional principles of statutory construction to find in its favour.

The State argued the legislation should be construed in favour of it to find that a payment to the Owners Corporation was equally a payment to the lot owners. Financial assistance had been provided to the Owners Corporation it argued as a representative of the lot owners. The State argued that principles of statutory construction supported this outcome. The State argued that the Owners Corporation represented the lot owners and could act on their behalf to replace the cladding and accept reimbursement from the State. The State submitted an inequity would be created if a court adopted LU Simon’s construction which would deprive the State from recovering public funds. The State argued that these provisions of the Building Act should be given a beneficial construction and not construed literally.

The State conceded in its material that there were three buildings where the State had entered a similar agreement with an Owners Corporation, where it might be argued that the Owners Corporation was not the owner of the cladding. The circumstances where an Owners Corporation Owners Corporation was not the owner of the external cladding are rare, but not unheard of. Parties must have reference to the relevant strata title plans and perhaps seek the guidance of a professional land surveyor to address this issue.

The Decision

Ultimately the court found thats.137F confers power on the Authority to pay the Owners Corporation on its own behalf and on behalf of individual lot owners and that the State is subrogated to the rights of those owners to recover payments for cladding remediation contemplated by the Building Act. The Authority’s agreement with the Owners Corporation was sufficient to represent a payment to “owners” of the building which included both the Owners’ Corporation and individual lot owners. Whilst the payment made by the Authority under the agreement to the Owner’s Corporation was made under the provisions of s 137F (1) in operation on 11 June 2020, amendments to the Act in force from 1 December 2020 did not change that analysis.

The court drew upon the powers conferred on the Owners Corporations by the Owners Corporations Act 2006, the definition of building and owner in the Building Act, the provisions of the Subdivision Act 1988 and Interpretations of Legislation Act 1984 and extrinsic material to construe the meaning, purpose and intent of s. 137F.  

The court construed the funding agreement to provide financial assistance to both the Owner’s Corporation and the individual lot owners, notwithstanding that it was only entered into with the Owners Corporation. 

Further, the court found that the word “pays” in section 137F (1) can include a payment through an agent, which would include a payment to one owner on behalf of other owners (of that building).

Implications 

The decision dealt with a rare factual situation where the bulk of the cladding for the Atlantis towers building was owned by individual lot owners and not the Owners Corporation and where   the funding agreement was only with the Owners Corporation.  Most funding agreements in this state for cladding rectification are with the Owners Corporation of a building which is the legal owner of the cladding. The broad interpretation of this particular provision of the Building Act may have limited application in any other context outside cladding rectification and these subrogated rights.

The decision clears the way for the State to recover by way of subrogation amounts paid to cladding owners, be they the Owners Corporation or individual lot owners, and notwithstanding that the funding agreements may not be with all the owners of the cladding, so long as they are owners of the building to which the cladding is attached. The decision provides greater certainty for the State’s recovery rights under its rectification program.