October 31, 2018

Around the grounds: The current status of combustible cladding in Australia - owner pays?

The approach to combustible cladding on existing buildings in Australia is not uniform with each state providing a different response to the risk posed by combustible cladding on public and private buildings.

New South Wales

From 15 August 2018, the use of aluminium composite panels (ACPs) with a core comprised of more than 30% polyethylene in any external cladding, external wall, external installation, façade or rendered finish in certain buildings, has effectively been banned.

This essentially is residential apartment buildings, hotels, office buildings, shopping centres, carparks and warehouses, factories and hospitals and other public buildings.  The ban does not apply to all buildings in those classes but only to those buildings with a number of storeys and of a certain construction type.

The ban operates retrospectively and thus applies to buildings constructed before the ban came into force, as well as those currently being built and any future buildings.  The ban applies even if the use of the ACPs was in accordance with the National Construction Code (NCC).

There are two exceptions:

(a) where the ACPs have successfully passed the Australian Standard test (AS1530.1) for combustibility prescribed by the NCC and an accredited testing laboratory has produced the test results on or after 1 July 2017;

(b) the ACP and the proposed wall assembly has successfully passed the Australian Standard test (AS5113) and the person or entity intending to use the ACP has declared by statutory declaration that the ACP will be installed in a manner identical to the tested prototype and an accredited testing laboratory has produced the test results on or after 1 July 2017.

It seems to be recognised in the industry that it is not easy to comply with either test.

What does this mean for existing buildings?

Owners of buildings and strata bodies that have banned ACPs in any external wall, external insulation, façade or rendered finish may be compelled by rectification order of the local council to remove and replace the banned ACPs on existing buildings if the safety risk cannot be minimised or eliminated.[1]

The use of combustible cladding after the ban or failure to act on a building rectification order may result in corporations facing fines up to $1.1 million (with $110,000 continuing per day for each day the offence continues).  Individuals may face up to $220,000 or two years imprisonment or both (with a penalty of $4,000 continuing per day for each day the offence continues).

Builders, manufacturers and suppliers may potentially be liable for contravening the ban.

The use of combustible ACPs is now treated as a major defect in residential work and an extended statutory warranty period of six years now applies.[2]  The extended warranty period for combustible ACPs applies if the owner is still able to bring proceedings for breach of the warranty or the warranty period has not yet commenced.  The warranty period generally commences on completion of the works.

This means that where the building work has been completed less than 6 years ago, an owner may recover from the builder or developer in relation to the use of combustible ACPs under the statutory warranty.

Fire Safety and External Wall Cladding Taskforce Audit

The Taskforce has assessed over 2,280 sites.  Four hundred and seventeen (417) buildings require further assessment as a high priority because they have cladding which potentially increases fire risks.  Two hundred and twenty-two (222) of 417 buildings are residential buildings, with 85 classified as high rise (more than 8-storeys).

The Taskforce in conjunction with the National Building Ministers Forum will also investigate and report on costs responsibility in meeting rectification costs caused by the use of combustible ACPs.  A report on this aspect has yet to be released.

Owners of certain buildings which have combustible cladding are required from 22 October 2018 to register the building with the NSW Government through their online portal.

Victoria

There have been various amendments to the Building Act 1993 (Vic) to strengthen laws in respect of inspection, testing and notice requirements of building works.

Victoria has been at the forefront of responding to the risks associated with the use of combustible ACP cladding.  It experienced the Lacrosse apartment fire in 2014 and proceedings by the apartment owners against the builder are currently before the Victorian Civil and Administrative Tribunal. 

Victorian Cladding Taskforce

The Victoria Cladding Taskforce has issued its October update which notes that the Victorian Building Authority (VBA) has completed its initial assessment of 1,369 building and planning permits where ACP cladding is a construction material.  Following the audit:

  • Emergency orders have been issued to owners of 12 buildings for urgent short‑term remediation.  The remediation may include further fire safety measures and removing ignition sources.
  • The Taskforce has reported that only a very small percentage of low rise buildings in suburban Melbourne and regional cities have combustible ACP cladding, the high risk buildings are 2 or 3 storeys high with a single exit and inadequate fire safety measures.
  • The Taskforce has noted it is difficult to identify ACPs with a polyethylene core – even for highly qualified and experienced building practitioners.  It is often necessary to undertake destructive testing.

In the audit, the VBA was able to deal with non‑compliant cladding on buildings currently in the planning stage and under construction as well as existing buildings.

Building notices which are essentially show cause notices to owners corporations have been issued.  The notice requires the owners corporation to show why combustible cladding should not be removed.  These were issued to about 150 buildings.

The process allows owners corporations the opportunity to provide evidence that the building is safe without the removal of the cladding.  However, the VBA has the right to disagree with that evidence.

The VBA has found 43 buildings in a higher risk category and the VBA has been appointed as the municipal building surveyor for those buildings plus another one for which it is also municipal building surveyor.  In relation to these 44 buildings, there is a longer term rectification issue which may involve removal of some or all of the cladding.

The Taskforce has also recommended that the Victorian government undertake an audit of all government owned and leased buildings.

The Building Amendment (Registration of Trades and Other Matters) Act 2018 (the Act) provided for Cladding Rectification Agreements (CRAs).  That part of the Act comes into operation on 30 October 2018.

The CRA scheme is a voluntary scheme entered into by owners corporations, councils and lenders to raise the funds necessary to rectify cladding and allows loan repayments to be made through an individual owner's council rates.  On settlement of a sale of a unit, the CRA transfers to the purchaser.

The CRA scheme identifies that it is individual unit owners who will bear the costs of rectifying combustible cladding.

Queensland

The approach in Queensland to private buildings with potentially combustible ACPs is to put the onus on the building's owners to undertake the necessary investigation and rectification measures.  The report of the Non-Conforming Building Products Audit Taskforce released in May 2018 recommended a strong regulatory role be taken by the Queensland Government to ensure private building owners adequately address the safety issues posed by combustible cladding.

The Building and Other Legislation (Cladding) Amendment Regulation 2018 (Qld) came into effect on 1 October 2018.  The Regulation requires private building owners of in-scope buildings to register through a Safer Buildings website and to complete an online checklist.  Buildings which are in-scope are those buildings for which a development approval was given after 1 January 1994 to construct or alter the building and the building is a Class 2 to 9 building of Type A or B construction.

The buildings which are in-scope are most high rise residential and commercial buildings.  The owner of a building subject to a community title scheme is the body corporate.

The Regulation requires building owners to:

  • Register on the Queensland Building and Construction Commission's online assessment system and provide a completed combustible cladding checklist by 29 March 2019.
  • If the building might be affected by combustible cladding, a fire safety engineer must be engaged to complete a fire safety risk assessment by 27 August 2019.  The assessment must be submitted by 3 May 2021.

If in the process it is ascertained the building is affected by combustible cladding, a notice that the building is affected by combustible cladding is to be displayed and the notice and the fire safety risk assessment are to be given to each owner and tenant within 60 days of receiving the fire safety risk assessment. 

Clearly the costs of complying with the Regulation will be borne by the owners of the buildings.  A building notice would affect the value of the units in the building and also impact on the rental returns.

Western Australia

Cladding Audit

The Western Australian Building Commission is conducting a state-wide cladding audit of all high-rise buildings with ACP cladding attached.  The scope of the audit is of privately owned buildings three storeys or higher and built or refurbished between 1 January 2001 to 30 June 2017 with ACP cladding on the building's exterior.  The buildings prioritised are residential, hospital, aged care and assembly buildings.

The status update of 11 October 2018 identified a total of 1,734 privately owned buildings with ACP cladding attached.  Of these 238 required a detailed risk assessment with 120 completed.  No further action is required for 118 buildings while two buildings have been referred to the permit authority for further action.

On 6 October 2018, the Building Amendment Regulations (No. 2) 2018 came into effect in Western Australia.  The Regulations now prescribe applicable building standards for non‑combustible external walls.  Rather than banning particular products as in some of the other States, the Regulations seek to control the performance of an external wall in a fire event by requiring external walls of certain buildings comply with the deemed to satisfy requirements of the Building Code of Australia.  Any performance solution proposed is required to satisfy full scale fire testing. 

The Regulations are not retrospective.

Owner pays

Currently in Australia, the responsibility for rectifying cladding is borne by the owner.  In high rise buildings this is usually the owners corporation.  In NSW, the inclusion of combustible cladding as a major defect gives owners a remedy against the builder or developer under the statutory warranty provisions of the Home Building Act 1989.

In our previous update for insurers dated 30 November 2017, we discussed the current issues for property, public liability and professional indemnity insurers.  Almost a year down the track, the extent of the problem of combustible cladding on existing buildings is becoming clearer.  From the audits conducted in each of the four larger states, it is clear that a reasonable number of buildings will require rectification although perhaps not in the numbers first anticipated.

It remains the case for construction professionals and their professional indemnity insurers that owners will seek to recover the costs of rectification from builders under the statutory warranty regimes in each state. Claims in negligence by owners corporations against building and construction professionals for pure economic loss (rectification costs) are limited because a duty of care in negligence does not usually extend to subsequent owners.

In our experience, high rise commercial and residential building work is usually undertaken by contractors under design and construct contracts.  The consultants such as the certifier and fire engineer are usually retained by the contractor, and often if the developer has retained the architect that contract is novated to the contractor.  The contractor ought to have professional indemnity insurance for a design and construct contract.  The contractor is likely to seek to recover any rectification costs from its consultants.

There remains the potential for significant litigation arising from the use of combustible cladding mostly as an attachment on high rise buildings in Australia.  The judgment in the litigation regarding the rectification of the Lacrosse apartments in Melbourne likely to be delivered by the end of the year may provide some guidance.  However, each case will have to be considered on its own facts which means there is no one answer that fits all to the question of who pays.

[1] Building Products (Safety) Act 2017 (NSW).

[2] Home Building Amendment (Cladding) Regulation 2018.