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Developers risk not being able to get occupation certificates from 1 September

17 June 2020

#Planning, Environment & Sustainability, #Construction & Infrastructure

Peter Holt

Published by Peter Holt, Christine Jones, Georgia Appleby

Developers risk not being able to get occupation certificates from 1 September

New legislation has just been passed which gives NSW building regulators the unprecedented power to prevent the issuing of occupation certificates (OCs) or the registration of a strata plan for residential apartment buildings where certain requirements are not met.

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) commences on 1 September 2020.

The RAB Act applies to Class 2 buildings within the Building Code of Australia (BCA) and includes any building that contains a Class 2 component under the BCA.

A Class 2 building is an apartment building, but could also include mixed-use residential and commercial buildings.

The NSW Government is heralding the RAB Act as one of its six reform pillars designed to build a better regulatory framework to protect consumers who have been wronged in the past by poor building and construction practices. These changes are about making sure that “Developers can no longer turn a blind eye to the work done by practitioners contracted for a project” and that “occupants of buildings deserve to feel safe and secure within their walls”[1].

It is difficult to disagree with the sentiments but questions still remain about how effective these changes will be.

An overview of the key components of the scheme

The scheme operates as follows:

  • the RAB Act requires developers to notify the Secretary (being the Secretary of the Department of Customer Service (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 seeking to 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, then the Secretary may issue a prohibition order that would prevent 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
  • if a developer fails to do that, then an OC may never be issued for the development and sales cannot be completed.

These components are discussed in more detail below.

The problem of volume

At the outset, we note that the RAB Act proposes to regulate a significant number of projects. In Sydney alone, we note that:

  • there were about 41,000 apartments or townhouses being built at the end of 2019[2]
  • there are about 2,700 apartments or townhouses completed in Sydney each month[3]
  • there have been at least over 200 large apartment developments under construction at any time for the last 4 years[4].

This means that the Secretary will need to be processing expected completion notices for hundreds of developments, and each of those developments may have staged OCs which would result in the trebling of that figure. For the system to be successful, the Secretary (and the Building Commissioner) will also need to carry out detailed inspections of a reasonable sample of these projects in an attempt to identify any defects.

The sheer scale of this task was recently described by the Minister for Better Regulation Kevin Anderson as “a mammoth undertaking”[5]. It is difficult to disagree with that statement.

As part of the six reform pillars, the Government has also said that it will establish a shared industry wide electronic platform. Potentially the first test of such a platform would be to manage the potentially overwhelming volume of expected completion notices what will start arriving from 1 September 2020.  Any failure to promptly respond to all the effective completion notices will damage confidence in the RAB Act and leave many projects stranded.

Who is a “developer” for the purpose of the RAB Act?

The RAB Act seeks to regulate “developers”. The definition of “developer” has been drafted very broadly as part of any attempt to capture (and therefore regulate) the various players that contribute to the construction of a residential apartment building.

This is why the term “developer” is defined under the RAB Act as including:

  • the people who contract, arrange, facilitate or cause the building work to be carried out
  • the owner of the land on which the building work is being carried out
  • the principal contractor (as defined under the Environmental Planning and Assessment Act 1979 (EP&A Act))
  • the developer of the strata scheme (within the meaning of the Strata Schemes Management Act 2015 (Strata Act)).

This means that for many projects, there will be multiple “developers” for the purpose of the RAB Act.

It is also worth noting that the RAB Act definition of a developer is even broader than the definition under the Home Building Act 1989 (HBA), which captures an individual, partnership or corporation on whose behalf residential building work is done (or the owner of the subject land), for some projects.

Notice of applications for an OC

One of the key features of the RAB Act is the introduction of a notification regime surrounding the date for the intended completion of building work.

Specifically, the Act requires that developers notify the Secretary at least six months, but not more than 12 months, before an application for an OC is made. This is known as the “expected completion notice”.

The completion date identified in the expected completion notice needs to be accurate to within 60 days because if the date changes beyond that 60 days (because work is expected to complete sooner or later than anticipated) a further notice, referred to as the “expected completion amendment notice”, needs to be issued to the Secretary.

The intention is that by providing the Secretary with a reasonable notice period that building work is nearing completion for part of a building, the Secretary will have sufficient lead time to examine the construction of the building and to detect and act on any identified serious building defects before an OC is issued[6].

Failure to comply with these notification provisions will render a developer liable for a maximum penalty of $55,000 in the case of a body corporate or $11,000 in any other case.

What is an OC for the purpose of the RAB Act?

The term “occupation certificate” is defined in s 3 of the RAB Act as an OC issued under the EP&A Act.

Relevantly, Part 6 of the EP&A Act which deals with building and subdivision certification was amended on 1 December 2019 to, amongst other things, remove interim OCs from the planning framework. Instead, OCs can now only be issued for completed buildings, or completed parts of buildings.

This is important because, as a matter of practice, developers will often stage a project, with each stage being subject to a separate OC (or previously an interim OC).

In the context of the RAB Act, it is clear that the obligations imposed on developers will need to be complied with in respect of each OC – even where a project might have multiple OCs.

This means that the administrative burden on developers, the Secretary, and the Building Commissioner alike will be multiplied tenfold.

Further, we also note that it is unclear how the RAB Act is to apply in respect of those developments caught by the savings and transitional arrangements under the EP&A Act which are not currently subject by the new Part 6 (and therefore, may be eligible to obtain interim OCs). For example, are the obligations under the RAB Act intended to apply to those applications for interim OCs? 

Power to prohibit the issue of an OC

The RAB Act also gives the Secretary the power to prohibit the issue of an OC, known as a “prohibition order”.

A prohibition order may be given where:

  • a developer fails to give 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 s 207 of the Strata Act has not been given to the Secretary.

A “serious defect” will exist where a building work rectification order is in effect, or a development control order has been issued under the EP&A Act which relates to a defect in building work. 

Once issued, the Secretary is required to give notice of the prohibition order to the local council or the relevant certifier for the building work.

The justification proffered for this prohibition power is that it “is the ultimate signal to the developer that they must resolve any noncompliance or face never having the building sold or occupied”[7].

Investigation powers

Part 3 of the RAB Act establishes an investigation framework that will be delegated to the Building Commissioner and his compliance staff. For example, the Act:

  • empowers authorised officers to require the provision of information and/or records, to require answers and to make records of questions and answers given
  • allows an authorised officer to enter any premises at which business (including building work) is in progress or is usually carried on, without a search warrant
  • provides that during an inspection of premises, an authorised officer may examine or inspect anything, take samples, conduct tests, and even open up, cut open or demolish building work where they have reasonable grounds for believing that the works are connected with an offence or a serious defect
  • allows an authorised officer to direct a developer to carry out certain building work at a specified time or in a certain manner.

These powers are coupled with a provision which makes it an offence for a person to obstruct, hinder or interfere with an authorised officer in the exercise of their functions.

Other enforcement powers

Aside from prohibition orders, the Secretary also has the power to issue a “stop work order” where there is an opinion that the building work:

  • is, or is likely to be, carried out in a manner that could cause significant harm or loss to the public or occupiers, or potential occupiers of the building; or
  • is likely to cause significant damage to the property.

Additionally, the Secretary may make a “building work rectification order” where it has a reasonable belief that building work is being carried out in a manner that could result in a serious defect. This order effectively requires the developer to carry out certain works, or refrain from carrying out certain works, in order to “eliminate, minimise or remediate” a serious defect or potential serious defect.

How to lift an order?

Once given, an order remains in effect until the order is complied with, expires (if a date is specified), or is otherwise revoked by the Secretary or the Court.

While the RAB Act does allow for undertakings to be provided, it appears as though the undertaking can only be given as an alternative to an order and is not a regime to allow developers to give undertakings in satisfaction of an order that has already been given.

This means that where a prohibition order has been made because, for example, a building work rectification order is in place, a developer will need to physically carry out the works in order for the prohibition order to be revoked and the OC to be issued.

This will place further financial constraints on developers as the inability to sell units (arising from the prevention of the issuing of OCs) will directly impact on cash flow, potentially making it difficult to finance the works required to satisfy an order.

Appeals

The RAB Act provides some limited rights of appeal. For example, a developer may appeal against the making of a prohibition order to the Land and Environment Court within 30 days of notice of the order. The same appeal rights apply in respect of stop work orders and building work rectification orders.

Given the serious consequences that flow from the issuing of any of these orders, 30 days is not a long period of time. Developers, landowners, and financiers alike will need to be cognisant of this and seek urgent legal advice once an order is made.

The other likely consequence of having such a short appeal window is that it provides insufficient time for developers to undertake their own investigations to determine whether an alleged defect exists and/or consider what would be required to remedy that defect. This means that in many cases, people will need to commence proceedings in order to preserve their appeal right, before they even know their position regarding the soundness or otherwise of the order. Not only is this inefficient, but it does not promote the just, quick and cheap resolution of disputes and will likely contribute significantly to an already overburdened court system.

Savings and transitional arrangements

The RAB Act incorporates a “transitional period” which ends six months from the commencement of the Act, being on 1 March 2021.

If the developer proposes to make an application for an OC during the transitional period, they are required to notify the Secretary of that OC application within 14 days of the commencement of the RAB Act, being by 14 September 2020.

This gives developers almost no time to adjust to the new regime and also means that the RAB Act will capture almost all existing projects – even those where construction is nearing completion.

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 and this reflecting down the chain.

What can we take away from this?

The Government’s sole focus is on protecting people buying apartments off the plan. 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.

This means that 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.

Hopefully all of the stakeholders will understand that this catastrophic delay is in their long-term best interests.

Authors: Peter Holt, Christine Jones & Georgia Appleby

  • Holding Redlich would like to thank Chris O’Dell at City Plan for his contribution in providing analysis on the Sydney Apartment market, and to Peter Holt for the image contribution.

[1] Second 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.
[2] Based on ABS data, analysis provided by City Plan.
[3] Based on data from the Department of Planning, Industry and Environment, analysis provided by City Plan.
[4] Based on the RLB crane index (a count of cranes visible across the City’s skyline), analysis provided by City Plan.
[5] NSW Government, ‘Building reforms boosted with new transformation team’, 6 February 2020.
[6] Second 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.
[7] Second Reading Speech by Mr Kevin Anderson (Tamworth-Minister for Better Regulation and Innovation) dated 2 June 2020, Legislative Assembly Hansard, 2 June 2020, page 5.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Peter Holt

Published by Peter Holt, Christine Jones, Georgia Appleby

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