Rounds 4 & 5 for the NSW Building Commissioner
Strata defects victories in NSW or, is it just a new strata owners shell game …
The NSW Building Commissioner has been very active in targeting developers and builders of defective new strata buildings with prohibition and other orders. But he’s then letting them wiggle off the hook: leaving the future strata owners to play the strata defects shell game.
[9:75 minutes estimated reading time, 1937 words]
Introduction
Do you know what a shell game is? Wikipedia explains it as follows.
In the shell game, three or more identical containers (which may be cups, shells, bottle caps, or anything else) are placed face-down on a surface. A small ball is placed beneath one of these containers so that it cannot be seen, and they are then shuffled by the operator in plain view. One or more players are invited to bet on which container holds the ball – typically, the operator offers to double the player's stake if they guess right. Where the game is played honestly, the operator can win if he shuffles the containers in a way which the player cannot follow.
In practice, however, the shell game is notorious for its use by confidence tricksters who will typically rig the game using sleight of hand to move or hide the ball during play and replace it as required. Fraudulent shell games are also known for the use of psychological tricks to convince potential players of the legitimacy of the game – for example, by using shills or by allowing a player to win a few times before beginning the scam.
I was concerned when the NSW Building Commissioner issued a prohibition order earlier this year against Toplace Development for Skyview Apartments development that there would be a legal challenge by Toplace or a deal made to end the prohibition quickly and said so in my article ‘Round 3 for the NSW Building Commissioner’.
Well, that prediction has [unfortunately] come true.
But, of even more concern is that another similar situation with another defective new strata building may mean it is the harbinger of a pattern of deals by the NSW Building Commissioner that will create strata defects shell games for future owners in the affected buildings.
The strata defects shell game set up
With lots of fanfare, NSW’s Building Commissioner is visiting new and almost finished strata building developments and giving the developers and builders hell. There’s plenty of news media stories about him finding drummy plaster, bad bathroom waterproofing, shoddy concreting, ugly fire hydrant systems, and worse. And, builders are being told that it’s not good enough and to up their construction game.
As I explained in my article ‘The NSW Building Commissioner’s Hard Hat Brigade in Action’ the NSW Building Commissioner has the power to issue building work orders and/or prohibition orders for new and almost finished strata buildings where there are defects.
Work orders are self-explanatory.
Prohibition orders prevent local councils from issuing occupation certificates for the building and/or prevent the strata plan being registered and, in most cases, allows buyers to avoid completing purchases: either temporarily until the defects are fixed and the prohibition order lifted; or; permanently if that takes too long and runs past the sale contract sunset clause dates.
It’s a powerful tool against developers [and consequently their builders] since holding up sales [and money] usually gets their attention and action. As Jack Nicholson so eloquently explains in The Departed:
There’s now been a few prohibition orders and other orders issued by the NSW Building Commissioner as you can see at NSW Fair Trading’s Residential Apartment Buildings (Compliance and Enforcement Powers) Act orders register.
In fact, after a year or so of activity by the NSW Building Commissioner, there are:
8 Prohibition Orders,
13 Building Work Rectification Orders,
1 Stop Work order, and
1 Enforceable Undertaking.
Since some of those orders and undertakings overlap they actually cover 12 new strata building developments in greater Sydney.
Given that there have been more than 1,700 new strata buildings registered in New South Wales per year since 2018 [see my article ‘7 + 3 Insights into 2020 Australian Strata Data’], I’ll let you judge how successful and effective the scale of this policing activity has been.
[PS – The identified defective strata buildings represent less than 0.1% of new strata buildings completed in NSW over that period.]
However, in this article, I’m going to focus on the effectiveness of the prohibition orders that have actually been issued by the NSW Building Commissioner.
Skyview Apartments & Imperial Apartments
Skyview Apartments is a 960 strata apartment development by Toplace Group at Castle Hill with structural faults. I’ve highlighted the attention it received from the NSW Building Commissioner in my articles ‘Serious Structural Faults: The New Normal in Strata Buildings’ and ‘Round 3 for the NSW Building Commissioner’.
Imperial Apartments is a 179 strata apartment development by Hassall Developments at Parramatta which has defective waterproofing, fire safety systems, and structural elements. The latest news about Imperial Apartments can be found in Matt O’Sullivan’s article in the SMH ‘’Nightmare’: Changed orders keep buyers locked into defective Parramatta towers’.
The NSW Building Commissioner issued prohibition orders over both Skyview Apartments and Imperial Apartments which prevented the developers from getting occupation certificates, registering strata plans, and requiring buyers to complete apartment purchases.
But that’s no longer the case because the prohibition orders have been lifted by the NSW Building Commissioner, even though the defects for which they were issued have not been fixed.
How can that happen without fixing the defects [I hear you ask]?
Well, it’s simple.
At Skyview Apartments, the NSW Building Commissioner has accepted an enforceable undertaking from Toplace, which is an agreement about what the developer and/or builders will do about the defects in the future with some backup guarantees and security and other review processes. By doing so, the prohibition order ceases to operate and the development can proceed.
The enforceable undertaking for Skyview Apartments is here and, in very general terms, provides that:
1. The developer and builder give a 20-year structural guarantee for the lower parts of the building.
2. The developer and builder will do the following things about structural defects in the building that have been identified in a nominated expert report:
Monitor the structural integrity of the defects and building under a specified regime,
Ensure the defects don’t create other new defects,
Pay to fix any other new defects, and
Provide regular certification.
3. The developer and builder will pay for an independent engineer and superintendent, if necessary, to do the monitoring, any required works, and any strata buildings costs.
4. $11 million in bank guarantees or insurance bonds are being provided that cover these promises as follows:
$2.5 million for 10 years for the structural guarantee,
$2.5 million for 20 years for the structural guarantee,
$3.5 million for 10 years for the rectification security, and
$2.5 million for 20 years for the rectification security.
5. The strata building must give access for inspections, monitoring, works, etc over that time.
It looks like a medium-term solution [since structural issues can impact the building long after 20 years] with some protections for non-compliance with the promises and the ability to access some money.
But it’s really a shell game [in my view] over this strata building’s defects.
After all, there are some very experienced construction players running monitoring, certifications, and work over the Skyview Apartment’s structure for the apparent benefit of a disparate group of unsophisticated and inexperienced strata owners over a longish time.
Is it likely these strata owners can keep enough of an eye on what the developer, builder, and engineer are doing to follow everything correctly, or notice any sleight of hand [or worse] by one or more of them? And even when those strata lift the shell to reveal the ball [or not], they may have to take legal action to enforce the promises.
At Imperial Apartments, things changed when the NSW Building Commissioner altered the first prohibition order to prevent the issue of an occupation certificate only but allow the registration of the strata plan. That relaxing of the prohibition order permits the developer to advance the development to create the new strata corporation and the strata apartment titles, triggering buyers’ obligations under sale contracts.
So, the shell game at Imperial Apartments is [arguably] even worse.
As Matt O’Sullivan reported, strata apartment buyers’ contracts had sunset clauses that expired on 30 August 2021 which would [mostly] allow them to elect to either proceed to buy or to end the contract without penalty. So, since the prohibition order was issued on 30 June 2021, many of them were hopeful that they could get out of purchasing strata apartments in the defective building thanks to the NSW Building Commissioner.
But, they can’t do that now at all, or, without legal disputes about terminating contracts.
Can you see what kind of shell game trick was played on those strata buyers here?
My issues with enforceable undertakings and moving prohibition orders
Here are a few issues I have with the NSW Building Commissioner’s quick retreat into enforceable undertakings or softened prohibition orders for almost completed strata buildings with defects.
1. It’s weak-kneed. After the NSW Building Commissioner’s ‘flex’ of issuing prohibition orders, to then release his grip on them and take a paper promise with an insurance bond for less than even 2% of the construction cost doesn’t impress me.
2. Why not get the defects at both buildings fixed first and then allow the development to proceed? If there are lost sales, those consequences will get resolved by market forces and it sends a pretty clear message to developers and builders.
3. The problems with these compromises are all explained in the name ‘enforceable undertaking’. Since an ‘undertaking’ is a promise; it’s of limited value depending on the promisee, and, because it’s ‘enforceable’ in any default; it will be left to the future strata owners to do the enforcing.
4. Backing down [and so quickly without a fight] sets a bad example for other defective strata developments by signaling to developers and builders that they can buy their way out of defects with future promises and some security.
5. Where are the strata buyers in this process? Since they have to pay money [and take loans] to buy these apartments and will inherit the strata building, the defects, and the enforceable undertaking, why don’t they have a say in the deal that’s being made?
6. Who’s representing the strata corporation’s interests in the negotiation and deal-making processes under prohibition orders and enforceable undertakings? The strata corporation doesn’t even exist and will end up with mandatory obligations to fix any defects. So, once again, the developer, the builder, and the government are getting together to dictate the strata corporation’s future circumstances on building defects.
7. Cash is king [not bank guarantees or insurance bonds]. After all, strata owners are expected to stump up cash into sinking of capital works funds for future building works, so why don’t developers for identified building defects? And, maybe they should put the cash straight into the strata building’s bank account with rights to get it back in the future.
8. Is the NSW Building Commissioner scared of litigating over his powers and prohibition orders and/or is he concerned about the consequent damages claims that might come from delayed settlements or, worse, lost sales? That’s a fair concern but underlines his limited commercial capacity and effectiveness.
Conclusions
These new developments in the new NSW Building Commissioner’s activities are not good signs.
So, I hope we’re not going to see the few new and defective strata developments that get identified by the NSW Building Commissioner each year end up having to play a future strata defects shell game over their defects.
August 13, 2021
Francesco …