GENERAL PROPERTYRESIDENTIAL PROPERTY

Apartment owners face potential financial ruin

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LESS than a week after the Mascot Towers evacuation, a joint report by Deakin and Griffith universities has revealed defects in 85% of apartment buildings such as cracking, dangerous cladding or other fire safety breaches, threatening lives and potentially putting unaware owners and investors hundreds of thousands of dollars out of pocket.

The report, authored by Deakin University’s senior lecturer Nicole Johnston with Griffith University’s associate professor Sacha Reid, analysed 212 building audit reports across New South Wales, Queensland and Victoria and found 3,227 line item defects.

Defects were found in 97% of New South Wales buildings, and 71% in Queensland and 74% in Victoria. An average of 14 line items per building were found, averaging 16 in NSW, 12 in Queensland and 11 in Victoria. Construction systems affected by defects per building was 5.93; NSW buildings had 6.5, Queensland 5.8 and Victoria 4.85.

Building fabric and cladding accounted for 40.19% of defects, followed by fire protection (13.26%), water proofing (11.46%), roof and rainwater disposal (8.58%), and structural (7.25%).

Structural construction system defects impacting the slab (i.e. concrete issues unrelated to ground movement) were most prevalent (48%), followed by framing (14.5%), foundation footing and slab (i.e. issues arising out of ground movement – possible footing failure, such as cracking; 13%), foundation subsidence (6%), foundation retaining walls (5%) and curtain wall (4%).

Structural defects resulted in building damage (35%) and multiple other impacts (35%), followed by water ingress, moisture, and rust.

Failures in fire safety with combustible cladding and faults along with balcony glass panels were the most common causes for concern. Alarmingly, interviewees told the study that owners are usually unaware and fire safety inadequacies or faults are uncovered only after an incident.

One lawyer told the study most do not know until they have a fire safety consultant involved.

“And more often than not, that’s because there are other defects in the building and they’ve gone to a consultant or a lawyer”.

Human error plays a significant part in building defects. Misuse of building products, due to lack of knowledge, poor workmanship, time pressures, cutting corners, poor supervision, lack of training, lack of licensing and trade accountability were all common.

Two recurring triggers for defects identified by the report were the motivation to make a profit, which incentivises builders and trades to source cheaper building solutions; and time pressure on completions that resulted in mismanaged construction processes and inferior builds.

A lawyer told the report that the developer does not have a vested interest in making sure a building would be constructed properly because they are ultimately not the long-term owner of the property.

“They just need to get it built and sold and out to make them money. That’s what their focus is.

“That’s the problem. It’s the management of the risk whereas a developer of a commercial property has tremendous incentive to really deal with the risk properly whereas the developer of resi properties are, ‘whatever’.”

Furthermore, when defects are identified, it is difficult to seek recourse several years after construction because it is common practise for small and large development and building companies to create single purpose companies or “two dollar companies” for each new project.

“So I have to caution my clients by saying that you may not see a dollar for this, and you might be spending good money with lawyers and experts and you won’t see a dollar for that either, and you’ve still got to fix it,” the lawyer said.

On top of health impacts, various psychological impacts – particularly stress – were experienced by owners, usually arising from financial pressures related to the devaluation of properties and drawn-out rectification processes.

“You do hear people get into serious trouble because they’ve got to sell the place but they can’t sell it because it’s worth nothing,” another lawyer said.

One manager told the study that lot owners are often unaware that insurance (in many instances) will not cover the costs associated with rectifying building defects.

“For some lot owners, the additional financial burden forces them to sell (if they can and usually at a significantly reduced price) or borrow additional monies.

“For some investors, either rents had to be reduced or they were unable to obtain a renter. A number of interviewees reported that lot owners have been forced into bankruptcy as a result of additional special levies that they simply could not pay. There were other people who were on the verge of bankruptcy there,”

They said the owners have “mortgaged themselves to the absolute hilt”.

“It’s their first homes. They don’t have the extra money to fix the buildings or to pay for legal fees. Another mortgage isn’t an option for them.

“There have been people who have lost their units and that’s been awful, it’s been awful to have to see. They just can’t afford it – they’ve had to move on. We’ve had to go through the debt collection stage and you can see they’re struggling and it’s not a nice thing to go through.

“For lot owners, there are often financial impacts (including raised levies to fund rectification works, loss of rent, and property value depreciation).”

The report released this week comes days after residents were evacuated from Mascot Towers in Sydney on the weekend after structural cracks were discovered, just six months after 3,000 residents were evacuated from Opal Tower on Christmas eve for the similar reasons.

It is also two years after the tragic Grenfell fire in London drew greater attention to risks associated with combustible cladding. A recent RMIT University study estimates Australian owners face a bill that could run into billions of dollars to replace combustible cladding.

Meanwhile residents of Mascot Towers were told at an extraordinary meeting that the emergency building repairs will cost an estimated $5.5 million. One apartment owner told the media his bank has declined to refinance his mortgage because of the building defects.

The Deakin and Griffith report interviewees are supporting calls for reforms, and there was general consensus by interviewees that changes were required to the private certification system.

Lawyers interviewed recommended extending the statutory warranty insurance scheme to cover buildings over three storeys. Many were perplexed about the current regime and believed that building defects would not be as prevalent if the insurance scheme was extended.

“If it’s less than a four-storey building, and a job over $20,000, you need to satisfy the home warranty insurer that you’ve got the capability and solvency for it not being an unacceptable risk,” one said.

“So if you’re going to build something in that window, it’s a lot harder for you to actually be allowed to do it, because you’ve got to persuade the insurer that you’re capable and good for it. So it’s not a licence issue but it effectively adds an extra licensing requirement before you can do the work. But you don’t even have that. So if an insurer won’t give you – doesn’t trust you enough to give you insurance to do a $25,000 job – just go and build a high-rise and you’re fine.”

They highlighted the decenniale (decennial) liability insurance in France, which is a 10-year long stop insurance that ties developers to building defects for an extended period.

“So if you prevent the developer from transferring that risk on to the lot owners and have him buy 10-year insurance which is going to be expensive, the incentive on reducing claims and all the rest of it is going to be there so they make sure things are built properly to start with.”

Another lawyer believed that more regulation is not necessarily what will cure the situation.

“You need to change the commercial imperatives of how things are done so that there’s a commercial imperative to doing it properly because commercial buildings seem to be built well.”

In NSW, many interviewees were concerned about the abrogation of rights in relation to commencing legal action against builders for defects.

“In New South Wales, it should be to learn a lesson from what’s happening in other states and territories, particularly Victoria, about the 10-year time period, and reintroduce that. … For Victoria, my message to regulators is don’t touch what isn’t broken. Don’t mess with this. Don’t touch it, it’s a system that has foibles and has limitations, but 10 years is a good period of time to bring a claim for building defects, and it shouldn’t be wound back,” a lawyer said.

“…part of the problem with building defects litigation in NSW is the process, how long it takes, how much money it costs, and how that becomes an attrition and survival process for owners, strata plans, as much as single dwelling owners who are on their own,” another lawyer said.

Interviewees also suggested changes to Australian Standards, which they said is too technical and bureaucratic, and not practical or realistic with hands-on experience.

Many interviewees were annoyed by the lack of collaboration with industry experts.

“I think the regulators need to engage more with the stakeholders in industry, insurers, practitioners. At the moment there’s very much a them and us mentality in the regulators, which I think is really unhelpful, and I think they’re just not doing enough to consult with insurers about these sorts of issues and I think they have a lot of very valuable input and expertise around these sorts of issues that they could be drawing on if they just bothered to ask.”

The Strata Community Association, representing the sector which oversees $1.2 trillion of strata properties under management, is calling on the federal and state/territory governments to come together for a common solution.

CEO Alisha Fisher said apartment owners faced potential financial ruin to fix building defect problems out of their control.

According to the 2016 ABS Census, the number of occupied apartments in Australia has increased by 78% to 1,214,372. More Australians than ever are taking up apartment living with 10% (2,348,434) of all people in Australia spent Census night in an apartment. There is now around one occupied apartment for every five occupied separate houses in Australia – compared with one to every seven, back in 1991.

“This report will shock people. It has unveiled the horror story the last few years has been for the construction sector in Australia. Thousands of people remain impacted by combustible aluminium cladding and now we have other major defects including problems with water penetration and incomplete fire safety systems still out there.” Fisher said.

Meanwhile the Owners Corporation Network’s chair Philip Gall has warned in an ABC editorial against buying off the plan apartments, while the Builders Collective of Australia president Phil Dwyer has called for a Royal Commission.