In the last couple of weeks, residents of Sydney Olympic Park’s Opal Tower have been evacuated because of fears that the building is structurally unsound and may collapse.
While residents are now being told by the builder (a Japanese company called ‘Icon’) that it is safe to re-occupy, people’s confidence in this building will be shot to pieces.
This unfortunate episode has led people to ask where the liability lies.
Where does the liability lie?
As a new building, there is a six year statutory warranty period that the builder owes to purchasers of the units. It is worth noting that:
- The six year statutory warranty period under the Home Building Act 1989 only applies to “major defects”; all other defects only have a two year warranty.
- The warranty period for major defects used to be seven years, but was reduced in 2012 to six years.
- Importantly, it is possible that a builder can become insolvent, die or disappear, which means a claim against the builder would be worthless and purchasers would have to rely on insurance.
How does Homeowner Warranty Insurance Work?
In relation to the insurance scheme the buyers may have to fall back on, there are some very important things to note:
- It is a scheme of ‘last resort’. While the NSW system of builder’s warranty insurance introduced in 1972 used to be a scheme of ‘first resort’, changes to the scheme a few years ago now make it a system of ‘last resort’. This means you have to (i) legally enforce the warranties against the builder (ii) establish the builder is insolvent, dead or has disappeared and then (iii) make a claim against the homeowner warranty insurer.
- Coverage is only as long as the statutory warranty period. i.e. six years for major defects and two years for everything else.
- Perhaps most importantly, it is not compulsory for buildings with more than 3 stories to have insurance in place. While this would appear a problem for Opal residents, it is understood the builder Icon does (at this stage) have sufficient financial capacity to meet the claims. But this would otherwise be a big risk that buyers would have to take into account when purchasing a new property which has more than 3 stories.
What isn’t covered by insurance / builder warranties?
It is important to remember that a claim against the homeowner warranty insurer is unlikely to reimburse the body corporate for the full extent of the costs of convening meetings, engaging lawyers and expert consultants in order to enforce a claim. This will leave homeowners out-of-pocket.
And it certainly will not cover the loss of capital value of the apartment, lost rental income and the loss of confidence that unitholders like those in the Opal building will unfortunately suffer.
What should a prospective purchaser of an off-the-plan or new build do?
As a bare minimum, purchasers should:
- conduct extensive due diligence on the builder / developer by looking at their past projects and experience;
- obtain a defect survey PPI (pre-purchase property inspection) report by a qualified building consultant experienced with the complex structures which are apartments, to highlight defects before settlement; and
- have a solicitor review the contract for sale to understand the defect notice periods that apply.
However, even taking those steps, purchaser’s need to recognise that this kind of purchaser is fundamentally a speculative one and a huge ‘leap of faith’ in the developer / builder. There are gaps in the statutory warranty and insurance regime outlined above and generally speaking very little consumer protection.