Once strata companies and Lot owners take possession of a newly constructed strata complex, the challenges for the strata company manger can be significant. Assisting and guiding the strata company and Lot owners through the statutory defect liability period can be a crucial skill for strata company managers.
The focus on this paper is on low level strata complexes (up to three levels) and common property.
Handover on a strata complex from the builder/developer to the new strata company and Lot owners/occupants can be an exciting and stressful time for all. Often Lot owners/occupants are under pressure to secure access as quickly as possible, given access to existing accommodation may be coming to an end. Similarly, despite the best intentions of the builder, it is not until the new strata property is actually occupied do all of the systems and infrastructure within a strata complex actually get fully tested for the first time, under normal occupancy conditions. The strata company is still in the formation phase and is only starting to bring together a number of new key stakeholders. In this complex scenario there are bound to be some issues that all stakeholders need to work together to resolve.
2 Will there be residual Construction Defects?
Yes! A multi Lot strata complex is a complex structure and despite the best intentions there will always be some residual items that will need to be addressed post-handover. This is the case with almost every construction site. So the key issues are not will there be residual items but how the builder responds to those items. A good builder, and there are a number of absolutely excellent builders in WA, will professionally and efficiently work through any identified issues. Sadly, there are also some builders that take the views that once handover occurs they have no residual obligation to the owners or the structure.
3 General Remediation Obligations
In short, a builder has residual obligations to remediate construction defects.
Where a defect is identified pre handover the obligations tend to be very clear. Where the issue is identified and is a construction defect, the builder will be obliged to remediate.
Post-handover, the water can start to muddy. If the builder can apportion blame to occupancy he may be able to dispute a defect. For example, a scratch on the glass pane pre handover may be a construction defect but post-handover may be attributable to occupancy. Hence, the importance of identifying as many construction defects as possible pre-handover.
Most contracts have a maintenance period during which time builders will take a more liberal approach to addressing construction defects, especially those that may fall within a “grey” area. Often the maintenance period will also align with retention period for final payments to the builder under the contract. It can be useful to raise as many of the identified construction defects with the builder as possible during this maintenance period.
Important to note that any monies retained under the builders contract are an issue between the Developer and the Builder – the parties to the contract. The strata company and the Lot owners often have little or no say on how any retained monies are applied to the retention of construction defects.
4 Statutory Defect Period
In WA, builders have a residual statutory defect liability period in which they are obliged to remediate construction defects. The WA Government through the WA Building Commission (“Building Commission”) can assist strata companies and Lot owners progress and resolve disputes with builders on residual construction defects.
The best approach is always to resolve the residual issues directly between the Strata Company/Lot owner and the Builder. This is the way quality builders tend to resolve residual construction defects.
However, there can be a real power imbalance post-handover in these discussions with some builders. The strata company/Lot owners have to manage the position that some Builders may not be that enthusiastic or reactive when required to invest further in resolving residual issues. The Building Commission complaint processes can be one mechanism to bring balance back to discussions on defect remediation.
Where a builder is slow or refuses to remediate construction defects a complaint can be lodged with the Building Commission for less than $120! Rather than spending months/years trying to get a builder to take action, strata companies/Lot owners should move as soon as possible to lodge a complaint to get the ball rolling. At a minimum, commencing the formal complaint process will get the builder to the table to respond to the construction defects when otherwise they may refuse to act.
But do not be fooled! Some builders are regulars to the Building Commission and the threat or actual lodgement of a complaint at the Building Commission is just a component of their normal construction processes. In fact some builders will use the process to defer and drag out any remediation obligations in an attempt to dissuade the strata company, Council of Owners or Lot owners from pursuing remediation of construction defects.
5 Common Property Vs Lot Property
During handover, the Lot owners tend to be highly focused on their Lot property and are generally quick to identify construction defects within the boundaries of their Lot. The problem is who is looking at the common property?
The old adage that Lot buyers buy the air in their single level Lots in a multi-level strata development has some truth. In this scenario, the common property actually represents that largest asset on the site. Hence the strata company is responsible for identifying defects and progressing remediation on the largest asset being the common property. However, as most strata managers appreciate, rarely is a strata company set up for success post-handover as it will generally have little or no funds to progress an action against the builder, let alone cover basic operational expenditure. Further, many first time Lot owners have difficulty in understanding the difference between common property, Lot property, strata companies and strata mangers.
It is critical that all stakeholders understand that only Lot owners can progress complaints against the builder for construction defects within the Lot property, the strata company cannot. Similarly, the strata company can only progress complaints against the builder for defects on common property and not Lot property. While relatively straight forward, the complexities are significant.
Let’s assume a Strata Company wants the strata common property inspected for construction defects and the Lot boundaries are the internal surfaces of the Lot walls, floors and ceilings. Standard on a multi-level site. The key is that any construction defect below the surface of a perimeter wall, ceiling or floor is a common property issue, but any defect on an internal wall is likely to be a Lot property issue. For example, water ingress through an external wall is likely to be a common property defect, while water ingress through an internal wall from a shower stall is likely to be a Lot property issue.
So a thorough inspection of construction defects on common property for a strata company in a multi-level strata complex with single level apartments should include all common property including the roof cover/plumbing, roof spaces/frames, ceilings, floors, perimeter walls (internal and external), windows and doors. A thorough inspection of construction defects on Lot property for Lot owners should include internal walls, doors, cabinetry and the final finishes on the surfaces of walls, floors and ceilings. The challenge, as always, is cost and access.
6 The Building Commission Complaint Process.
The complaint process via the Building Commission is very specific and the processes must be followed exactly. It is critical that the Strata Manger, Strata Company, Council of Owners and Lot Owners read and understand the required processes. While the cost of lodging the complaint is largely insignificant, the processes can involve substantial costs in additional secondary independent reports, Tribunal Attendance and a massive volume of emails and correspondence. The processes can take months if not years and can be complex if the matters are escalated by the Commission to the State Administrative Tribunal. Lawyers and a myriad of professionals then tend to become involved.
The Building Commission has enormous powers and will exercise them. But do not underestimate the required effort. Most builders understand the processes intimately and will have a team to defend Building Commission complaints. For some, the process is simply a mathematical formula. If there are remediation costs of say $200,000 it can make financial sense to use all available resources to reduce this potential cost to $50,000 by investing $50,000 in a myriad of defences. Being able to invest substantial sums in defending a position is generally not available to strata companies or Lot owners who are often deterred by the need to invest to make a claim against a builder.
7 Builders Indemnity Insurance
In WA, Builders of Strata complexes of three levels and less, are required to obtain builders indemnity insurance prior to commencing construction. The policy is capped at $100,000 and can only be claimed on if the Builder is insolvent, deceased or unable to be located.
Given the same policy is required for a single house construction costing $200,000, as a strata complex of $10 million it is inequitable that the same policy is required despite the potentially significant difference in defect remediation costs. Why there is no obligation for builders indemnity policies on properties over three levels is even more ridiculous, just ask the owners of the multiple Diploma properties left with significant reconstruction remediation costs.
Notwithstanding the pathetically low insurance cover, when builders do enter bankruptcy it can be the only recourse left for Strata Companies and Lot Owners. In the strata construction market below 4 levels, there is unfortunately a much higher proportion of Builders who become bankrupt. Strata Managers need to be aware of this option and pursue it when appropriate.
8 Records and Record Keeping
Maintaining impeccable records on the resolution of construction defects is critical. This needs to be a coordinated and professional approach, especially for strata companies given the multiple stakeholders. Key requirements include:
- Ensure that the Strata Company has a copy of the Council Approved Building Permit Including:
- Full construction plans
- Engineers plans
- Building permit
- Builders Indemnity Insurance Policy
- Notice of practical completion
- Ensure correspondence between the strata company and the builders is logged, retained and accessible
- Only maintain one list of construction defects. We have seen multiple examples where there are multiple lists of defects making it almost impossible to track progress.
- Track progress on all remediation work
9 When to act
It is important that Strata Companies are proactive when it comes to construction defects. Defects should be communicated to the Builders as soon as possible. Remediation should be undertaken within a reasonable period. Delays in remediation should be acted upon so as to minimise secondary damage caused by the defect.
Important to note that some defects will be identifiable almost immediately post-handover while some defects will only start to appear as the structure settles into its foundations and or is subject to a prolonged period of rain, where water ingress issues may start to emerge.
10 Impacts of New 2018 Legislation
Once the new legislation is supported by Regulations there will be some benefits to Strat Companies, specifically in the supply of some of the key documentation. However, many of the issues described above will remain.
11 Bottom Line
Construction defects and omissions are a component of every construction including strata properties.
It is important that the construction defects are identified as soon as possible so as to avoid secondary damage.
Once a defect has been identified, the strata company has three options:
- Ignore the issue and accept the defect and any subsequent consequences
- Pay remediation of the defects out of Strata Company funds (special levies)
- Pursue the builder (or insurer when applicable) to remediate
While over simplified the above are the key options which the Strata Company needs to consider.
12 Suggested actions for Strata Mangers of newly constructed strata properties
- Ensure you obtain all of the key documents associated with the construction of the property. If the Builder/Developer will not provide these critical documents, obtain copies from the Approving Council/Shire.
- From day one. Assume you are going to court on construction defects. Make sure your records on the identification, communication and remediation of defects with the builder are impeccable.
- Hold the builder accountable. They have statutory obligations to remediate defects. If they do not take reasonable action to remediate defects then do not delay. Progress a complaint with the Building Commission to balance the conversations.
- Where defects are identified, the strata company must decide to ignore (with the associated impacts), to pay for remediation or pursue the builder/insurer. This is a decision the strata company must make within an understanding of the various competing issues.
- While some builders are excellent at resolving construction defects, others are not. It can take months if not years to progress items through the Building Commission. Secondary costs can be considerable and the process will test the resolve of most Strata Companies, Council of Owner members and Strata Mangers. Some builders know this and will test the resolve.
- It is important that Strata Companies constantly apply a commercial overlay to progressing construction defects against a Builder. Does it make sense to spend $1,000 to purse a Builder to remediate an item that costs only $500 to fix?
The above is meant as a general comment and observation only. Strata managers and strata companies should seek independent legal advice as appropriate.
13 The Advert
Houspect conduct s a large number of strata building inspections including for Strata Companies include:
- Pre Hand Over – Strata Common Property Practical Completion Inspections
- Post-Handover Defect Liability Inspections
- Maintenance Period Inspections
- Statutory Liability Period Inspections
- WA Building Commission Reports
- State Administrative Tribunal Reports
- Tribunal Attendance (WABC and SAT)
- Investigation Inspections
- Stage Construction/Maintenance Work Inspections
- 10 Year Maintenance Plans