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How the new 2020 SOPA Regulation will affect owner occupier construction contracts: the key changes that you need to know

Following our article HERE that summarised the reforms introduced by the Building and Construction Industry Security of Payment Regulation 2020 (NSW) (2020 Regulation), this article explains in detail one of the key reforms.

Reform effecting owner occupier construction contracts

Currently, section 7(5) of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the Act) and clause 4(1) of the provide that the Act does not apply to the prescribed class of owner occupier construction contracts.

An owner occupier construction contract is a construction contract for the carrying out of residential building work (as defined in the Home Building Act 1989 (NSW)) on such part of any premises as the party for whom the work is carried out resides or proposes to reside in. Accordingly, for this type of construction contract, builders are not able to apply for adjudication if there is a payment dispute.

This position will change when Schedule 2 of the 2020 Regulation commences on 1 March 2021. Schedule 2 of the 2020 Regulation will omit the current clause 4(1) of the 2020 Regulation and remove owner occupier construction contracts as a prescribed class to which the Act does not apply. The effect of this is will be that the Act will apply to owner occupier construction contracts so that builders will be able to serve payment claims on owner occupiers under the Act and apply for adjudication.

What residential home builders and owner occupiers need to know

While the 2020 Regulation commenced on 1 September 2020 and currently provides that the Act does not apply to owner occupied construction contracts, it seems that the NSW Government has provided residential home builders and owner occupiers with a transition period to adjust to the reform.

The period from now until 1 March 2021 should be utilised to understand how the changes will effect residential home builders and owner occupiers. Importantly, both parties should be aware that:

  • Residential home builders will be able to serve payment claims pursuant to the Act on owner occupiers.
  • Owner occupiers should familiarise themselves with the Act as it will apply to contracts entered into for residential building work at their residence (or proposed residence). Most significantly, owner occupiers should be aware of the requirement to serve a payment schedule within 10 business days after the payment claims is served by the builder if the amount claimed is disputed and will not be paid in full. The consequences of not serving a payment schedule within the timeframe prescribed in the Act are serious and may compromise an owner occupier’s right to participate in an adjudication.
  • The due date for payments will be effected. In accordance with section 11(1C) of the Act, a progress payment becomes due and payable on the date on which the payment becomes due and payable in accordance with the contract or within 10 business days after a payment claim is made (if the contract has no express provision regarding the due date for payment).
  • As the adjudication process is relatively quick and cheap to recover progress payments compared to litigation (in some circumstances), it is likely that adjudication will become a popular method for resolving payment disputes under owner occupier construction contracts.

If you would like to discuss or would like any more information, please contact us at info@bradburylegal.com.au or (02) 9248 3450.

 

 

What is the amount of damages available to an owner for late completion of work on a residence that the owner does not intend to live in or rent?

In Leeda Projects Pty Ltd v Yun Zeng [2020] VSCA 192, the Victorian Court of Appeal (VSCA) was required to answer this question.

The case demonstrates that the court will look at the intention of the owner in ascribing a value, if any, to the use of the residence which was unable to be enjoyed as a result of a builder’s breach by late delivery of works.

Facts

In March 2011, Mrs Zeng and her husband purchased the penthouse of the Eureka Tower in Melbourne. On 24 September 2013, Mrs Zeng and Leeda Projects Pty Ltd (the builder) entered into a contract for fit out of the property as a private art gallery with a residential component consisting of two bedrooms with ensuites, a lounge, kitchen and laundry.

Mrs Zeng and her husband intended to use the property as a non-profit private art gallery and potentially spend some time residing in the property. They had access to several other Victorian premises to live in (when they were not travelling internationally), and their primary residence was in Shanghai. There was no intention to rent out the property.[1]

A dispute arose between the builder and Mrs Zeng. The builder made a claim to the Victorian Civil and Administrative Tribunal (VCAT) for progress payments and release of retention. Mrs Zeng counter-claimed for substantial damages on account of the delay in completing the works.

By the time the matter had reached the VSCA, it was not controversial that the builder had breached the contract as there was a delay period of 130 weeks between the date when the works should have been completed and the date when practical completion was achieved. Accordingly, Mrs Zeng was unable to occupy the apartment for those 130 weeks.

However, Mrs Zeng was not required to rent an alternative residence because she continued to live in Shanghai and had other Victorian residences available to her. Mrs Zeng did not lose:

  1. the opportunity to rent the property, as it was never intended to be a rental investment property; or
  2. takings from the art gallery, as it was intended to be a non-profit gallery.

Decision

The VCAT’s award of $100 nominal damages was not the correct measure, nor was the award of $357,500 plus interest by the trial judge for lost rental income at the rate of $2,750 per week.[2]

The VSCA[3] held that case authorities recognised the possibility of the loss of use of a property as being an available compensatory claim.[4] In ordinary cases, this might result in a financial loss to the owner of rent for an alternative residence.[5]

However, in this case, the proper award of damages to Mrs Zeng was $283,802.17 which Mrs Zeng spent on owners corporation charges, council rates and utilities during the 130 weeks.[6] These amounts were spent without benefit to her, but in respect of the property which the builder retained for its own use, being the completion of its works and were a reasonably foreseeable consequence of the breach of contract.[7]

Take Home Tip

If parties want to ensure certainty in the measure of damages payable by the builder in the event of delay, a mechanism for payment of a rate of liquidated damages for such a breach should be included in the contract. However, in doing so, parties must be mindful that a clause for liquidated damages may be challenged where the pre-estimated loss is found to be a penalty clause because it was not based on a genuine estimation of the loss that would result from the builder’s breach.[8]

In the absence of a liquidated damages clause, a builder faced with a claim should check whether the amount claimed is truly compensatory – i.e. does it put the owner in the position in which it would have been if the builder had not breached the obligation to complete on time?

[1] See [86] and [143].

[2] Per McLeish JA at [184].

[3] Comprised of Tate, Kaye and McLeish JJA. We note that McLeish JA gave the lead judgment on the ground dealt with in this case note, with Tate JA agreeing. Kaye JA agreed with the orders proposed by McLeish JA, yet His Honour gave a separate analysis of the authorities.

[4] Per McLeish JA at [174] and [175].

[5] Per McLeish JA at [179].

[6] Per Kaye J at [58] and McLeigh JA at [187].

[7] Per Kaye J at [57] and McLeish JA at [191].

[8] See Paciocco v Australia and New Zealand Banking Group Limited [2014] FCA 35.

NCC 2019 Amendment 1: Changes starting on 1 July 2020

In response to the recommendations of the Shergold Wier Building Confidence Report, the Australian Building Codes Board (ABCB) and the Building Ministers’ Forum have undertaken an out of cycle amendment to the National Construction Code (NCC). While the NCC was not due for review until 2022, the amendment known as “NCC 2019 Amendment 1” will be adopted by all Australian jurisdictions on 1 July 2020.

The NCC is a performance-based code containing technical standards for the design, construction and performance of buildings as well as for plumbing work and drainage systems. It is published and maintained by the ABCB and adopted by each Australian jurisdiction through its own legislation. For example, in NSW the NCC is given effect by the Environmental Planning and Assessment Act 1979 (NSW), the Plumbing and Drainage Act 2011 (NSW) and subordinate legislation.

The aim of the NCC is to create a uniform set of technical standards that apply to all Australian jurisdictions. However, as identified in the Shergold Wier Building Confidence Report, there have been a number of systematic issues with the implementation and enforcement of the NCC which has prompted NCC 2019 Amendment 1.

What will change?

Following a period of key stakeholder consultation last year, NCC 2019 Amendment 1 will introduce the following changes:

  • a new provision regarding egress from early childhood centres (NCC Volume One);
  • clarification of the concession that permits the use of timber framing for low-rise Class 2 and 3 buildings (NCC Volume One);
  • clarification that anti-ponding board requirements only apply to roofs where sarking is installed (NCC Volume Two);
  • an update to the Governing Requirements for all Volumes to require labelling of aluminium composite panels in accordance with SA Technical Specification 5344; and
  • correction of minor errors, including the correction of typographical errors and errors in diagrams.

In addition to the above, the ABCB announced last month that NCC 2019 Amendment 1 will also include a provision mandating the process for developing Performance Solutions. This process is based on the ABCB’s existing Development of Performance Solution Guideline and requires that the process for documenting Performance Solutions be commensurate with the complexity and risk of the design.

Unlike the other amendments, this amendment will not commence until 1 July 2021. However, as the process is included in NCC 2019 Amendment 1 there is plenty of time for industry participants to prepare necessary documentation to encompass the process for Performance Solutions prior to the amendment taking effect next year.

Other changes expected

It was also proposed that NCC 2019 Amendment 1 would include the new defined term of “building complexity”. The draft definition proposes a risk-based system from levels 0 to 5 for classifying complex buildings, which assists to identify buildings where additional regulatory oversight is needed during the design, construction and certification processes.

 

The ABCB announced last month that this new definition would not be included in NCC 2019 Amendment 1, however it has been published on their website with a six month consultation period for comments and feedback.

A copy of the preview of NCC 2019 Amendment 1 is available on the ABCB website via the NCC Suite.

If you or someone you may know is in need of advice regarding NCC 2019 Amendment 1 or the NCC generally, please contact our office by phoning (02) 9248 3450 or by email at info@bradburylegal.com.au.