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Long awaited private building cladding rectification fund announced

On 16 July 2019, Premier Daniel Andrews announced the establishment of a funding package of $600 million to fix privately owned buildings with combustible cladding in Victoria.

Pressure has been mounting on governments Australia wide to help to solve the swiftly escalating crisis presented by the number of buildings containing non-compliant combustible cladding uncovered in the last 3 years.

The announcement by the Premier has been strongly anticipated over the last year and comes after the Victorian Government committed earlier this year to fund cladding rectification work on public buildings.

The announcement is consistent with the key recommendations made in the Final Report of the Victorian Cladding Taskforce, which was also released on 16 July 2019.

Set out below is a summary of the key aspects of the funding package.

Why is the crisis escalating?

For lots of reasons.

  • The extent of the problem is overwhelming. 2,227 individual buildings have been inspected, and 1069 have been found by the Cladding Taskforce to have non-compliant cladding. In actuality, the total number of buildings containing non-compliant cladding in Victoria is higher, because those numbers do not include those buildings outside the remit of the Taskforce, such as industrial and commercial buildings.
  • The risk presented by many of those buildings is significant. 7% of the buildings inspected to 5 July were rated ‘extreme’ risk and 40% were rated as ‘high’ risk.
  • Owners of affected buildings, many of whom are owners corporations, have been unable to fund the cost of cladding rectification work, which in many cases will be millions of dollars. The cladding rectification agreement mechanism, introduced by the Victorian Government in late 2018, in an attempt to facilitate funding for such work, has had limited take up.
  • The insurance market is in self-protection mode. Many industry participants are now no longer able to obtain insurance for cladding related work. On 11 July this year, the Victorian Minister for Planning amended the Building Practitioners’ Insurance Ministerial Order to permit building surveyors to obtain professional indemnity insurance, which excludes claims directly relating to cladding. Those insurers who continue to provide professional indemnity insurance for such claims have increased premiums so substantially that some building surveying businesses will no longer be viable.
  • The market value of those buildings with combustible cladding has been significantly impacted, exposing the owners of those buildings to potential mortgage foreclosure or at the very least, large financial loss on resale.
  • Some would say the cladding crisis has uncovered an endemic and deeply entrenched structural problem with the building industry. At the heart of that problem is the tension between the need for robust regulation and enforcement of building and safety standards and on the other hand, the commercial world in which industry participants operate, which, post privatisation of the building surveying profession in 1993, has left the front line for upholding building standards to the private sector.

How will the funding package work?

The package is for $600 million but only half will be funded directly from the State. The remaining $300 million will be funded by changes to the building permit levy payable by applicants for a building permit under the Building Act 1993. That is, it appears that half of the package will be funded through an increase to that levy in the future. Details of when and how the increased levy will apply are not known.

How the $600 million will be allocated is also unknown, but given the size of the crisis, it can only be assumed that the funding will be used to subsidise the cost of the rectification work, not pay for it entirely.

It is clear that the funding will be available first for the buildings with the highest risk rating. 15 initial buildings have already been identified, presumably all of which have been rated with ‘extreme’ or ‘high’ risk ratings.

What does this mean for the cladding crisis?

The announcement yesterday is a welcome and bold initiative by the Victorian Government in addressing the cladding crisis. However, the challenge is certainly not over because:

  • The cost of cladding rectification work required on private buildings in Victoria will likely exceed $600 million. That can only mean that only the owners of those buildings with the highest risk ratings will have access to the funding or that the funding will be very widely distributed between all owners of buildings with combustible cladding. Either way, it may be the case that the private sector will still be required to fund a proportion or in some cases, all of the works.
  • Even where it is funded, procuring rectification work may still be a practical challenge because a large number of building surveyors are no longer insured for claims arising from cladding work and will therefore be reluctant to accept briefs for such work.
  • The nature of the rectification work required remains unclear. While it is clear that the Building Code of Australia (BCA) deemed to satisfy provisions to prohibit external combustible cladding, it is possible for such cladding to be used where an appropriate, bespoke performance solution can be developed, which otherwise satisfies the relevant BCA performance requirement. Those bespoke performance solutions cannot be applied in a blanket, ‘one size fits all’ manner and in some cases, will be impossible. In those cases, complete removal of the cladding will be required if the integrity of the performance requirement itself is to be genuinely maintained despite commercial pressure to minimise rectification costs.
  • Regulators and most importantly, Local Government, will continue to be placed under pressure to take action to ensure that buildings are brought into compliance notwithstanding the inability of many owners to fund or procure those works and the corresponding limitations on Local Government resources to ensure that is occurring.
  • The availability of funding for rectification work is also likely to prompt more litigation as owners take steps to carry out works that were previously on hold and recover the shortfall from those parties responsible.

Pressure on other State Governments to respond in a similar fashion is inevitable. More significantly, pressure on the Commonwealth Government to contribute to future funding is now strong. Premier Andrews made clear in the release on 16 July 2019 that the State of Victoria wanted ‘the Federal Government to be part of the solution.’

AUTHORS
Simone Holding | Partner
+61 3 9258 3858
simone.holding@maddocks.com.au

On 16 July 2019, Premier Daniel Andrews announced the establishment of a funding package of $600 million to fix privately owned buildings with combustible cladding in Victoria.

Pressure has been mounting on governments Australia wide to help to solve the swiftly escalating crisis presented by the number of buildings containing non-compliant combustible cladding uncovered in the last 3 years.

The announcement by the Premier has been strongly anticipated over the last year and comes after the Victorian Government committed earlier this year to fund cladding rectification work on public buildings.

The announcement is consistent with the key recommendations made in the Final Report of the Victorian Cladding Taskforce, which was also released on 16 July 2019.

Set out below is a summary of the key aspects of the funding package.

Why is the crisis escalating?

For lots of reasons.

  • The extent of the problem is overwhelming. 2,227 individual buildings have been inspected, and 1069 have been found by the Cladding Taskforce to have non-compliant cladding. In actuality, the total number of buildings containing non-compliant cladding in Victoria is higher, because those numbers do not include those buildings outside the remit of the Taskforce, such as industrial and commercial buildings.
  • The risk presented by many of those buildings is significant. 7% of the buildings inspected to 5 July were rated ‘extreme’ risk and 40% were rated as ‘high’ risk.
  • Owners of affected buildings, many of whom are owners corporations, have been unable to fund the cost of cladding rectification work, which in many cases will be millions of dollars. The cladding rectification agreement mechanism, introduced by the Victorian Government in late 2018, in an attempt to facilitate funding for such work, has had limited take up.
  • The insurance market is in self-protection mode. Many industry participants are now no longer able to obtain insurance for cladding related work. On 11 July this year, the Victorian Minister for Planning amended the Building Practitioners’ Insurance Ministerial Order to permit building surveyors to obtain professional indemnity insurance, which excludes claims directly relating to cladding. Those insurers who continue to provide professional indemnity insurance for such claims have increased premiums so substantially that some building surveying businesses will no longer be viable.
  • The market value of those buildings with combustible cladding has been significantly impacted, exposing the owners of those buildings to potential mortgage foreclosure or at the very least, large financial loss on resale.
  • Some would say the cladding crisis has uncovered an endemic and deeply entrenched structural problem with the building industry. At the heart of that problem is the tension between the need for robust regulation and enforcement of building and safety standards and on the other hand, the commercial world in which industry participants operate, which, post privatisation of the building surveying profession in 1993, has left the front line for upholding building standards to the private sector.

How will the funding package work?

The package is for $600 million but only half will be funded directly from the State. The remaining $300 million will be funded by changes to the building permit levy payable by applicants for a building permit under the Building Act 1993. That is, it appears that half of the package will be funded through an increase to that levy in the future. Details of when and how the increased levy will apply are not known.

How the $600 million will be allocated is also unknown, but given the size of the crisis, it can only be assumed that the funding will be used to subsidise the cost of the rectification work, not pay for it entirely.

It is clear that the funding will be available first for the buildings with the highest risk rating. 15 initial buildings have already been identified, presumably all of which have been rated with ‘extreme’ or ‘high’ risk ratings.

What does this mean for the cladding crisis?

The announcement yesterday is a welcome and bold initiative by the Victorian Government in addressing the cladding crisis. However, the challenge is certainly not over because:

  • The cost of cladding rectification work required on private buildings in Victoria will likely exceed $600 million. That can only mean that only the owners of those buildings with the highest risk ratings will have access to the funding or that the funding will be very widely distributed between all owners of buildings with combustible cladding. Either way, it may be the case that the private sector will still be required to fund a proportion or in some cases, all of the works.
  • Even where it is funded, procuring rectification work may still be a practical challenge because a large number of building surveyors are no longer insured for claims arising from cladding work and will therefore be reluctant to accept briefs for such work.
  • The nature of the rectification work required remains unclear. While it is clear that the Building Code of Australia (BCA) deemed to satisfy provisions to prohibit external combustible cladding, it is possible for such cladding to be used where an appropriate, bespoke performance solution can be developed, which otherwise satisfies the relevant BCA performance requirement. Those bespoke performance solutions cannot be applied in a blanket, ‘one size fits all’ manner and in some cases, will be impossible. In those cases, complete removal of the cladding will be required if the integrity of the performance requirement itself is to be genuinely maintained despite commercial pressure to minimise rectification costs.
  • Regulators and most importantly, Local Government, will continue to be placed under pressure to take action to ensure that buildings are brought into compliance notwithstanding the inability of many owners to fund or procure those works and the corresponding limitations on Local Government resources to ensure that is occurring.
  • The availability of funding for rectification work is also likely to prompt more litigation as owners take steps to carry out works that were previously on hold and recover the shortfall from those parties responsible.

Pressure on other State Governments to respond in a similar fashion is inevitable. More significantly, pressure on the Commonwealth Government to contribute to future funding is now strong. Premier Andrews made clear in the release on 16 July 2019 that the State of Victoria wanted ‘the Federal Government to be part of the solution.’

AUTHORS
Simone Holding | Partner
+61 3 9258 3858
simone.holding@maddocks.com.au