• Peter Merity

High Rise Residential Living

PROBLEMS WITH HIGH RISE RESIDENTIAL APPARTMENT BUILDINGS

Once upon a time all owners of residential buildings received the protection of the House Purchaser’s Insurance under the Builder’s Licensing Act which insured them against defective and incomplete work performed by a licensed builder.

The insurance coverage arose when a fully licensed builder performed residential building work. Although a premium was payable by the builder it could be chased up retrospectively and was not necessary for the coverage to exist. Each residential building unit was given an insurance coverage equivalent to one half of the coverage given for a freestanding house. This meant that there was a quite substantial amount available to a body corporate to fix defects. The insurance was provided by the NSW State Government and underwritten by overseas reinsurers. The insurance was a first resort scheme where the owners applied to the insurer, the Builders Licensing Board, and were paid direct and the Board would then recover the payment from the builder responsible.

The State Government politicians eventually made it obvious that they could not be trusted to run such a scheme (the same politician would insist the Board pay out an unmeritorious claim one month and the next month object to the builder having to repay the Board for an obviously unmeritorious claim) and the reinsurers were getting upset. As a result it was proposed that the insurance would be provided by commercial insurance companies and that it would be compulsory for a builder to insure in order to claim monies under a building contract. The politicians thought that this would also mean that the insurers, who had the right to refuse coverage, would effectively police the home building industry by refusing to insure builders who performed defective work, that is builders who were high risk. The politicians then got rid of the superb group of building inspectors who enforced standards imposed by the Builders Licensing Board. The insurers, however, did what insurers always do. They did not pick winners, they simply worked out how much they had to pay out in a given year and then raised the premiums to cover that and provide themselves with a very healthy profit. There has been no serious attempt at the imposition of effective building standards since that time until recently.

As time went on, the cost of rectifying defects in residential unit building began to rise as developer companies cut corners and engaged dodgy builder companies, both of which tended to dissipate their assets after the project was completed leaving the insurer to carry the can.

Then the HIH collapse occurred. HIH had covered most to the home building insurance in New South Wales. The other insurers only agreed to continue to provide insurance if they were not going to be made to insure high rise until buildings. In fact anything over three stories.

After then the high rise residential buildings in New South Wales have been built without effective supervision and by developers and builders who have no interest in building them properly.

Of recent years the State Government, in response to public pressure arising from things like the Opal Towers problems, has set up the Building Service Commissioner. The BSC is doing its best but it cannot be effective until the industry is structured so that good building practices are in the interests of developers.

As a band aid fix to an amputated leg, the developers of high-rise buildings are now required to pay a bond of 2% of the contract value, which is held in a trust. It is used to pay for the costs of rectifying any defects identified by an independent building inspector between 15 months and 18 months after the completion of the building work. This is substantially less than the coverage period provided by the Home Building Compensation Fund, which is up to six years for major defects. Any building rectification works should be completed within three years, and the unspent bond is refunded to developers. However, in very many cases the bond amount is less than the value of the rectification works required. The statistics would be interesting but I have been informed that when the problems are serious and structural, you are looking to about 68% of the contract value. Remember too that the 2% is not paid into an insurance fund, it is only to be used for the building in question. This is completely inadequate.

THE SOLUTION

The solution is to make good building practices in the interests of the developers. The way to do that is to ensure that they have “skin in the game” by requiring them to retain 20% by value of the block of units for six years after the occupation certificate is issued. They will then have an interest in ensuring that the units are built to a good standard, or at least built well enough to be trouble free for six years.


Regards

Peter Merity


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