Over 2 million Australians live in residential multi-owned properties, i.e. units and townhouses, and the numbers are increasing each year. However, researchers have uncovered systemic issues within the building and construction industry and a lack of enforcement of standards by regulators. These two factors, amongst others, are causing an alarming number of new building defects in Queensland, New South Wales and Victoria – with an average of 12-15 defects found in the buildings audited.
This pilot research ‘An examination of building defects in residential multi-owned properties’ by Associate Professor Sacha Reid from the Department of Tourism, Sport and Hotel Management and Griffith Cities Research Institute, and Dr Nicole Johnston from Deakin University, examined 212 building defect reports that identified 3227 building defects throughout the three States, and involved 21 interviews with stakeholders including; developers, lawyers, building certifiers, strata managers and lot owners, to develop insight on the key issues.
“People have this perception that Australia has rigorous building codes and building standards, but the issue is that they are not being enforced,” said Associate Professor Reid.
“And it’s not about the numbers of defects, it is about the severity and the impacts of those defects. And unfortunately with high-rise, if there is a defect with level four because of the repetitive nature of construction, it will be throughout the whole building.”
The research aim was to investigate the building defect reports in the Eastern States of Australia to develop a new classification system for analysing defects. This was identified early, as there has been no current system for the grading and codification of building defects.
“So basically this project was identifying the range and scale of defects that were currently being experienced within multi-owned properties or strata-titled buildings, as the predominant ownership structure,“ said Associate Professor Reid.
“One of the key areas was examining what defects were out there and under what sort of construction classification code or system could be used to analyse them.”
“We found there were some 3227 different defects, with buildings on average having 12 defects per building. Remembering this was only identifying defects that happen within the defects liability period.”
“So within different jurisdictions, the defects liability period varies. For Queensland, NSW and VIC, in the first 6-12 months you have the minor defects (often aesthetic) start to arise and there is a 12-month minor defect liability period,” said Associate Professor Reid.
“That’s where you have got something is missing from what’s been contracted. The walls aren’t done properly or the tiles are cracking. It’s a visual thing, the aesthetic aspects.”
“Through to 6.5 years in Queensland and New South Wales or in Victoria it’s 10 years. And that’s where you have got the structural defects. So the more substantial defects that can affect the structural context of the building.”
The researchers identified a wide range of defects with the top three being; 1. Building Fabric Cladding 40%, 2. Fire Protection 13%, 3. Waterproofing 11%. Almost half of the buildings audited (85) had issues with building fabric cladding and many buildings (28) had fire protection defects – which is a concern considering flammable cladding is known to be a major contributor to building fires, e.g. London’s Grenfell Tower.
“These are new buildings that we are talking about, and the time period we’re looking at is from when the builder or the developer hands-over to the new lot owners, and then that first period up till the end of the defect liability period,” said Associate Professor Reid.
“Construction is about time, cost and quality – and it’s perceived to be cheaper to do it quickly (with hand-over defects) than to do it right the first time.”
“And the pace that buildings are going up. They’re going up one floor per week, or sometimes quicker if the construction is behind schedule in an attempt to catch up the schedule. Yet, concrete needs to cure for a certain period of time and that might not be the best building practice.”
“Waterproofing needs to be installed correctly to start with and then it needs time to cure, and there are different ratings of the membrane as well. So you have got to use the right membrane in the right location,” said Associate Professor Reid.
If you are considering buying a new unit off-the-plan, make sure you analyse the contract you’re given by the developer and conduct due diligence checks on the developer and builder’s past projects for defect issues. It’s suggested to look for properties aged 6-10 years to reduce the possibility of issues with structural integrity, as usually this time-period is after major defects have emerged.
“One of the key things is people don’t do appropriate searches of the Body Corporate records when purchasing if they are purchasing into an existing development. So they don’t know what they are buying. And therefore they don’t know what they are buying into,” said Associate Professor Reid.
“The Body Corporate records highlight and detail all of this communication and all of the issues that may be taking place. But because that adds to the conveyancing costs for that type of purchase many people don’t do it and they go with cut-price conveyancing.”
“I would be hesitant to buy anything after 2000. As any building that was built prior to 2000 has a lot higher standard or quality, particularly in Queensland.”
“So prior to the late 1990s private certifiers were more a component of the local government planning departments. When they outsourced private certification, that was one trigger, I’m not saying it was the only trigger, it has led to a decline in enforcement of standards,” said Associate Professor Reid.
The report explains people have an expectation that buildings are constructed to Australian standards, and there is a perception someone is overseeing the construction looking for defects during official certification processes. However, the private certifiers interviewed have said that legislatively that is not what is required, and they only need to visit the site at key points during construction and to collect Form 16s, which are signed-off by the competent individual (registered tradesperson) to state that everything was installed to standard.
“The public doesn’t realise that that is the role of the private certifier. The public perceives that the private certifier is there to ensure the quality standards of the national construction code,” said Associate Professor Reid.
“So there is this disconnect between what people believe the private certifier to be doing and the actual role of the certifier in the construction process, and the inherent conflict of interest in that role.”
“There are really great private certifiers out there who are doing an amazing job, and they are well qualified, but the conflict of interest arises because their business is reliant on getting work and their work comes from developers.”
“So therefore, the more work they do, the more they are going to get paid. And the easier it is for the developers, the more they will get hired,” said Associate Professor Reid.
“So there is this inherent conflict of interest there and a lack of government oversight, and especially in terms of the regulators who are considered a farce by some stakeholders.”
It was identified that the project construction finance process is compounding the number of building defects – as the majority of units are sold off-the-plan (OTP) to enable developers to obtain finance – well before any physical inspections can be undertaken by a building certifier or inspector.
“If we think about the way the financial system is set-up, most apartment buildings need to be sold off-the-plan, to achieve finance from the banks. Depending on the bank and the developer’s experience it’s around 70-80 percent OTP sales contracts executed before construction starts,” said Associate Professor Reid.
“So we are selling projects off-the-plan, as a pretty picture some detailed drawings, but the contracts themselves are heavily skewed towards developers.”
“And if we think about those, 67% of apartments are sold to investors, and in Australia we have very small numbers of investors who have more than one or two properties in their portfolios.”
“So we are talking about mum and dad investors, fairly unsophisticated investors. They are not looking at it from that commerciality or risk perspective,” said Associate Professor Reid.
“Yes they are looking at the financial returns on that investment, and they are looking at how much income can I generate and how much is it going to cost me to hold this asset.”
“Negative gearing helps to offset some of those costs, but then there are other aspects, for example, people want to keep the body corporate fees as lows as they can, so they don’t have to pay more.”
The issue around building defects and the impacts it has on people achieving an equitable solution is complex as it involves a multitude of stakeholders, including developers, builders, certifiers, engineers, strata managers, lawyers and lot owners. And intensifying this complexity is legislative requirements for mandatory repairs once defects have been identified.
“There are so many challenges, many different stakeholders and there are the government structures as well. So the way these buildings are owned you have legislation which creates the title, but it also enforces how they are managed and maintained,” said Associate Professor Reid.
“Which you don’t have in a private dwelling. In a private dwelling, you own your property and you can do what you want to it, when you want and how you want.”
“But when you have shared ownership of a property, what you do can affect the structural integrity of the building and all sorts of things. And getting people to agree to anything is a challenge.”
“So initially you sign a contract, you have got the rectification works budget. Which is, for example, one million dollars to fix the known defects. You start doing the rectifications and then you open a can of worms,” said Associate Professor Reid.
“Because then you identify all these other problems, and once you identify them in a strata-titled building, they have to be fixed – so that one million dollars could now be five million dollars.”
In the last decade, new buildings have grown substantially in size in Queensland – tripling in the average size and with this expansion, the facilities have increased to include, pools, gyms and entertainment areas that require more maintenance and costs.
“The scale and intensity of the developments that are being built in Queensland have grown substantially since 2010, so prior to that it was more common to have 30-40 unit sized complexes, then it began to grow in size,” said Associate Professor Reid.
“Since 2010, it is very common to have over 100 units in a development. And now they have a range of different amenities, the pools and gyms and all of the lifestyle features.”
“They are becoming larger in scale and harder for an unsophisticated person or a person with no professional building, engineering or facilities management qualifications – which is effectively what the Body Corporate and the Executive Committee are – to be able to make informed decisions that affect the building itself.”
“The developers sell the project on the capacity of these lifestyle features, but they all cost money. So the buildings are becoming increasingly more complex and costly to run,” said Associate Professor Reid.
The increasing demands on strata management have meant their roles have become more demanding and it’s believed more education, qualifications and professionalism is needed to provide better outcomes.
“More education and training is needed, and one of the challenges is – I think we need to have more professionalisation of the strata managers,” said Associate Professor Reid.
“Currently, the strata managers’ role in this whole process is they are the administrators. So they send out invoices, take committee meeting notes, distribute them, make sure you are doing your voting correctly by the legislation.”
“Whereas we need to have a professional body managing some of these buildings, like a professional committee.”
“However, the legislation doesn’t enable professional committees to run Strata Title, so that’s another factor that makes it really challenging,” said Associate Professor Reid.
The researchers have found the building and construction process from the inception has pitfalls with quality assurance control measures, as contracts between developers and builders permit substitutions to construction materials, and in some cases design, that can adversely impact construction quality standards.
“And if we look at the construction site where the building defects start, you have got different development and building contracts,” said Associate Professor Reid.
“So a developer might have a concept idea. They tender it to construction or building companies, and that could be a design and build contract, so they have the vision and as long as the builder can deliver on that vision, it’s acceptable.”
“Builders can basically build projects how they want to. So there provides an opportunity for cost-cutting to ensure that they achieve more profitability for the building and construction.”
“Architects as well, they might design these buildings, but then they might be removed from the process that allows for builders to do product substitutions. And the builder will product substitute to a lessor cost items, which might not be up to standard,” said Associate Professor Reid.
Many unit buyers in multi-owned complexes are not provided with the same home warranty protections that are given to private dwelling buyers, especially if the building is more than three storeys in Queensland. These warranty protections are administered by the regulator, Queensland Building Construction Commission (QBCC).
“In Queensland, any building over three storeys in height, does not fall under the building warranty insurance scheme. So basically it’s up to the body corporate to fix it, if they can’t get the developer to come back and fix it,” said Associate Professor Reid.
The QBCC Home Warranty Scheme Product Disclosure indicates the exclusions to multi-owned complexes that are over three storeys – exclusions ‘A multiple dwelling of more than 3 storeys’.
Among the report findings, it was identified that a common practice was to use shelf companies for individual projects to reduce risk exposure in the event construction has unforeseen liability outcomes. This can make it difficult to pursue parties using these structures for rectification costs when major defects occur.
“I am not picking on the developer here, but these companies are set-up as shelf companies and that is for a risk mitigation purpose,” said Associate Professor Reid.
“They can still maintain their development company, and the risks of one bad product going pear-shaped isn’t going to affect their whole stream of work.”
“If they are a large developer reputation is a big thing. You don’t want the name of your company being associated with an Opal Towers or Mascot Towers.”
“More often than not, it’s going to be the building unit owners to come up with a special levy to fix it. And the issue then is – you do a defect audit report and you identify what the defects are, and you sign a rectification works contract,” said Associate Professor Reid.
“You definitely want to have an independent organisation doing the audit that isn’t aligned with either party. They will do the report which will identify all the known or seen defects, but often what doesn’t get identified in the defect report is the latent or hidden defects.”
“Behind the walls, what is missing or lacking, and unfortunately a lot of that doesn’t get identified until the rectification works starts.”
Later this year there will be further research into off-the-plan (OTP) apartment sales contracts, in order to examine information disclosure requirements and current OTP sales contracts inclusions. As there is a need to examine what consumers are signing up to and being delivered is congruent, and to provide policy advice for consumer protection.
“Another concern is off-the-plan contracts are not clearly defined. They don’t actually specify in great detail what you are buying into and they are allowing developers to make changes, so what you signed-up for might not necessarily be what you get delivered,” said Associate Professor Reid.
“We recently received a grant to examine off-the-plan building contracts from the Consumer Policy Research Centre.
“I think there just needs to be a lot more transparency in those contracts, and a lot more consumer protection. Currently, it’s heavily skewed towards the developer and there is limited consumer protection.”
For more information on residential building defects research please contact Associate Professor Sacha Reid or access the full report here ‘An Examination of Building Defects in Residential Multi-owned Properties’.
Feature Image: Brisbane City by Paul Fletcher Photography