An issues paper on a Review of the Residential Building Cover Package. Residential Building Cover Review Panel

Transcription

1 An issues paper on a Review of the Residential Building Cover Package Residential Building Cover Review Panel August 2013

2 BACKGROUND The Minister for Lands, Planning, and the Environment announced on 19 June 2013 that a review of the Residential Building Cover Package (RBC) to examine how it had performed for the industry and consumers and potential modifications to reduce red tape. The review will also look at past cases in which consumers were affected by lack of cover and whether the current RBC would have assisted or protected consumers. The review panel comprises an independent consultant (Deloitte Touche Tomatsu) and representatives from the Department of Treasury and Finance and Department of the Attorney General and Justice. The RBC package, which commenced on 1 January 2013, comprises a number of elements to ensure that consumers are protected during the residential building process. These include in part the following; Creation of mandatory requirement for a fidelity certificate prior to commencing prescribed residential building work. This certificate covers the owner in the event that the builder dies, disappears, becomes insolvent or deregistered. Builders need to demonstrate financial eligibility to the fidelity fund prior to being able to obtain a fidelity certificate. Cost of the certificate is paid for up front by the builder with the cost passed onto the consumer. The fidelity certificate is issued by an independent fidelity fund managed by the Master Builders Association NT. This fund is currently the sole source of cover in the Northern Territory Cover under the fidelity certificate is limited to $200,000 with non completion component limited to a maximum of 20% of the contract price. Any balance can be used for rectification of non compliant building work. Payments for non completion are used for the reasonable costs of engaging a new builder and for rectification of any defects. Statutory consumer guarantees were introduced on 1 January 2013 for the first time in the Northern Territory. These require a builder to rectify any defects during the guarantee period. Non structural defects are covered for a period of 1 year and structural defects are covered for a six year period. Builders are required to maintain a minimum of $50,000 net tangible assets for the duration of registration and may be required at anytime by the Building Practitioners Board to demonstrate compliance. The Commissioner of Residential Building Disputes was established to provide a streamlined process for disputes between consumers and builders with the emphasis on mediation. However, if no agreement can be reached binding orders can be imposed by the Commissioner. Building contracts are required to contain a schedule of progress payments with a maximum deposit of 5% and the final payment of 3% mandatory. A declaration by the builder must be provided to the owner prior to receiving payment for a completed stage. 1

3 TERMS OF REFERENCE 1. To examine specific past cases in the Northern Territory where builders have died, disappeared or become insolvent and to quantify the extent that the current Residential Building Cover Package (RBC) (including the cover provided by the fidelity fund scheme) would have benefited consumers. 2. To examine whether there is an ongoing need for the mandatory residential building insurance of the RBC package either through a fidelity fund or private insurer. 3. To identify potential modifications to the RBC package to reduce the red tape burden on the building industry whilst maintaining consumer protection. The Panel wants to know what industry, consumers, and other stakeholders think about the Residential Building Cover Package including how they think it is performing, whether it is considered necessary and why or why not, and whether there are modifications that could reduce the red tape burden on industry whilst maintaining consumer protection. Residential Building Cover Package Review Panel 2

4 Contents How do I make a submission or comment?... 4 What happens with my submission?... 4 What did the Residential Building Cover Package include?... 4 Whom does Residential Building Cover indemnify?... 4 Trigger events... 5 Work that requires Residential Building Cover... 5 Work that does not require cover... 6 Where does it apply?... 6 Where is cover taken out?... 6 What is the purpose of the package?... 6 What is the difference between Fidelity Funds and Private Insurers?... 7 Consumer guarantees... 7 Defective work... 8 Structural and non-structural... 8 Structure of the Residential Building Cover package... 9 What is covered?... 9 Dispute resolution: Commissioner of Residential Building Disputes Disputes other than consumer guarantee disputes Other elements of the package Progress payments Residential building contract requirements Registration Standards and tolerances Key questions

5 How do I make a submission or comment? A brief overview of the package is set out below to provide some background and context to assist you when considering the issues raised in the paper. The Panel invites written comment on this paper and encourages all interested parties to provide submissions addressing the matters discussed. You may provide your comments or submission to rbi@nt.gov.au or mail to RBC Review Panel, GPO Box 1680 DARWIN NT Submissions and comments are due by 6 September 2013 What happens with my submission? Your submission will be used to inform the Panel s review and identify key issues relating to the operation of the Residential Building Cover Package. The Panel may cite from or attach the content of submissions to the report provided to Government. If you do not want your personal details identified in the report, please make that clear in your submission and your personal details (for example your name, or your business name) will not be disclosed. What did the Residential Building Cover Package include? The Package comprised of Residential Building Cover, regulation around progress payments, strengthening of the Building Practitioners Board s powers, development of a Standards and Tolerances Guide, and education for consumers. Whom does Residential Building Cover indemnify? Residential Building Cover indemnifies the current owner of land within the period of consumer guarantees, which is six years for structural defects and one year for non-structural defects if a trigger event has occurred. It does not cover the builder. Builders are responsible for rectifying defective work that they carry out for the period of the consumer guarantees. For Class 1a buildings (houses, duplexes, townhouses) that are constructed by a builder on land owned by someone other than the builder, the cover is for the benefit of the owner that has contracted with the builder, and subsequent owners (within the period of consumer guarantees). For Class 2 buildings (apartments, units, flats) that are three residential storeys and under, the cover is for the benefit of a successor in title to the developer. This means that it does not cover noncompletion events. Similarly for houses constructed by a builder on land owned by that builder (developers or owner-builders), the cover will only be for the benefit of subsequent owners for noncompliance (defects) during the period of the consumer guarantees. 4

6 A builder must take out the cover and provide a copy of the certificate to the owner before demanding or receiving any payment from the owner (whether a deposit or otherwise). It is an offence under the Building Act for a builder not to comply with this requirement. Building Act: sections 54AC, 54AD, 54BB Trigger events The trigger events that enable an owner to claim are where the builder: Dies Disappears Becomes insolvent or bankrupt Has their registration suspended or cancelled If a trigger event has not occurred, and there are allegations by the current owner of defective or incomplete work, the owner may apply to the Commissioner of Residential Building Disputes. Building Act: sections 54C, 54D Building (RBI and Fidelity Fund Schemes) Regulations: regulation 8 Work that requires Residential Building Cover The mandatory requirement for a builder to take out Residential Building Cover is work of at least $12,000 in value, for the construction of the following buildings: a new Class 1a building (which are houses, duplexes, townhouses) and an extension to a Class 1a building a new Class 2 building up to three residential storeys (which are apartments, units, flats) and an extension to a Class 2 building (also only if the Class 2 building does not exceed 3 residential storeys) a Class 10 building (which includes garages, retaining walls, verandahs) attached to a Class 1a or 2 building (under three residential storeys), if the Class 10 building is constructed at the same time as that building a Class 10 building that is a retaining wall (whenever constructed) that is not attached to a relevant building but on which the integrity of the relevant building depends The Building Regulations require relocated houses to be brought up to building standards in force at the time of relocation, unless the house is being moved to a rural area. Buildings that are relocated to rural areas under that exemption do not require Residential Building Cover. All other relocated houses, where the value of the work is over $12,000, will require the cover Building work as described above and done for Defence Housing Australia, requires the cover Building Act: sections 54A, 54AB, 54AC, 54B Building Regulations: regulation 2(2) 5

7 Building (RBI and Fidelity Fund Schemes) Regulations: regulations 3, 5 Work that does not require cover Work that has a value of less than $12,000 Renovations or alterations to an existing building (Class 1a or Class 2 up to 3 residential storeys) that do not increase the floor area of the existing building (unless the renovation is under the same contract with the same builder that is carrying out an extension) Examples of renovations that do not require the cover: The re-cladding of roofs or walls, replacement of windows, construction of new external openings and enlargement or filling in of existing external openings Prefabricated dwellings All other classes of buildings and Class 2 buildings that exceed 3 residential storeys Work done for the Northern Territory Government does not require the cover Building Act: sections 54A, 54AB, 54AC Building (RBI and Fidelity Fund Schemes) Regulations: regulation, 5 Where does it apply? Residential Building Cover must be taken out for relevant work in both Tier 1 and Tier 2 building control areas. Building Act: section 6 Building (RBI and Fidelity Fund Schemes) Regulations: regulation, 4 (definition of declared consumer protection area) Where is cover taken out? Builders take out the cover. Owner-builders and developers must also apply to take out the cover. The Master Builders Association NT are managing the fidelity fund and issue Fidelity Certificates. Information including the amount a Fidelity Certificate costs (based on the cost of the work) and application forms can be accessed from MBA s website: What is the purpose of the package? Prior to the commencement of the package there were no products available in the Northern Territory to cover owners building new homes or extensions for the reasonable costs of engaging a new builder, or the cost of rectifying defective work (including cosmetic defects) if the builder died, disappeared, became insolvent, or lost their registration. Interstate that type of cover is commonly referred to as Home Warranty or Home Indemnity Insurance, however, it is referred to as Residential Building Cover in the Northern Territory. This type of cover will pay a claim if one or more of the following trigger events have occurred in relation to the builder: Death 6

8 Disappearance Insolvency/bankruptcy Suspension or cancellation of registration The cover is designed to provide a safety net where there is no ability for the owner to recover from the builder because the builder has died, disappeared, become insolvent, or has lost their registration. These types of schemes also provide the builder with the opportunity to defend an allegation of defective or incomplete work in a relevant dispute resolution forum if the builder is still operating (where a trigger event has not occurred). What is the difference between Fidelity Funds and Private Insurers? The sole provider of Residential Building Cover in the Northern Territory at the moment is the MBANT Fidelity Fund. Fidelity Funds are different from private insurance companies that offer similar residential building cover interstate. For example, assets of the Fidelity Fund Scheme are to be used solely for issuing of certificates, payment of expenses, investments in cash or cash equivalents, payment of amounts to beneficiaries and any other purpose gazetted by the Minister. In addition to restrictions on the manner that assets are used, there are significant reporting obligations and regulation of the approval of Fidelity Fund Schemes. For example, the Minister must approve the auditor, actuary, and trustees of the Scheme. The Fidelity Fund must also provide an Annual Report to the Minister on accounts, performance of the scheme, audit certificate and provide an Annual Report to the Commissioner of Consumer Affairs on the number of claims, amount of each claim, payments made, and reasons for the rejection of each claim refused. The Minister can suspend or cancel the approval of a Scheme if non-compliant. Building Act: sections 54DA, 54DB, 54DE Building (RBI and Fidelity Fund Schemes) Regulations: regulations 26, 62, 80, 81 Consumer guarantees The Residential Building Cover package inserted a number of consumer guarantees into the Building Act. A breach of a consumer guarantee, resulting in defective or incomplete work, will enable the owner to: Where a trigger event has occurred make a claim under the fidelity certificate; or Where a trigger event has not occurred apply to the Commissioner of Residential Building Disputes. The consumer guarantees are that: the residential builder will carry out the building work in a proper and workmanlike manner and in accordance with the plans and specifications: o specified in the building permit for the work; and o if there is a residential building contract for the work specified in the contract; all materials supplied by the residential builder will be good and suitable for the purpose for which they are to be used; all materials supplied by the residential builder will be new unless: o the residential builder is an owner-builder or developer; or 7

9 o if there is a residential building contract for the work the contract for the work specifies otherwise; the residential builder will carry out the building work in accordance with this Act, the Regulations and other laws in force in the Territory; the residential builder will carry out the building work with reasonable care and skill; the residential builder will complete the work: o if there is a residential building contract for the work by the date, or within the period, specified in the contract; or o otherwise within a reasonable period. The consumer guarantees provide a basis for an owner to apply under the Residential Building Cover (if a trigger event has occurred), or to the Commissioner of Residential Building Disputes (if no trigger event has occurred). They do not replace or affect other rights that an owner has under other laws in force in the Northern Territory (for example, the Australian Consumer Law). Building Act: section 54B, 54BC Defective work Defective work is work that has been carried out otherwise than in accordance with a consumer guarantee. That means that the work may be of poor quality, may not conform with the National Construction Code, or the goods supplied may be faulty. Defective work may be structural or nonstructural. Building Act: section 4 (definition of defective) Structural and non-structural A structural defect is a defect in a structural element of the building as a result of defective residential building work, or a defect that is reasonably likely to cause a defect in a structural element of the building. An example of a structural defect is a waterproof membrane attached to a wall or floor of a bathroom. A non-structural defect is a defect in a non-structural element of the building as a result of defective residential building work. A structural element is a load bearing component of the building (whether internal or external) that is essential to the stability of the building or part of the building, or a component (including weatherproofing) forming part of the external walls or roof of the building. Examples of structural elements are foundations, floors (not floor coverings), walls, roofs, columns, or beams. A non-structural element is a component that is not a structural element. Building Act: section 4 (definition of defective) Building (RBI and Fidelity Fund Schemes) Regulations: regulation 6 Building (Resolution of Residential Building Work Disputes) Regulations: regulation 9 8

10 Structure of the Residential Building Cover package There are two major components to the Residential Building Cover Package. They are the Residential Building Cover, and the dispute resolution process with the Commissioner of Residential Building Disputes. The Residential Building Cover is only accessible when a trigger event has occurred. In other words, the builder has died, disappeared, become insolvent or has had their registration suspended or cancelled. This means that in all instances where there is an allegation of defective or incomplete work by an owner and a trigger event has not occurred, the owner must apply to the Commissioner of Residential Building Disputes, not the insurer or fidelity fund provider. The Commissioner has the power to determine whether the building work is in fact defective or incomplete, and if it is order that the builder rectify or complete the work. Other elements of the package that complement the Residential Building Cover and dispute resolution process are discussed below. What is covered? Residential Building Cover indemnifies current owners for two things. The first element of the cover is that it will pay out on claims arising from non-completion of the building work, for example, where a trigger event occurs during construction. In that situation, there are costs for the owner to engage a new builder and the cover indemnifies the owner for those reasonable additional costs of engaging the new builder (within the cap of up to of 20% of the contract price up to a maximum of $200,000). Examples of typical costs incurred for non-completion include higher margin costs for the incoming builder, and expert reports to assess the work performed by the first builder. The second element of the cover is that it will pay out on claims for defective work, also only where a trigger event has COVER occurred. UNDER For FIDELITY example, CERTIFICATE if defects become apparent during the period of the consumer guarantees, and a trigger event has occurred, the current owner may make a claim to the Residential Building Cover provider (currently, Master Builder s Association is the only provider in the Northern Territory). The cap for this element of the cover is $200,000, less any amount that has already been paid for a non-completion event. This means that the total amount that could be claimed on is $200,000. The claims that the insurance and fidelity fund must cover are: loss for defective guaranteed work (including defective design work under a contract) or the non-completion of guaranteed work; the costs of alternative accommodation, removal and storage for a period not exceeding 60 calendar days, reasonably incurred as a result of the defective guaranteed work or noncompletion of the work; the loss of a deposit or progress payment under a contract relating to the work (except the payment of a deposit or progress payment above the amount specified in the contract relating to the guaranteed work); legal or other reasonable costs incurred in seeking to have a builder rectify or complete the work; an increase in costs for rectification of the work caused by the passage of time; any acts or omissions of persons engaged as contractors by the builder in relation to the work; 9

11 any additional reasonable costs associated with engaging another builder to rectify or complete the work (excluding the costs associated with the work carried out by that builder). If a trigger event has not occurred and defects become apparent, the owner may apply to the Commissioner of Residential Building Disputes. The two elements to the cover for non-completion and non-compliance events are explained in more detail below. Building Act: sections 54C, 54D Building (RBI and Fidelity Fund Schemes) Regulations: regulations 8, 14, 17, 45, 48 Dispute resolution: Commissioner of Residential Building Disputes The Residential Building Cover package established the position of the Commissioner of Residential Building Disputes. The Commissioner of Residential Building Disputes may consider three types of applications. Consumer Guarantee Disputes For the same type of work that must be covered by Residential Building Cover (insurance or a Fidelity Certificate), if no trigger event has occurred, the owner can apply to the Commissioner of Residential Building Disputes if they allege there has been a breach of a consumer guarantee and the contract is at an end. The Commissioner may hear the matter and make a binding order. These types of disputes are referred to as Consumer Guarantee Disputes. This process is designed to be quicker and less expensive for parties than court. This is because the matters in dispute are confined to whether there is defective or incomplete work (because of a breach of a consumer guarantee) and there are restrictions regarding legal representation of parties. Building Act: sections 54FC, 54FD, 54FE Building (Resolution of Residential Building Work Disputes) Regulations: regulations 6, 18, 19, 20, 21, 68, Part 2.2, Part 2.5, Part 3.3, Chapter 4 Technical Inspections In addition to determining Consumer Guarantee Disputes, the Commissioner has the power to order a technical inspection to assess whether building work is defective. Builders may also apply to the Commissioner for a technical inspection, if the owner alleges there is defective work. Building Act: sections 54FB, 54FD, 54FE Building (Resolution of Residential Building Work Disputes) Regulations: regulations 6, 14, 15, 16, 17, Part 2.4, Part 2.5, Part 3.1 Mediation / conciliation The Commissioner is also able to facilitate mediation or conciliation for parties in relation to all residential building work (for example a high rise residential complex, or disputes about a pool) where parties voluntarily agree to participate. 10

12 Building Act: sections 54FA Building (Resolution of Residential Building Work Disputes) Regulations: regulations 5, 10, 11, 12, 13, Part 2.3, Part 2.5, Part 3.1, Chapter 4 Disputes other than consumer guarantee disputes The Commissioner does not have the power to determine other disputes, such as a contractual claim by the builder that the owner has not paid the builder. The Commissioner only has the power to decide whether a builder has breached a consumer guarantee. Accordingly, a builder cannot apply to the Commissioner of Residential Building Disputes because they will never be alleging that they themselves have breached a consumer guarantee. Other avenues such as Court and adjudication remain available to the builder and owner for disputes other than consumer guarantee disputes. Building Act: sections 54FC, 54FE Other elements of the package In addition to Residential Building Cover and the dispute resolution components, a number of other elements underpin the operation of the package. They are discussed in detail below. Progress payments Work that requires a residential building contract must include progress payments that comply with the standard progress payment schedule set out in the Building Regulations, unless parties agree and sign the approved form to vary the standard progress payments. However, there are two stages that cannot be varied by agreement and they are the deposit, (which if there is one, must be no more than 5%), and the final payment on receipt of the occupancy permit, (which must be no less than 3%). If parties agree to vary the standard progress payment schedule, the agreement must be in the approved form and must be either attached to the residential building contract as an annexure, or may be included in the body of the contract. The standard payment payment percentages are: If there is a deposit, no more than 5% Base stage - no more than 10% Frame stage - no more than 20% of the total contracted price Enclosed stage - no more than 25% Fixing stage - no more than 30% Practical completion stage - no more than 7% Final stage - the remaining percentage (must be no less than 3%) Building Act: section 48B(2)(A) 11

13 Building Regulations: regulations 41G, 41H, 41HA, 41HB, 41HC, 41HD, 41HE, 41HF, 41J Residential building contract requirements In the Northern Territory, the contents of a building contract are generally negotiable, however, the Building Act and Regulations prescribes some matters which MUST be included in a residential building contract for certain building work. Work that is subject to the requirements relating to residential building contracts is work of a value of $12,000 or more, in connection with the construction of the following: Class 1a detached houses and Class 10 buildings (i.e. carports, garages, verandahs) attached to the house and constructed at the same time as the house Extensions to Class 1a detached house that increase the internal floor area (note that it does not have to be a habitable floor area but rather the addition of internal floor area. Retaining walls (whenever constructed) that are not attached to a Class 1a detached house but on which the integrity of such a house depends The RBC Package amended the Building Regulations to provide that (in addition to the requirements that applied before the commencement of the RBC Package) contracts for the above work must: specify the percentage of the total contracted price which is only payable after completion of all contracted stages of the building works and when the owner has received either an occupancy permit or a builder s declaration and a copy of all relevant documents or certificates have been provided to the owner. This percentage amount must not be less than 3% of the total contracted price A contract must specify either the standard progress payments or a variation of the standard under a progress payment agreement Standard progress payments specify the percentages of the total contracted price, payable as progress payments, to be made after completion of the base stage, the enclosed stage, the fixing stage, the frame stage and the practical completion stage. A varied progress payment agreement may vary both the stages of work and the percentages payable for the work except for the mandatory limits on the deposit and the final payment A contract provision in relation to dispute resolution is of no effect if it purports to restrict or remove a person s right to access a dispute resolution process available under a law in force in the Territory. Such a provision is of no effect if it requires a dispute to be referred to a third party for a final and binding decision A contract must include the consumer guarantees. It is an offence under the Building Act not to include the consumer guarantees in the contract and any provision attempting to restrict or remove a person s rights in relation to the consumer guarantees has no effect When you receive a claim for a progress payment, the invoice from your builder must include a declaration to the effect that the work to which the claim relates has been completed Building Act: sections 48B, 54B, 54BA Building Regulations: regulations 41G, 41H, 41HA, 41HB, 41HC, 41HD, 41HE, 41HF, 41J 12

14 Registration The Residential Building Cover package strengthened the powers of the Building Practitioners Board in relation to the financial requirements of building contractors for registration. Building Contractors must maintain a minimum of $50,000 net tangible assets (as certified by an accountant) at all times during the period of registration. The Building Practitioners Board has the power to require a building contractor to provide evidence that they hold and have maintained the required financial assets (as set out in the Regulations) at any stage during the registration period. Building Act: sections 24B(1)(c), 25B Building Regulations: regulations 39B, 39C Standards and tolerances A Northern Territory Standards and Tolerances Guide for Residential Building is being developed to assist builders, owners, regulators, and providers of insurance or fidelity fund cover when considering workmanship standards and tolerances for residential construction across the Northern Territory. This Guide covers elements of the residential construction process including footings and slab systems through to internal fixings such as basins and kitchen cupboards. It is intended to be used to help resolve disputes about poor workmanship both with the Commissioner of Residential Building Disputes, and fidelity fund claims. Building Act: section 167B 13

15 Key questions Can you suggest ways to reduce red tape whilst maintaining consumer protection for residential building? Do you think that the scope of Residential Building Cover is adequate? Are there additional things that the cover should indemnify the owner for, or are there things covered that you think should not be covered? Do you consider you have been unreasonably restricted by the Fidelity Fund, in terms of the number of projects that you may undertake at a given time (turnover limits)? Can you provide details of your experience? Are there key parameters of the Package that should be changed, for example, do you think that the time limits of 12 months for structural, and 6 years for non-structural defects are appropriate or should be changed? Do you think that the caps that apply to the Residential Building Cover are appropriate for example, 20% of the contract price up to a maximum of $200,000 for non-completion claims and a total limit of $200,000? Are there other models of building consumer protection in Australia or elsewhere that you believe offer better consumer protection and industry support? If yes, please provide us with details. Do you consider the Residential Building Cover Package has negatively affected your business? Is the scope of the work covered by the RBC Package adequate or should it be expanded? For example, do you think that the Package should be extended to renovations or other types of residential building work? Do you think the cost to obtain the cover (the premiums) is appropriate? Why? 14