Insight,

ACT developer regulation – the Government is treading cautiously

03 February 2023

Background

In response to growing community concerns about the conduct of developers and controversies about building defects - in December 2022, the ACT Government released a Developer Regulation Discussion Paper (accessible here). This paper considers various issues and options intended to improve the perceived accountability of developers in the ACT and providing Canberrans with greater information about developments and the developers behind them.

This brief is designed as a summary of the options the Government is looking at, before they venture into uncharted regulatory waters for developers and their consultants. The Government is potentially looking to override established lines of legal responsibility and to impose new levels of responsibility and risk on developers. The Government is ultimately looking at the question of who should be responsible for developments and their defects. The ACT Government believes that “there is a public perception of developers that is not positive and largely comes from poor behaviour in a small portion of the industry.” The Government has identified four key areas in the developer space that it thinks should be more strongly controlled:

accountability and transparency;
ethical behaviour and work practices;
project capacity; and
building quality and safety.

The Developer Regulation Discussion Paper suggests some possible options (both regulatory and non-regulatory) to manage these four focus areas. The Government is treading cautiously on the potential regulation of developers. The Discussion Paper will guide discussion with key stakeholders on focus areas and options to inform further Government consideration. Written comments to EPSDDBuildingReform@act.gov.au are due by 10am Monday 27 February 2023.

The possible options discussed in the Paper are likely to affect landowners, developers, financial institutions, estate agents, contractors, and professional teams (including planning and economic consultants, architects, quality surveyors, engineers, solicitors, and accountants).

Regulatory options

There are seven different regulatory options discussed in the Paper: a licensing scheme, a registration scheme, a disclosure scheme, documentation, project trust accounts, bringing developers into the regulatory chain of accountability for building work, and amendments to the Building Regulatory System. Below, we explain what each of these options might look like and their pros and cons.

Licensing Scheme

There are two possible options for a licensing scheme: Positive Licensing and Negative Licensing. The ACT currently has neither in place with respect to developers. Positive Licensing means that you must hold a licence prior to providing services, and there are eligibility requirements to obtain a licence. Negative Licencing on the other hand involves the establishment of a statutory requirement providing for anyone to practice a particular occupation, as long as that person does not breach legislative requirements that relate to unacceptable or unsatisfactory conduct.

The pros and cons of each are discussed below, along with a description of what these schemes could look like in the ACT, and some questions to consider:

Positive Licensing

What is positive licensing?	Four core elements: Requirement to hold a licence prior to providing services Eligibility requirements Standards that must be complied with Compliance and enforcement mechanisms.
Pros of positive licensing	Provides some assurance of minimum service quality to consumers within the broader community. Could address accountability and transparency, ethical behaviour and work practices, project capacity, and building quality and safety.
Cons of positive licensing	Direct financial, administration and compliance costs for business, administration costs for government, and costs to consumers due to higher prices or less choice of suppliers or products and services. Industry and government bear the direct costs of managing and complying with license requirements
What might a positive property developer licensing scheme in the ACT look like?	Might include some of the following elements: Eligibility criteria to undertake development activity Minimum capability requirements to be a property developer, such as qualifications, experience and competencies Fit to practice requirements – suitability Disclosure obligations Evidence of an appropriate level of working capital for the life of the project Code of conduct – establishing industry standards and ongoing obligations Offences and associated penalties
How would a positive licensing scheme be implemented in the ACT?	New legislation would need to be developed. The standard timeframe for developing and passing legislation for this sort of scheme is 12-18 months.
Questions to think about	Is there support for the introduction of a positive licensing scheme for property developers in the ACT? Should there be a threshold met to be licensed? What minimum requirements should be set for a person/entity to be licensed? Should individuals or entities or both be required to be licensed?

Negative Licensing

What is negative licensing?	Can establish a statutory requirement that provides for anyone to practice a particular occupation, as long as that person does not breach legislative requirements that relate to unacceptable or unsatisfactory conduct. Provides sanctions for unsatisfactory conduct. Can prohibit people from engaging in certain activities if they meet certain criteria, such as convictions. Do not require someone to have a licence to practice in a particular occupation. Government retains the authority to withdraw the right to practice if someone fails to meet minimum capability and professional standards of work and conduct.
Pros of negative licensing	A more targeted, less restrictive and less costly form of regulation than positive licensing schemes. Provide the regulatory tools to deal directly with those who behave illegally or in an incompetent, exploitative or predatory manner. Provide an additional level of public protection with respect to unregulated professions, at a lower cost to the community than positive licensing schemes. Can generally be implemented through amendments to existing legislation rather than requiring entirely new legislation to be developed. More cost-effective than positive licensing schemes through lower compliance costs, fewer costs on participants, and lower administrative costs for Government and industry.
Cons of negative licensing	Requires a complaint and an investigation which may allow someone to operate inappropriately for some time before being detected. For negative licensing to work effectively, the Government needs to allocate resources to identifying and pursuing businesses that do not meet acceptable standards.
What might a negative property developer licensing scheme in the ACT look like?	There are two main examples of options for property developers in the ACT: A prohibition on people participating in the industry who cannot satisfy suitability requirements – eg have certain convictions. Inclusion of criteria must be carefully balanced against the rights of an individual to work in their chosen profession and to earn a living and must be compliant with ACT human rights requirements; and/or A code of practice with associated enforcement powers for breach of the code – this might include the following matters: Professional and personal conduct requirements (eg acting with honesty, fairness and integrity; not engaging in conduct that is detrimental to the profession or contrary to the public interest); Professional expertise (eg awareness of the legal requirements that apply to one’s profession); Management of conflicts of interest; Record-keeping obligations; Complaints-handling processes; and Disclosure of commercial, business or financial arrangements with a third party.
How would a negative licensing scheme be implemented in the ACT?	No new legislation would need to be introduced, just an amendment to existing legislation. Although this is effectively the same
Questions to think about	Is there support for the introduction of a negative licensing scheme for property developers in the ACT? What should the minimum capability and professional standards of work and conduct be? If the ACT was to go down the path of a negative licensing model premised on restricting certain persons or entities from the profession due to certain characteristics, what characteristics should prevent a person or entity from carrying out development activity in the industry?

Registration Scheme

A registration scheme is an alternative to a licensing scheme. The ACT does not currently have a registration scheme in place for developers. A registration scheme is similar to a licensing scheme - it means that a person who is registered is lawfully able to carry out the activity for which they are registered and must comply with relevant standards, codes of practice, etc in carrying out their work. Below are some pros and cons with a registration scheme, as well as what it might look like in the ACT:

Registration Scheme

What is a registration scheme?	A person who is registered is lawfully able to carry out the activity for which they are registered and must comply with relevant standards, codes of practice, etc in carrying out their work.
Pros of registration scheme	Has many of the same benefits as a licensing scheme. Allows for benchmarks to be set with regards to qualifications, experience, competencies, and ongoing obligations relating to conduct and Continuing Professional Development. Provides increased information about practitioners to the public, consumers and employers. Gives regulators the ability to determine who can provide certain services in the first place and to take appropriate action in instances of breaches of requirements, which increases consumer protections.
Cons of registration scheme	Does not address project capacity. Requires new legislation.
What might a registration scheme in the ACT look like?	Might include some of the following elements: Eligibility criteria to undertake development activity; Minimum requirements to be a property developer, such as qualifications, experience and competencies; Fit to practice requirements; Disclosure obligations; Code of conduct; and Offences and associated penalties.
How would a registration scheme be implemented in the ACT?	New legislation would need to be developed. The standard timeframe for developing and passing legislation for this sort of scheme is 12-18 months.
Questions to think about	Is there support for the introduction of a registration scheme for property developers in the ACT? What should the minimum capability and professional standards of work and conduct be for a person to be registered? Should individuals or entities or both be required to be registered?

Disclosure Scheme

The Government is considering is a disclosure scheme, which would address the information constraint for consumers and community when it comes to the business structures used by those engaging in development activity and those ‘behind’ a development. Information constraints can arise when:

Consumers do not have access to adequate information;
The cost of obtaining information is prohibitive;
Consumers do not have the skills to collect or interpret the information; and/or
Consumers do not use the available information when they choose which products or services to buy.

A disclosure scheme could operate in addition to a licensing/registration scheme, or in place of a licensing/registration scheme.

Disclosure Scheme

What is a disclosure scheme?	·A disclosure scheme is designed to enable the community to understand enough about a company so that they can make their own informed decisions. Information provided through a disclosure scheme needs to be useful, clear, concise, consistent, balanced and unambiguous.
Pros of disclosure scheme	Can be more appropriate than a comprehensive licensing scheme when the main purpose of a regulation is to overcome a lack of consumer information on the product or service, or consumer rights and responsibilities. Can encourage entities to improve their standards because consumers can easily access information and make informed decisions. Addresses accountability and transparency, ethical behaviour and work practices, project capacity, and building quality and safety.
Cons of disclosure scheme	If the information disclosed is too technical or complex, then the scheme will generally be ineffective. Other legal frameworks may prevent the disclosure of certain information and other information may be commercially sensitive.
What might a disclosure scheme in the ACT look like?	The Government has not given any indication of what a disclosure scheme in the ACT might look like.
How would a disclosure scheme be implemented in the ACT?	New legislation would likely need to be developed. The standard timeframe for developing and passing legislation for this sort of scheme is 12-18 months.
Questions to think about	Should funding sources be included? Should it include any regulatory action? If so, against whom and what types of regulatory action? Should a disclosure scheme include the names of responsible individual Directors or controlling shareholders?

Documentation

Improving the quality of documentation provided by developers, including to contractors when preparing for work, to owners’ corporations, and to consumers, is another possible way to increase transparency. Below is some information about what this might look like in the ACT and some of the pros and cons:

Documentation

What documentation relating to development activity could be improved?	The quality of documents provided by developers to contractors when preparing for the work Documentation provided to consumers and owners’ corporations at handover of a project Quality of documents provided to consumers before sale or as part of the sale contract
Pros of improved documentation	Can lead to improved transparency and reduce the risk of there being a disconnect between ‘as-designed’ building documentation and the ‘as-built’ documentation.
Cons of improved documentation	Additional work for developers to prepare extra documentation.
What might improved documentation requirements in the ACT look like?	Introducing minimum voluntary standards for documentation to be provided as part of the works tendering process Requiring building approval documentation to be prepared by appropriate categories of registered practitioners Ensuring existing legislation supports a comprehensive suite of documents being provided at handover Introducing standard contract conditions relating to documentation for sale contracts Introducing documentation standards and requirements into a code of practice for developers Developing guidance materials for developers when producing documentation either as part of a works tender process or when providing to consumers before and after sale
How would improved documentation requirements be implemented in the ACT?	Current legislation would need to be amended.
Questions to think about	What are the objectives to be achieved for improving documentation in relation to developments? Are there other options the ACT Government should consider?

Project trust accounts and bond schemes

To help prevent builders, subcontractors and projects collapsing and to provide funds for defect rectifications, project trust accounts and bond schemes are two alternative models that the ACT Government is looking into. There are a few different types of project trust accounts which are described in more detail below, but they generally involve money being paid by developers into a trust fund of some kind ahead of the project beginning, and the money can then only be used for particular purposes (eg for use on the project):

Project Trust Accounts

Possible models for project trust accounts	Project trust accounts – This option requires payments and retentions to be deposited into a statutory construction trust fund established by the head contractor. Deemed trust model – Under this option, once retention monies are received by the head contractor, in law they are deemed to be held on trust for the benefit of subcontractors or for use on the project. General project amounts – Under this model, a distinct account or sub-account must be set up for each project. The funds would not necessarily be deemed in trust but only payments directly relating to that project must be made from the relevant account.
Pros of project trust accounts	Could be used to ensure any building defects that arise during construction or post-construction are able to be addressed without additional cost to the builder or home owner.
Cons of project trust accounts	May require developers to provide more upfront costs.
How would project trust accounts be implemented in the ACT?	Would likely need new legislation to be developed. The standard timeframe for developing and passing legislation is 12-18 months.
Questions to think about	Is there support for introducing project trust account legislation for the building and construction industry? Which model is preferred? How would the trust model fit in with the security of payments legislation?

Bond schemes are a possible alternative to project trust accounts. They are similar in that they would require developers to set aside money for a particular purpose, but that generally relates to building defects and warranty issues. The main issue that bond schemes deal with is where corporate entities no longer exist or no longer have funds to pay for rectifications where there are building defects that emerge:

Bond Schemes

What would a bond scheme look like?	Provides for money to be available to pay for rectifications even if the corporate entity that was established for the project no longer exists or has no funds.
Pros of project trust accounts	Could be used to ensure any building defects that arise during construction or post-construction are able to be addressed without additional cost to the builder or home owner
Cons of project trust accounts	There is a question as to whether bond schemes are able to resolve all building defect and warranty issues.
How would project trust accounts be implemented in the ACT?	Would likely need new legislation to be developed. The standard timeframe for developing and passing legislation is 12-18 months.
Questions to think about	Is there support for introducing a bond scheme for the building and construction industry? Should such a scheme mirror the NSW model which only applies to defects identified during a limited period after construction? Is a bond scheme preferable to project trust legislation? Should the ACT Government investigate insurance for the ACT (as NSW does, but is limited to buyers of residential apartments)?

Bringing developers into the regulatory chain of accountability for building work

Another option that the ACT Government is looking at is “bringing developers into the regulatory chain of accountability for building work.” At this stage what they are proposing in this space is somewhat vague, but below is some information about what the Government is considering:

Regulatory Chain of Accountability

What is the status quo?	Currently the ACT’s Building Regulatory System already contemplates the bringing of counterclaims in actions for damages or loss relating to defective building work and defective construction work. It also provides that if a court decides to award damages, they must give judgment against each defendant to the action who is found jointly or severally liable for the damage for the proportion of the total amount of damages that the court considers to be just.
What would bringing developers into the regulatory chain of accountability look like?	This would require: Defining and developing a chain of accountability; Identifying and defining the common responsibilities of a developer; Potentially piercing the corporate veil and accessing the players behind the company developer; Defining the common obligations that a developer has; Identifying the reasonable and proportionate level of accountability within the building and construction industry; and Legislative reform to bring the developer into the remit of the regulator.
Pros of bringing developers into the regulatory chain of accountability	Would mean that the regulatory chain of accountability more accurately reflects the fact that developers have become more involved in decision making processes during the construction phase of a development.
Cons of bringing developers into the regulatory chain of accountability	May mean that the developer and builder have equal levels of accountability and responsibility when this does not necessarily reflect the reality. Builders can already join a developer to any proceedings relating to the development. Legislation would take 12-18 months to develop.
Questions to consider	Should the developer and a builder have equal levels of accountability and the same level of responsibility in the regulatory chain of accountability? Are existing common law processes that enable a builder to join a developer to any proceedings relating to the development sufficient?

Amendments to the ACT’s building regulatory system

The final regulatory option that the ACT Government is looking at is a review of statutory warranties, and possibly extending statutory warranties to developers.

Amendments To Building Regulatory System

What would these amendments look like?	The ACT Government is planning a review of statutory warranties as part of its future building reform program. NSW has recently introduced a requirement that developers are subject to statutory warranties under its legislative framework for building and construction work, as well as a requirement that developers are now liable for the quality of residential apartment buildings.
Pros of statutory warranties	Greater assurance for owners and occupiers of buildings and residences that the quality of the craftsmanship is high. Owners can ensure any defects will be rectified for a period of several years (eg for builders in the ACT, the statutory warranties are 6 years for major defects and 2 years for other (non-major) defects)
Cons of statutory warranties	Additional liability for developers Possible lack of clarity for what developers will be held responsible for (in contrast to builders, for example)
Questions to consider	Should developers be subject to statutory warranties in the ACT? Should developers be subject to rectification orders in the same way as other construction occupations are?

Non-regulatory options

The ACT Government is also considering non-regulatory possible options. These may be in addition to or in replacement of regulatory options, and are:

A voluntary code of conduct (could either be developed by industry or by government);
A developer rating tool (possibly similar to the NSW independent Construction Industry Rating Tool (iCIRT));
Educative tools for both the community and developers; and
Promoting the security of payment to industry.

There are some general pros and cons of non-regulatory options (in contrast to the regulatory options described above):

Non-Regulatory Options

Pros of non-regulatory options	Generally voluntary, and therefore more of a form of self-regulation rather than direct Government regulation. This could still lead to increased standards across the occupation, without harsh penalties for noncompliance. More proactive than reactive – eg educative tools for developers to help foresee issues before they crop up.
Cons of non-regulatory options	Due to their voluntary nature, non-regulatory options are not able to be enforced by the Government. This may mean that developers simply do not engage with the non-regulatory options, and that any time and money invested by the Government is a poor use of resources.
Questions to consider	Can non-regulatory, non-mandatory options achieve the same benefits as regulations? What sort of non-regulatory option(s) are considered to be most effective?