An Australian first: The ACT Property Developers Bill 2023 - it’s hard to believe this is real

Overview

The Bill enshrines:

These regimes have been introduced to combat ‘developers that do the wrong thing’ and to ‘give Canberrans the confidence that their homes will be built to the highest standards by trustworthy professionals’.

However, the Property Council of Australia has suggested that the Bill ‘will act as a deterrent to the creation of homes and lead to an increase in housing costs’.

Key concepts

The triggers for a licence

Rather than requiring a developer of residential property to take out a licence directly, the Bill instead amends other laws to say that if particular trigger events occur then a licence will be required.  A person will need to obtain a licence to:

• apply for development approval in relation to certain residential building developments under the Planning Act 2023 (ACT);
• apply for a building approval, building commencement notice or certificate of occupancy in relation to certain residential building work under the Building Act 2004 (ACT); and
• sell, or advertise the sale of, residential property off-the-plan under the Civil Law (Sale of Residential Property) Act 2003 (ACT).

The Bill confusingly diffuses the requirements for a licence throughout other laws.  The Bill itself does not impose the requirement for a licence.  The Bill merely deals with how to apply for a licence and how the licence is administrated.  This seems very strange and will mean understanding the requirement for a licence will be hard to work out among the inexperienced. Most likely people will be caught when they lodge an innocent DA.

It will usually be sufficient if a related entity of a developer holds the licence.  But that means that a parent company’s licence can be put at risk through the subsidiary’s involvement in the residential development.  So, decisions will need to be made as to whether a parent company will make available its licence for use by a subsidiary.  One presumes that for joint ventures there will need to be a new licence applied for, rather than relying on the licence of a related entity.

A licence will be for a term of 7 years, so this will alleviate the need for regular renewals.

The need for a licence with a DA

Under the Planning Act ‘residential building development’ is to be defined as:

• building or altering a residential building on land; and
• for the purpose of building a residential building on land:
  • undertaking earthworks or other construction work on or under the land;
  • subdividing or consolidating the land;
  • varying a lease relating to the land (other than a variation that reduces the rent (payable to a nominal rent)); or
  • demolishing a building on the land.

The Planning Authority must not accept a DA in relation to a proposed residential building development (or an application for a significant amendment to a residential building development approval) unless:

• the proponent for the development, or a related entity of the proponent, holds a licence; and
• the relevant licensee is not restricted under their licence from undertaking the development.

It is very odd to require a licence to lodge a DA to merely subdivide or consolidate land or to vary a Crown lease.  And how will the relevant intent be evident to the Planning Authority who is required to be the DA licence police?  Presumably the Planning Authority will initially be relying on a lodgement declaration from the applicant.   The applicant for a licence will need to allow several months to prepare for lodgement of a licence application, as well as allow time for assessment and the approval to issue a licence or a conditional licence.  Developers who do not already have a licence will need to budget for this time and cost in their project program.

The need for a licence under the Building Act

Certifiers will not be able to consider building approval applications, for residential building work, unless each person arranging for the building work to be carried out or a related entity of the person:

• holds a licence; and
• is not restricted under their licence from arranging for the work to be carried out.

The construction occupations registrar will not be able to issue a certificate of occupancy for residential building work unless the registrar is satisfied that:

• the residential building work was carried out or arranged to be carried out by a person who holds a licence or whose related entity holds a licence; and
• the relevant licensee is not restricted from carrying out the residential building work.

The Bill looks to cover the field in terms of where a developer touches the Building Act regime in order to ensure that a licence is obtained.  In this way the Bill appoints the building certifier and the construction occupations registrar as the building laws licence police (whether willingly or unwillingly).

The need for a licence when selling off the plan

When selling residential property, it is important to understand what type of contract method is being used.  An ‘off-the-plan contract’ means a contract for the sale of:

• a unit for residential use before the units plan for the unit is registered;
• a residence (other than a unit) on land identified in the contract before the certificate of occupancy for the residence is issued; or
• vacant land for residential use identified in the contract before the Crown lease for the land is registered.

A seller will commit an offence if 2 parties enter into an off-the-plan contract and either:

• the seller does not, or any related entity of the seller does not, hold a licence; or
• the seller or a related entity holds a licence that restricts the seller or related entity from entering into the off-the-plan contract.

A person will also commit an offence if:

• the person publishes an advertisement for the sale of premises under an off-the-plan contract; and
• the advertisement does not contain the licence number of the proposed seller or a related entity of the proposed seller.

There is a similar offence for those who include a statement in an advertisement for the sale of premises under an off-the-plan contract that is false or misleading regarding the licence.

Essentially, the Bill looks to require a seller to have a licence before selling off the plan or before the building is completed.  It seems odd that a licence is not required in the instance where a dwelling is sold after it has been built.  More likely however, the other circumstances for obtaining a licence will have been triggered before such a sale has occurred.

Before a buyer and seller can enter into an off-the-plan contract, the seller must give the buyer a disclosure statement which includes, amongst other things:

• (if the seller or its related entity is required to hold a property developer licence), the licence number; and
• the fixture and fittings included in the sale.

If a disclosure statement is not provided then the buyer may rescind the contract for sale.

Licence application process

Applications for development licences must be made to the ACT Property Development Registrar (Registrar) in writing. Section 15(2) of the Bill requires that applications include two key elements:

Other elements and qualifications may be added by regulation in due course.  We anticipate that applicants will need to match or surpass a minimum rating in its rating report (eg an iCert 2 gold star or 3 silver star rating) to be able to apply for a licence.  

Defect rectification insurance

It is also possible that defect liability insurance may be included as an obligation for potential licensees, or at least it would be highly desirable to be able to get a licence.

Defect rectification insurance is an insurance product not widely used in Australia.  We understand there is at present only one insurer who offers the product.  More mainstream insurers are reluctant to offer the insurance for fear there could be millions of dollars at stake for certain projects that are not properly assessed.  We understand the conditions of insurers themselves are extremely onerous and will need to be factored in by developers who wish to take out this form of insurance.

Most importantly, defect rectification insurance does not insure the developer.   Rather, the insured parties are the resident and owners corporation.  It is seen as a plus by potential buyers who will have the comfort of knowing that their purchase is insured against building defects.  Those buyers though will be paying for the insurance through the price for their unit.  Such insurance while projecting a favourable feature by buyers is also a product that comes with some degree of caution by the developer.  Insurers are professional litigators so the developer cannot be surprised to see claims on the policy by residents quickly turn into litigation claims from the insurer and so on down the line of responsibility.  Dispute lawyers are not likely to be disappointed with the passing of the Bill in its current form.

Rectification orders

Relevant to the rectification orders regime is the definition of “property developer”.

Definition of “property developer”

Section 49 of the Bill defines a ‘property developer’ as any of the following in relation to residential building work:

• a person who contracts or arranges for, or facilitates or otherwise causes (whether directly or indirectly) the building work to be done;
• the owner of the land on which the building work is undertaken at the time the building work is done;
• the principal builder of the building work; and
• for a residential building under a units plan – the developer, as defined in the Unit Titles Act 2001 (ACT) in relation to the units plan.

This definition, though extraordinarily wide, only applies to part 6 of the Bill (ie that part dealing with rectification orders).

The Bill also proposes to insert a new definition for ‘property developer’ in the Building Act 2004 (ACT) which is limited to subparagraphs (a) and (b).

Under the Bill there will be multiple parties who are potentially regarded as the property developer for the one project.  How they (and their directors) will each react to being liable for building defects will be a confusing jumble of liabilities.  Courts ultimately will be asked to sort out the jumble and point the fingers at those parties who are around and solvent.  Indeed, those parties who have the greatest net asset worth will end up holding the baby.

Subparagraph (b) will mean that an owner of land will be regarded as a property developer whether or not the owner is actually carrying out the development of their land.  In this way, an owner/investor under a development agreement with a developer will be regarded as a property developer.  Subparagraph (b) also allows for ordinary individuals to be regarded as property developers who will require a licence for residential development.  Given the recent introduction of the Territory Plan 2023 (ACT) and subparagraph (d), it is possible that a person who subdivides their RZ1 block into dual occupancy housing and sells the second dwelling could be captured as a property developer and not only require a licence (under Part 3 of the Bill) but also may be subject to a defect rectification order (under Part 6 of the Bill).

Both the Bill and Building Act definitions allow for a person to be included and excluded from the definitions by regulation.  Currently, no draft regulations have been circulated but we anticipate that an exemption could be created based on the maximum number of residential properties worked on in a certain amount of time (eg no more than the development of 3-4 dwellings each year). 

The rectification orders regime (and retrospectivity)

The definition of “serious defect” is critical to the rectification order regime.  Without going into the definition in detail, a “serious defect” includes a defect attributable to a failure to comply with a BCA performance requirement or an Australian Standard, or a defect attributable to a defective design or defective work causing an inability to live in or use part of the building.

If the Registrar reasonably believes there is a serious defect in a residential building, or if residential building work was or is being done in a way that could result in a serious defect, section 51(2) of the Bill allows the Registrar to issue a written notice to the relevant developer (Notice).  The Notice will outline the details of the proposed rectification order and give the developer a chance to respond to the proposed order.

Once a Notice has been issued and any response to the Notice has been considered, section 52 of the Bill allows the Registrar to issue a rectification order.  The rectification order can specify one or more of the following:

• action to be taken to rectify the serious defect or possible serious defect within a certain timeframe (which can’t be less than 1 month after the rectification order is given) (Required Rectification Work);
• information to be given to the Registrar about the Required Rectification Work; and
• any other thing reasonably necessary to ensure the Required Rectification Work is completed.

However, rectification orders can only be made before the latest of the following:

The starting date of the ‘10-year period’ is defined in section 52(6) of the Bill as the later of:

• the day the residential building work resulting in the serious defect or possible serious defect was finished or halted; or
• the day certificates under sections 69, 71(2), 72(2) or 73 of the Building Act were issued for the building containing the serious defect or possible serious defect.

Section 47 of the Bill makes it clear that the rectification orders regime is intended to have retrospective application, meaning it will apply to work carried out both before and after commencement of the Bill.

This effectively means the Bill allows rectification orders to be given retrospectively for buildings that were built up to 10 years before the commencement of the new law.  So, rectification orders can apply to both new and older buildings.

Section 57 of the Bill makes it an offence not to comply with a rectification order.

The application of the 10-year look back principle creates some curious anomalies.  For example:

• a residential building was constructed 9 years ago that has a serious defect;
• the serious defect becomes apparent 8 years after the build was completed (ie 1 year ago); and
• the warranty period to rectify defects associated with most materials for the build was 6 years, so they have now expired.

In this scenario, there is the possibility that the developer will be exposed with no recourse to those responsible for the serious defect.  With the expiration of the warranty and the 6-year limitation period for the duty of care breaches and actions under the building contract, the developer is potentially exposed for the liability for the remaining 4 years of the 10 year look back period.

Developers who thought that they needed to only worry about complying with the new law for new projects will be very surprised to learn that they could also be liable for claims relating to their pre new law projects as well.  Retrospective laws are rarely good laws from a public policy perspective.

Section 56 deals with rectification orders given to multiple parties.  As can be seen there will be multiple “property developers” for each development.  Orders issued to 2 or more property developers will apply jointly and severally to the property developers, so they will not be able to escape the application of the orders by pointing the blame at one another.  The expectation is that the parties will be able to continue their actions against each other while the defects are being rectified by one or both of the parties.  It is not clear whether the parties maintain their other rights against each other (eg under the construction contract or development agreement) or whether those rights as against each other are overridden by the liability under the new law.  It is thought that the parties will retain their non Bill rights against each other (in contract and tort).

The Bill creates a minefield of liabilities and possible multiple claims between many parties arguing about who is to blame and who is required to rectify serious defects.  One can assume though that the party with the deepest pockets will be the prime liability candidate.

Personal liability of a director

This area of the Bill is the most controversial.

If the Registrar intends to issue or issues a rectification order to a corporate property developer that is deregistered, subject to a winding-up order or in administration, receivership or liquidation, section 55(2) of the Bill allows the Registrar to hold directors of the developer personally liable for the order.  The Registrar must consider if a latent defects insurance policy or other similar insurance policy covers the Required Rectification Work before deciding if making a director personally liable is appropriate.

This power can create several unfavourable outcomes for companies and their directors:

• if a residential building was built 9 years ago and a rectification order is issued to rectify a serious defect, a director could be held personally liable if the corporate property developer has been wound up.
• in this same scenario, a director could be held personally liable even if they were not a director at the time the building was built.  Section 55(2) of the Bill captures people who become directors of the corporate property developer after the relevant residential building work was completed or halted.
• subjecting a corporate property developer to one or several lawsuits is an effective tactic for third parties to make directors personally liable.  As section 55(1) of the Bill states that the developer can be wound up, deregistered, or placed in administration, receivership or liquidation after a rectification order is issued, burying the developer in lawsuits can force them into a situation where directors can be personally liable for the order.

This power allows the Registrar to pierce the corporate veil, a remedy that is typically only available in very limited circumstances.  It is a fundamental principle that a corporation is a separate legal entity from its directors and shareholders.  The company shields the principles and company officers (for the most part) from personal liability to encourage risk taking and to allow projects to not be undertaken in a personal capacity.  For example, piercing the corporate veil has been permitted when Australian courts have found that the company functioned as a mere agent of its directors or shareholders[1], or if the company was used to evade a legal or fiduciary obligation.[2] Again, whether this is good public policy is highly debateable.  It is one thing to say that people in the best position to prevent building defects should be those held responsible, yet this seems to overlook the reality that many innocent persons will be held to account for the questionable practices of others or their mistakes.

This aspect of the Bill will lead many directors to consider their position on boards of developers.  Many will consider the risk of personal liability is too great and they will resign.  Of course, what happens to an entity if all the directors resign?  Those dealt the harshest treatment are not-for-profit and charitable organisations who are developers by virtue of undertaking their missions.  Community housing providers will be directly exposed to the reality of the Bill.  Directors of these entities will ask themselves is it worth the risk of remaining a director when they are mere volunteers (mostly) trying to help the communities in which they live.  What is in it for a person to be a director of these bodies?

Even more sobering is the prospect that even if a director decided to resign, this does not limit their liability for prior projects dating back up to 10 years from the new law commencement.  This seems an inherently unfair aspect of the Bill (on top of many others).  Directors could be held responsible for defects they did not even know about when they were a director many years ago.

A practice will arise, whereby residents and owners corporations will embark on a strategy to wind up a shell developer entity so they can access the directors personally.  While developers will be motivated not to wind up or deregister their companies after a development is completed, the residents will be motivated to do the opposite and seek to leverage off the threat to directors of personal liability.  The new law does not guarantee there will be any assets held by either the developer company or its directors, so we query what is the overall benefit to the residents in chasing assetless parties.  Bankruptcy may be a strategic reality for some directors.  The risk of director liability is a real threat to both the director of a not-for-profit developer and a director of a listed property developer.

Decisions to invest, or not to invest, in residential developments in the ACT will be seriously considered at boardroom tables.

Other surprises

Reverse onus of proof

The Bill inserts a new division 6.2B into the Building Act.  New section 89F(3) creates a presumption that any defect identified by the affected party, within the first 2 years post building completion, is indeed a defect and able to be rectified unless proven otherwise.  This places the onus of proof on the builder and/or developer to show that no defect exists.  This is a remarkable concept and places the resident in a very powerful starting position in any claim or threat of a claim for defect rectification.

Statutory duty of care

More importantly though, the Bill notably includes new section 89F(4) into the Building Act. This section creates a statutory duty of care by allowing affected parties to claim damages from the builder and the property developer for any reasonably foreseeable loss or damage resulting from a defect.  A defect here is much wider than the “serious defect” relevant for rectification orders.

Given that both the builder and property developer can be added to a claim for damages, we anticipate that claims will add both the builder and property developer to the claim instead of one so the claimant can cover more bases.  It will then be open to the parties to try and allocate responsibility for the defect and by extension the damages if the claim is successful.

It is not clear whether this statutory duty of care to rectify defects is limited to claims made within 2 years after building completion, like for the reverse onus of proof for defect claims.  We expect this issue to be battled out in court.  A conservative view of section 89F(4) would suggest that the liability is not restricted to just the 2 year period and so would be subject to the statute of limitations 6 year limit.

Contrary to the rectification orders’ 10 year retrospective look back, section 89F(6) clarifies that the statutory duty of care only applies to residential building work carried out after the commencement of the new law.  Nor will the duty apply to building work under a building contract entered into before the commencement of the new law.

Next Steps

The Bill is expected to be examined by a committee of review in the Legislative Assembly and will then be debated in the first half of 2024.  The ACT Government will continue to engage with local industry and key stakeholders to progress the Bill as part of a broader package of reforms for the building and construction industry.

Despite the lobbying efforts of industry bodies, it is unlikely that the Bill will be amended.  With the support of the ACT Greens and the ALP it is expected the Bill will be passed into law by the Assembly  before the election due in October 2024.

How the Bill reconciles its objectives in a time when there is a national housing affordability and supply crisis is an interesting policy conflict.  It seems a strange endeavour when the stated goal of the ACT Government is to deliver 100,000 new dwellings into the ACT by 2050.

We will continue to monitor the progression of the Bill and its related documents.