NSW Government set to overhaul the construction industry with new building reforms

The NSW Government’s ambitious agenda for building legislation reform has taken another step forward, with the release of three Bills for public consultation as part of the Construct NSW transformation strategy which focuses on building “trustworthy buildings” which are fit for purpose in order to restore consumer confidence in the construction industry.

After an initial focus on the residential building sector, the NSW Government has now set its sights on the commercial sector. It is proposing to regulate, for the first time, the builders and designers undertaking commercial work. This will involve a new licensing scheme, as well as expanding the Building Commissioner’s powers to commercial buildings. This next phase of reforms is also focused on strengthening consumer protections and the regulator's enforcement powers, as well as making all relevant people in the supply chain responsible for their work (including suppliers of building products).

The NSW Government is consulting on the following new pieces of legislation:

• the Building Bill 2022 will replace the Home Building Act and regulate all building work in NSW (residential and commercial), including licensing of practitioners and consumer protection
• the Building Compliance and Enforcement Bill 2022 will replace the Residential Apartment Buildings Act and expand regulatory compliance and enforcement powers for the building and construction industry in NSW
• the Building and Construction Legislation Amendment Bill 2022, and the Building and Construction Legislation Amendment Regulation 2022 will amend various existing Acts governing the building and construction industry.

Building Bill 2022

The purpose of the Building Bill is to create end-to-end accountability for building work in NSW and consolidate and regulate key elements of the building and construction industry including:

• what building work is intended to be regulated and who should be licensed to perform it;
• the approval process for building work;
• fire safety requirements for building work;
• key consumer protections that have been preserved for residential building work; and
• limiting the work owner-builders will be able to carry out and introducing tighter restrictions on who is able to apply for an owner-builder permit.

Key features of the Building Bill

The Building Bill will replace, incorporate and build on the regulatory features of the Home Building Act 1989 (NSW) (HBA). Key features of the Building Bill include:

• expanding the definition of “developer” to align with the definition currently used in the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) and thereby expanding the parties liable to consumers for defective building work;
• expanding licensing requirements to the commercial sector, as well as to designers, engineers and building inspectors of residential and commercial buildings (rather than just residential builders or those carrying out specialist work);
• transferring the building and subdivision certification under the current Part 6 of the Environmental Planning and Assessment Act 1979 (NSW) (EP&A Act) to the Building Bill (thereby bringing all certification of buildings post development consent into the building system rather than the planning system);
• introducing a new regulatory scheme for pre-fabricated and manufactured housing;
• extending consumer protection obligations to manufacturers of offsite construction and pre-fabricated buildings; and
• mandating maximum progress payments per stage for home building work and the process for documenting variations for home building work.

While the Building Bill will govern residential and commercial buildings, the NSW Government has determined that it will not it extend it to infrastructure / civil construction works, though this is subject to consultation.

Duty of care

• The Building Bill will incorporate and consolidate the duty of care provisions from the Design and Building Practitioners Act 2020 (NSW) (DBP Act) and the EP&A Act into one piece of legislation;
• the duty of care has been explicitly expanded to all types of building work as well as subdivision work. It has also been expanded to include inspection and certification of such work. This means that designers and builders of non-residential buildings or carrying out subdivision works will also owe duties of care to future owners of those buildings (although that is already partly the case following the decision in Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624). It also means that certifiers will become liable for economic loss caused by defects to future owners.

Statutory warranties

The Building Bill will expand the existing statutory warranty scheme under the HBA including by:

• more clearly making developers liable to provide statutory warranties to future owners and broadening the range of parties that are considered a developer;
• extending to supply and assembly of off-site components;
• aligning the definition of “major defect” with “serious defect” under the RAB Act; and
• expanding the definition of “owners” who are entitled to the benefit of the warranties, including in respect of holders of 99-year leases.

The NSW Government is also considering extending the timeframe for warranting serious defects from 6 years to 10 years and from 2 years to 3 years for other (minor) defects.

However, unlike the majority of the Building Bill, the statutory warranty scheme will continue to only apply to home building work, and not other types such as commercial buildings.

Building and Compliance Enforcement Bill 2022 (BCE Bill)

The purpose of the BCE Bill is to create a single legislative framework for the regulation of building compliance and enforcement. The BCE Bill’s compliance and enforcement powers will be applicable to a number of building related Acts, which will be deemed to be ”building enforcement legislation”.

The BCE Bill will replace the RAB Act and expand the existing powers under the RAB Act (which are currently limited to Class 2 buildings) to cover all building work across NSW.

Other key features of the BCE Bill include:

Expanding existing powers to other classes of building

• expanding notice requirements for developers and prohibition order powers to apply to any notifiable building ((currently limited to Class 2 buildings and any building work requiring a building declaration under the DBP Act). However, the NSW Government is separately proposing to expand the DBP Act to Class 3 and 9c buildings under the Building Legislation Amendment (Building Classes) Regulation 2022, in which case these powers would expand to cover those building classes; and
• expanding building work rectification orders and stop work orders to apply to all classes of buildings rather than just Class 2.

Empowering the regulator

• strengthening powers for authorised officers to investigate, gather information and enter premises;
• empowering the regulator to take action for instances of non-compliance with the building enforcement legislation, including:
  • expanding the power to issue stop-work and rectification orders to all building enforcement legislation;
  • entering into enforceable undertakings;
  • general compliance notice powers to remediate building work and bring it into conformity with the required standards; and
  • powers in respect of the maintenance and repair of common property by owners corporations.

Establishing deterrence and enforcement powers

• implementing a consistent disciplinary action process for all current and former licence-holders;
• introducing a demerit points scheme and increasing penalty offences for industry participants who commit serious offences; and
• powers to pierce of the corporate veil to hold directors and other individuals in positions of influence personally liable.

In addition, it is proposed to have the existing levy on developers for building work (currently under the RAB Act) reviewed by the Independent Pricing and Regulatory Tribunal every 3 years.

Use of voluntary undertakings as compliance tool

The Office of the Building Commissioner has flagged a greater focus on voluntary undertaking as a compliance tool, to avoid costly compliance actions for the regulator and to instead achieve a collaborative approach to resolution of defect issues.

This is consistent with the BCE Bill, which expands the regulator's ability to accept undertakings from a range of industry participants including owners corporations, registered practitioners and certifiers in respect of a large range of building issues. Of note is the proposed ability to enter into undertakings with owners' corporations for failure to carry out maintenance or repair work.

Building and Construction Legislation Amendment Bill 2022 (Amendment Bill) and the Building and Construction Legislation Amendment Regulation 2022 (Amendment Regulation)

The Amendment Bill and the Amendment Regulation aim to achieve the following outcomes:

Ensure building products are safe and suitable through amending the Building Products (Safety) Act 2017 (NSW) to:

• impose responsibility on all participants in the building product supply chain (e.g. directors, designers, manufacturers, importers, suppliers and installers) to ensure building products are compliant and fit for purpose;
• require persons in the building supply chain to provide certain information to the next person in the chain (including about the product's intended use, its safe use and installation instructions);
• restrict the supply of non-conforming building products (NCBPs);
• requiring building participants to report the use of an NCBP; and
• empower the Secretary to issue building product warning notices, building product supply bans and building product recall notices in respect of NCBPs, as well as trading bans for repeat offenders.

These amendments are based on lessons learnt in Queensland, adopting elements of the 2017 reforms to the Queensland Building and Construction Commission Act 1991 (Qld).

Enhance rectification of strata buildings through amending the Strata Schemes Management Act 2015 (NSW) to:

• allow inspectors to raise new defects in its final inspection report, and give the owners corporations access to the building bond if the developer does not rectify defects within a 90 day period;
• extend the maturity date for the bond to 4 years to cover any additional period where defects are being rectified;
• making requirements for the appointment of Authorised Professional Associations and building inspectors more transparent; and
• penalising individuals who falsely represent they are a building inspector.

Improve professional standards and competencies through amending the Building and Development Certifiers Act 2018 (NSW) (BDC Act) to:

• provide more flexible pathways to registration for industry practitioners by allowing the assessment of certifiers by authorised industry bodies;
• standardise continuing professional development requirements; and
• enable inspectors to hand out education and training notices instead of issuing a penalty infringement notice for lower-risk offences.

Ensure prompt and fair payment through amending the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOP Act) to:

• provide more transparency to owner occupiers receiving SOP Act claims by requiring the claimant to attach a Homeowners Notice providing information about the claim process and consequences of not responding;
• lower the threshold for retention money in trust accounts from $20 million to $10 million to capture more construction contracts (and subcontractors) and protect against insolvency;
• allow for claimants and respondents to seek a merit review of an adjudication decisions by another adjudicator (on the basis that no new issues may be raised);
• require respondents seeking review of an adjudication claim to pay the undisputed amount to the claimant and pay the disputed amount into a trust account until the review is finalised; and
• allow adjudicators, at their discretion, to arrange for the testing of, and engage experts to investigate and report on, relevant matters for the adjudication.

Promote robust regulatory intervention by:

• amending the EP&A Act to enable certifiers to issue a “written direction notice” to rectify serious defects at an earlier stage in the construction process;
• amending the RAB Act such that the definition of “serious defect” captures failures to comply with performance requirements of the National Construction Code rather than just the Building Code;
• allowing Fair Trading to attempt to resolve disputes under the HBA for strata building work before the appointment of a building inspector under the strata building bond scheme;
• amending a range of building legislation to clarify that the right against self-incrimination does not apply to corporations;
• allowing the regulator to recover its investigation costs;
• amending the BDC Act, DBP Act and HBA to address illegal phoenixing activity to:
  • define “intentional phoenix activity”; and
  • place a duty on registered practitioners to take reasonable steps to ensure persons with whom they do or maintain a business association are not and have not been involved with illegal phoenixing activity in an industry relating to building and construction.

A staggered approach to commencing the building reforms

Following a process of public consultation, the Bills need to be passed by both Houses of Parliament, and we expect:

• the Building Bill and BCE Bill will not commence until 2024 (with some provisions like the new licensing scheme coming into effect over a 2-5 year transitional period); and
• the changes proposed by the Amendment Bill and Amendment Regulation will be made to existing legislation and commence operation before they are incorporated as part of the new Building and BCE Acts in accordance with a staggered timeframe.

The impacts on the NSW building sector

Key issues for:

Developers include:

• expanded liability in respect of defective building work for all building types, not just residential;
• the possibility of a 10 year warranty period for serious defects in homes (rather than 6 years);
• Class 3 or 9c buildings may become subject to the requirements of the OC audit regime and requirements of the DBP Act; and
• building bonds under the Strata Scheme Management Act may need to be held for up to 4 years.

Builders include:

• an expanded duty of care in respect of economic loss caused by all building types;
• new licensing requirements for commercial and non-residential buildings;
• the possibility of statutory warranties for home building work for up to 10 years for serious defects (rather than 6 years);
• new obligations regarding payments and variations in home building contracts; and
• additional obligations to hold retention money in trust under the SOP Act and new rights to have adjudication decisions reviewed.

Designers include:

• new licensing requirements for commercial and residential buildings that are not Class 2; and
• an expanded duty of care for defective building work including for all building types.

Certifiers / building inspectors include:

• new licensing requirements;
• a new duty of care in respect of defective building work in any building type; and
• enhanced powers to issue rectification orders or require training.

Manufacturers of building materials or of pre-fabricated or offsite buildings include expanded liability to consumers and obligations in respect of home building contracts.