High rise owners face bill for replacing dangerous cladding
Australian Financial Review
by Duncan Hughes
15 September 2017
Apartment owners in buildings taller than three storeys will have to
pay to replace dangerous cladding themselves because of a legal
loophole that means neither builders nor insurers are not liable.
The loophole in a 2003 agreement between state governments and the
industry could be used by developers and insurers to shift the
potentially huge cost of replacing dangerous cladding on high-rise
buildings onto owners or taxpayers.
A 'catastrophe' fund negotiated in the same agreement, by which
builders would fund cash-strapped owners in a crisis, is empty because
state governments never enforced mandatory contributions, industry
The agreement was first negotiated by the NSW and Victorian governments
in the wake of the collapse of HIH Insurance and was subsequently
adopted nationally under the Council of Australian Governments.
The prospect of apartment owners of hundreds or thousands of buildings
higher than three storeys having to pay costs totalling hundreds of
millions to replace faulty cladding is expected to rock a residential
apartment sector already nervous about over-supply and falling demand.
Lenders are also expected to question the capacity of off-the-plan
buyers' to pay additional refurbishment costs before agreeing to final
funding of a purchase, according to industry specialists.
"Purchasers have more consumer protection when they buy a fridge or
microwave than purchasing a $500,000 apartment," warns Sahil Bhasin,
national general manager of Roscon Group, which advises on strata
"The question of who ultimately pays for the repair and/or
rectification of properties affected by flammable cladding will take
years to answer," said Simon Black, a partner with Barry.Nilsson
"In the short term, it seems increasingly clear that buildings and
apartment owners will be the most immediately impacted," Mr Black said.
The 2003 agreement between developers and the NSW and Victorian
governments followed the collapse of HIH Insurance with losses
totalling more than $5 billion.
The mandatory requirement for builders of high-rise residential buildings to provide builders' warranty insurance was removed.
"Owners of high-rise dwellings will have access to a last resort
catastrophe fund which is to be funded by builders and insurers," the
There is no evidence a fund was established or contributions made, according to industry representatives.
"Governments conduct related to home warranty for consumers is
scandalous," said Phil Dwyer, national president of the Builders
Collective of Australia, a lobby group to improve building standards
A spokesman for Richard Wynne, Victoria's Minister for Planning, confirmed the agreement.
He said "protection of consumers and property owners" is a top priority
of the Victorian Cladding Taskforce, which was set up by the government
in July to investigate the extent of non-compliant cladding on
The absence of a catastrophe fund, legal disagreement about
responsibility and uninsured owners being unable to meet repayments
could lead to tax payers having to foot some of the bill, industry
"This will raise issues for high rise apartment buyers," said Elishah
Lusi, director of Direct Property Group, a real estate agency that
specialises in inner-city residential accommodation. "How will they
know which apartments are impacted?" she said.
The number of new apartments due to settle over the next two years is
approaching the average number of apartment sales during the past five
years, which is a record high, according to CoreLogic, which monitors
Much of the focus about dangerous cladding has been on high rises in the Melbourne and Sydney central business districts.
But the biggest problems could be in metropolitan outer suburbs where
buildings under 25-meters, or seven storeys, have mushroomed during the
past five year property boom.
The number of buildings with dangerous cladding is being investigated
but best guess initial estimates is that it will be thousands. There
are estimated to be more than 5000 buildings in Melbourne alone.
"For now, owners will bear the brunt of immediate rectification costs
but should have one eye firmly on their rights of recovery from third
parties," said Mr Black.
Insurers are introducing cladding exclusions or imposing high premiums and excesses, he warns.
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