Combustible Cladding: A Resolution in Sight?

Combustible cladding in apartment buildings has caused significant damage globally. In 2017, 72 people died in the Grenfell Tower tragedy in London sparking a global concern regarding the use of combustible cladding.

The Building Amendment (Registration of Building Trades and Other Matters) Bill 2018 (Vic) (Bill) seeks to address the repair and replacement of combustible cladding in apartment buildings.

The Bill

The key elements of the Bill are as follows:

1. The Minister for Planning will be given the power to prohibit the use of a "high risk" external wall cladding product if it presents a serious risk to human life or property which will be published in the Government Gazette.
2. The second reading speech notes that builders who fail to comply with any prohibition will be liable under the Building Act 1993 (Vic) for a fine of up to $400,000 or five years’ imprisonment.
3. Introduction of Cladding Rectification Agreements (CRA).

Cladding Rectification Agreements

A CRA is an agreement between a council, owner or owners' corporation and a lender to provide access to low cost finance to fund the rectification of non-compliant cladding.

It is important to note that a CRA can only be utilised to fund cladding rectification of a cladding type which has been specified by the Minister for Planning in accordance with point 1 above.

How does a CRA work in practice?

Once a CRA is agreed between the parties:

1. The lender will advance the funds to the owner or owners' corporation to allow for the undertaking of the rectification works.
2. Councils will then levy a Cladding Rectification Charge (CRC) on the affected property and use it to repay the lending body, the principal amount plus any agreed interest accrued. Councils are able to include an administrative charge to recover costs.
3. The loan amount may be repaid in equal instalments over at least a ten year period.

Difficulties in implementing a CRA

Whilst the CRA provides a mechanism to rectify the combustible cladding, it may cause disquiet within owners' corporations for the following reasons:

1. The loan attaches to the property and transfers to any subsequent purchaser.
2. 75% of owners' corporation members must vote to enter a CRA.
3. The CRC takes priority ahead of existing mortgages and would require consent of any existing mortgagees.
4. Owners and owners' corporations must provide the council with relevant financial details of:
   • Mortgages;
   • Taxes;
   • Rates; and
   • All charges owing on each lot,

to ensure control over debt levels so as not to diminish the security of existing mortgages.

Impact

Despite the Government failing to address the underlying issue of who is liable for the installation of the cladding, the proposed introduction of CRAs will likely assist owners and owners' corporations in rectifying combustible cladding by providing a practical solution to the issue. However a number of hurdles still remain to be overcome before an owner or owners' corporation can implement a CRA.

If you have any queries in relation to your rights as a builder, owner or owners' corporation in relation to contractual rights or any other commercial, business or property matter, our team at Burke Lawyers is able to assist.

Please contact our Property & Development team if you have any queries.