Rebecca Kent
Hello, podcast listeners. We're talking cladding in this episode of the perspectives podcast and we're tripling up on insights with our guests. We've got David Bannerman who is principal at Bannerman's lawyers. Hi, David.
David Bannerman
Thanks for having us, Rebecca
Rebecca Kent
Duane Loader, a project director at JLL.
Duane Loader
Great to be here.
Rebecca Kent
And Leif Golder, Operations Director in JLL's residential management team Hello Leif.
Leif Golder
Hi Rebecca, thank you for having me.
Rebecca Kent
No problem. So, David, it's been three years since the Grenfell tower fire in London, which in Australia triggered some new legislation and, in some cases, government funds to eliminate cladding on buildings that is deemed a fire risk. What's the latest on this front?
David Bannerman
Melbourne's leading the charge because they've been dealing with a significant fire event that happened before the Grenfell tower, about two years prior and interestingly, they've managed to wrap it in with the COVID response as well. So, they've offered A$600 million to owners to fund their replacement of the cladding. And to deal with issues arising from COVID, they've quadrupled that now to try and create that as a bit of an economic stimulus package.
There's been lots of reform throughout New South Wales in response to that, although New South Wales doesn't have a rescue package like the Victorians do.
The UK responded from the 200-million-pound rescue package to increase that to a billion-pound rescue package.
So, I think eventually New South Wales will have to consider a bit of a rescue package like other places in the world and parts of Australia.
New South Wales has been responding with creating a lot of rights for disaffected owners to recover through litigation or other means from the people who caused their loss.
Some big changes made there on the 10th of June, some huge retrospective rights for owners to sue people giving them a 10-year period within which, if they've suffered losses, they could go back 10 years and start suing the people who are accountable.
Rebecca Kent
And is one state’s approach better than the other, do you think?
David Bannerman
There's different solutions for different problems. And I think the fact that the Victorian Government is offering money to people to take cladding off the building has to be a superior solution to any solution, which requires somebody to try and recover the money from someone else.
But I think that New South Wales has got the superior recovery rights. If you had to go and get the money off somebody else.
Rebecca Kent
New legislation is paving the way for court action as building owners look to recover the costs of replacing flammable cladding. You’re proceeding with a Supreme Court hearing currently on behalf of such owners. Can you tell us about that?
David Bannerman
It's the usual scenario of an owners’ corporation suffering financial losses. And then they seek to be reimbursed those losses relying on the statutory warranties from the builder and the developer.
And there's a hearing to determine liability for the losses associated to the cladding.
So, there was an earlier case in New South Wales, which went on appeal. It was in the tribunal, and they found that cladding, that brown sort of, what looks like wood, but it's called bio wood, on the external facade, and that was used on a strata building in New South Wales. And they were awarded the cost to rectify that cladding, that is, to get that cladding off and replace it with something more suitable that wasn't combustible. And so that one was on appeal.
There are significant sums involved though with cladding cases. It's not often surprising to see that if you've got cladding and it's on your building it might be A$80,000 per lot to fix that cladding. So, it can be a significant sum.
Rebecca Kent
And Duane, what is combustible cladding? And why is it even used on buildings?
Duane Loader
I'll start with why it's used on buildings. It's most often the external skin of the building, and it can be used decoratively. It's a weather seal to keep water out. And there to an extent it's the thermal and acoustic insulation as well.
So, it's widely used and has been. There are some products that are composite materials that are compliant, others that aren't.
It's a composite material, it's made up of an outer layer of a metal, most commonly aluminum, maybe zinc or copper, and then an internal layer that includes material polyurethane.
The polyurethane that's inside is very flammable. So if there's a fire point where it starts to spread very rapidly up the building. So the risk of where the fire starts is where there's a potential ignition point, and it has been a case where a cigarette butt or an ashtray that caught fire was the ignition point for whole façade to catch fire and also potentially a barbecue.
There's one other type of product around which is an expanded polystyrene that's been used internally for insulation. That's often well inside the outside skin of the building. That's also a big problem that's been in industry.
Rebecca Kent
Roughly how many buildings are considered non-compliant across Australia?
Duane Loader
It's changing all the time as I think audits are continuing. The state government cladding task force have some numbers on their website. Thousands of buildings are being audited. I understand over 400 buildings have got a problem in New South Wales, and 300 in Victoria, and fewer in the other states.
And some of those buildings have a bigger problem than others.
Progressively as well, the owners, particularly commercial owners, are starting to get ahead of residential. So, of those buildings that are identified, the industry is starting to pick up and starting to remove the cladding off a lot of the buildings.
Leif Golder
The good point that was raised there is commercial owners of those schemes, they're more motivated to comply earlier because if they've got a non-compliant building, their tenants could break the lease because the building is unsafe. Whereas in the residential schemes, they generally have to self-fund and can take a lot longer to get that process through.
Rebecca Kent
And you're dealing with multiple owners.
Leif Golder
That's right. Yeah, the Strata Schemes Management Act, you could have 300 lot owners, there's a lot of emotional involvement. They may even look at bringing new by-laws through that protect balconies from use of cigarette butts coming off balconies, being thrown from balconies. Stopping the use of barbecues on balconies to protect lot owners.
Even though those balconies may be sprinkler protected in the event of a fire on a balcony, it's still regarded by the insurer as a non-compliant building.
And some of the owners’ corporations have faced at the moment situations where there may only be one insurer left in the country who is willing to insure them. And they're getting to a stage where if the cladding is not removed, they're given an ultimatum by the insurer. If it's not removed by a certain date, then they're forced to take their insurance offshore, and that would go overseas, it could be a bucket of up to 25 or more insurers accepting the risk.
And there's a lot of implications on strata committees even having protection as an office bearer. So, there's lots of things and outcomes that are being brought to the surface at the moment with this situation.
Now, since Grenfell, the industry is being driven by the insurer.
So the insurance industry is now at the forefront of the removal of cladding. In particular, in some of the residential schemes, and they’ve taken their time.
So, in those schemes, they're producing reports. It's a very costly process, having their experts come in, perform the testing of the cladding, and that's usually done through an expert like the CSIRO, a third-party independent organisation - very reputable. A hire contractor or consultancy firm will put that report together. And then the owners’ corporation would develop a way to present a case and then hand that through to a legal body.
Rebecca Kent
Duane, just explain to us what’s the whole process in identifying non-compliant cladding.
Duane Loader
Sure. Well, there's a couple of different products with different degrees of polyurethane inside them.
So the first thing to do is to undertake a test to see how flammable the polyurethane is on the product that’s on the building.
So, obtain a sample of the building, send it to an accredited lab and have it tested and backed up with a report from a qualified fire engineer. That will determine whether the material is flammable.
If you find out that it is, check your annual fire safety certificate and then start looking at some of those interim measures to reduce the risk while you're in occupation.
If it is combustible as well then you need to look at a way of solving it to make sure that you end up with a compliant building and that's where I get involved in the process. I manage teams of consultants and contractors to help owners and represent owners to try and remove and address the problem.
Because the facade system provides thermal, acoustic and waterproofing features to a building, you need to make sure that when the new compliant product goes up that all of those aspects of the building are protected.
So it involves a small team of consultants to help make sure that the right system is specified to go back up on your building.
Typically, then we will prepare a contract with lawyers to make sure that the building will behave during the construction period. And we undertake a tender on behalf of the owners to find the most cost effective, best way of accessing the building without affecting your operation or occupation. And then we manage the builder through that process, ultimately getting certification of the building at completion.
Rebecca Kent
And Leif, you know, you manage the operations of a building undergoing these rectification works. Give us some insight into how disruptive it can be.
Leif Golder
It is very disruptive. For example, in buildings where it's fully surrounded by cladding, it would literally put the building as a construction site possibly for more than 16 months. So, you can imagine living in an apartment, there’s now a full scaffold around the building or around sections of the building, with the mesh. So, you can't look out of your balcony. And it can be quite stressful.
We've had some owners asking us, ‘can we can we move out? What should we do?’.
Typically, unless the building is structurally affected, the building would remain occupied during that process. If the buildings have the sliding louvers, those louvers may need to be removed during that process. Lots of things that needs to be very carefully taken into consideration from the project manager’s perspective on compliance, and just making sure that the residents’ rights to a peaceful strata community are at least listened to.
Rebecca Kent
We were saying earlier the challenge for commercial buildings is that like a tenant may have grounds to break a lease if they find the cladding on the building they occupy is non-compliant. In a residential building, some of the implications are the resale value of an apartment, or getting loans to fund some of the works if they find they have to pay out, right?
Leif Golder
Yes. That's right. Yes, we've seen in these schemes, the valuation of these apartments typically drop by the cost of the unit entitlement costs per lot.
Purchasers of those buildings, they try to then drive that price even further down.
We've seen where schemes and owners, lot owners, are trying to refinance or take a line of credit against their equity, and their loan-to-value ratio is affected, or they're essentially being blacklisted to some extent financially. They can't borrow or some funders won't fund that particular property. So, it's really a very stressful process for owners in these schemes.
Rebecca Kent
David, there are class actions pending in Australia against the suppliers and manufacturers of Alucobond and Vitrabond panels. Apartment owners, through their respective owners’ corporations, are seeking damages there.
That aside, what practical steps can affected owners take to recover the cost of replacing non-compliant cladding?
David Bannerman
The first thing you want to do is work out whether you've still got a statutory warranty right, because that's your best right in New South Wales.
But if you miss it by one day - what I mean by miss it is that if you don’t lodge your court action within the exact period of time that's allowed - those statutory warranty rights are lost.
And then what you're left with is the new right that the government has created, which is this ‘duty of care’, which is akin to a negligence action, for second owners.
But the problem with the backdated negligence action is that the builder and developer can say, ‘look, I'm only 10 percent liable, and you’ve got to sue these others for the other 80 or 90 percent’.
That adds multiple parties to the proceedings, it exponentially costs more for the proceedings, and takes a lot longer to run through the courts.
Now, those remedies might be available, and you've got more defenses.
So, at the moment with the statutory warranty scheme, you've got this ‘fitness for purpose’. And doesn't matter whether or not that’s the way everyone was doing it, or whether they read the CodeMark, or it didn't apply properly. Those things fit in that what everyone was doing as a peer professional was sensible. But the statutory warranty regime is higher.
So, if you've got your statutory warranty rights, rely on those. If you don't, then you're going to have to look at your duty of care options, which aren't as great as your rights under the statutory warranties.
Leif Golder
Also, just to mention, Rebecca. Once the owners understand that they do need to replace the cladding, they then need to look at what type of product, whether it be another aluminum composite product, or if it's to be the solid aluminum, which some of the industry is taking that pathway.
Once cladding is either being investigated or being removed, we've seen in some schemes where the sarking, which is the aluminum framework holding the cladding in place, has also been deemed against the manufacturer's warranty.
So those corporations are facing a second problem: that the sarking, the system that's holding the cladding in place, may not be compliant, or may not be appropriate for the new material to go on because it's a much heavier weight. So, it's a whole other cost that adds to the projects that that Duane would head up.
Duane Loader
It will obviously take a long time to litigate and recover money off a potential builder. But for a very low cost, the early stages of a facade rectification can be commenced, so you can engage those qualified engineers and consultants to help understand the extent of the problem and tender it.
So that process of understanding the extent of it could help with claims, because at least you can quantify the cost of rectification for future claims.
So, I wonder David, do you have a view about whether you start the process of claiming off a builder or wait until you start engaging consultants to try and rectify the problem or think you should start early?
David Bannerman
I think from a health and safety point of view, you need to investigate to determine the level of risk, and then you need to work out what your rights are to get somebody else to pay to make the building compliant. And then from there, you need to negotiate to get the building addressed in a safe manner.
Responsible builders and developers are coming to the scene without having to take court action against them in relation to that, like the big-end-of-town guys.
But then there aren’t that many who are that willing to come back and do it without litigation thrust at them. So, litigation is often just the catalyst or leverage to extract a settlement.
And the sooner that you get those processes in play, then the sooner you can make a building safe.
Rebecca Kent
Thank you very much, David, Leif, and Duane, appreciate all your insights and talk to you soon.
Leif Golder
Thanks.
Duane Loader
Thanks for having me.
David Bannerman
Thanks, Rebecca.
Rebecca Kent
That was the perspectives podcast. Thank you for listening to what I hope was a useful and interesting episode. If it was, do hit the share button and send this on to someone who might also like to listen.
If you’d like to get in touch with Duane, Leif, or David, pop over to jll.com.au/perspectives-podcast and drop them a line via our podcast page. I’m Rebecca Kent, catch you next time.
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