Review of Residential Building Cover

The Society welcomes the opportunity to comment on the legislative framework supporting Residential Building Cover (RBC) in the NT. In developing this response the Society has conducted consultations with its Commercial Law Committee which brings together many decades of experience in commercial law practice in the Territory.

The Society has a number of concerns with aspects of the review, in summary the Society?s concerns are as follows:

• The review is premature because the RBC is still in it?s infancy and reliable information is unlikely to be gathered;
• no rationale has been provided for the review;
• The Society supports continual improvement of the building industry, by:
  • strengthening consumer protections; and
  • the licensing and accreditation of builders within the industry.

The introduction of the RBC in January 2013 was welcomed by the Society because it provided additional legislative protections to individuals engaged in the process of building their own home. Prior to its introduction owners who engaged in building their own home (Owners) in the NT, unlike most other jurisdictions, had limited legislative protection from defective workmanship and scant redress from builders who absconded with their money or became insolvent during the construction process.

Owners require protection in this industry because the playing field between builders and Owners can often be unequal due to information asymmetry disadvantaging Owners. Individuals are unlikely to participate in building their own home more than once in a life time and as such they are unlikely to be sufficiently familiar with the industry and its practices prior to purchasing building services and products. For these reasons the RBC was viewed as positive reform for the building industry.

Evidence Must Support Reform of the RBC

Timing is Premature
The most noticeable concern regarding the review of the RBC is its timing. The RBC has now been in place for 8 months and arguably is still in its infancy. Time is required to allow the industry to work with the RBC and for the RBC to ?find its feet?, including an opportunity for the different elements of the RBC to be actioned. For example the Society is aware that no claim applications have been received and accordingly no payments from the fidelity fund to owners have occurred. This is not unexpected given the short life of the RBC and no meaningful conclusions can be drawn from this, particularly a conclusion that amounts directed into the fund should be reduced or adjusted at this stage.

The Society is concerned a review of the RBC conducted now is unlikely to result in the gathering of reliable information which can assist the Panel to form meaningful conclusions as to how, or even whether, the RBC could be improved for builders and consumers.

No Evidence Exists
The Society believes in the use of evidence to inform legislative reform. The Society is quite concerned the Issues Paper provided by the Review Panel contains no facts or statistics around the performance to date of the RBC. Moreover it does not contain any explanation or description as to what problems are perceived to exist and by whom. The Society further notes the financial records and accounts of the fidelity fund can only reflect a 6 month period as it has not completed a full financial year cycle and again such reports are unlikely to present sufficient information from which to draw conclusions for the purpose of this review.

The Society supports continual improvement of the building industry and mechanisms which ensure building standards consistent with the Building Code of Australia. Consumers require from this industry health, safety and amenity outcomes and mechanisms that assist the industry to strive towards such outcomes are supported by the Society.

The RBC represents an improvement on what prevailed prior to it?s introduction. The RBC introduced more regulation around builder registration and a system enabling consumers to seek redress in the case of faults or non-completion by builders.

Given the existence of the RBC and the absence of any evidence to suggest problems exist or that health, safety and amenity outcomes are being undermined by the existing RBC, then no change is recommended at this stage.

The Society is concerned consumer protections provided by the RBC and the integrity of existing registration system may unnecessarily or unintentionally be diluted if changes are given effect at this early stage without proper analysis of the costs and benefits of such changes on the industry as a whole.

The Society is concerned that there is a real risk that lowering the threshold requirements on builders prior to undertaking and during the performance of the prescribed works or the curtailing the powers of the Building Practitioners Board which assists in preventing and mitigating the incidence of faults within the industry could be of great detriment to consumers. A reduction in threshold requirements would not represent a correct balance with the need to protect against defects.

RBC Provides Important Consumer Protections

The Society views legislating for the inclusion of certain terms into building contracts has been beneficial to redress the imbalance between builders and Owners which was evident prior to the introduction of the RBC.

Progress Payments
The requirements around progress payments to be commensurate with works performed by the builder minimise the financial risk to Owners throughout the construction process. The ?standard progress payments? defined in the Building Regulations and the capping of deposits to 5% of the contract price are reasonable and the Society is not aware of any examples that suggest the statutory requirements should be altered.

Guarantees and Defects
The consumer guarantees around workmanship are also very important. The Society does not view the guarantees set out in the Building Act as imposing a higher standard on builders, beyond that which an Owner would expect an ordinary reputable builder to deliver in the course of constructing a residential home. The inclusion of the statutory guarantees in any event largely represents the standard of workmanship required of a professional builder under the common law.

The defect periods of 1 year for non-structural works and 6 years for structural works, appear to be appropriate for the industry and consumer requirements and again the Society is not aware of any reason why these defect periods should be amended. Any reduction in the defect period would raise concerns and unnecessarily exposes consumers to defective without redress.

Industry Checks and Balances
The collapse of various builders, in particular but not only Carey Builders in 2010, demonstrated that both consumer guarantees were required and a system for ensuring a greater level of professionalism prevailed within the industry.

The Society acknowledges the consumer protection regime introduced in 2010 required that all builders undertake additional administration to become registered and meet certain financial prerequisites in order to carry out prescribed works under the Building Act. As in all professions that impose licensing requirements, it can act as a barrier to entry into that profession and inevitably some individuals may be prevented from practicing as a builder until they are able demonstrate they has fulfilled the minimum criteria. The Society acknowledges that some builders may have expressed concerns regarding the administrative burden of the regime, however their concerns must be balanced with the overall objectives of the RBC, which includes establishing a scheme relating to residential building consumer protection [section 3(hc) of the Act].

The Society?s own assessment of the requirements on builders is that it appears to be quite modest, particularly as building contracts may be valued at many hundreds of thousands of dollars and may represent the life savings of families and individuals who enter in such contract with builders.

A matter of particular importance to the Society in respect of any consideration around a reduction of ?red tape? for builders is that such considerations must be tempered in light of the need to ensure the integrity of the fidelity fund through the use of mechanisms that prevent and mitigate the incidence of events which may give rise to payments from the fund. It is important that an appropriate balance is achieved.

The fidelity fund was established to assist consumers as a last resort when they have incurred financial loss consequent upon the failures of a builder, though the builder?s insolvency, deregistration, disappearance and leaving the owner with defective work[1]. The fidelity fund is sourced ultimately from Owners, through higher building costs and as such reasonable efforts should be made to ensure the funds are not drawn down to cover financial loses which could have been prevented or mitigated, by requiring builders demonstrate they meet a set of minimum requirements. The Society considers it important that a builder, who may enter into high value contracts with Owners to demonstrate a level of financial credibility.

We look forward to contributing further to this process.

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