Introduction
The recent introduction of the Property Developers Act 2024 (ACT) (the Act) will change the landscape of residential property development in the Australian Capital Territory. This article provides an overview of the most pertinent provisions and legislative effect.
Commencement of the Act
The Act has a staggered commencement.
Provisions relating to rectification orders, stop work orders and undertakings take effect on and from 11 July 2024 and apply to developments which received approval on or after 11 July 2024. The remainder of the Act has not commenced. Regulations and a Code of Practice are yet to be released.
Presumption that Claimed Defect is a Defect
Summary
Section 89F of the Act provides that there is a presumption that work claimed to be defective within 2 years of the work being completed is defective unless proven to the contrary.
Effect
This reverses the onus of proof and requires developers to show that the work is not defective to escape liability. This presumption can only increase litigation in the construction and property industries respectively.
Licensing Regime for Residential Property Developers
Summary
Which type of developments does the licensing regime apply to?
Part Two of the Act sets out a licensing regime to enable a person to:
- apply for development approval for certain residential building developments;
- apply for approval, building commencement notices, and occupancy certificates under the Building Act 2004 (ACT); or
- sell or advertise the sale of residential property ‘off-the-plan’ under the Civil Law (Sale of Residential Property) Act 2003 (ACT).
Residential building work is defined as building work in relation to a regulated residential building, which is itself defined as
- a class 1 or class 2 building, or a building that contains a class 2 building, construed as a part of a project to construct 3 or more dwellings; but
- does not include a building excluded by regulation
This definition of “regulated residential work” means that single dwellings, dual occupancies and adding secondary dwellings are not captured by the rectification orders (see below), or licensing regimes. This protects most occupant homeowners from having to be licensed to undergo renovations.
Further exemptions will likely be specified in the regulations when they are released.
Licensing requirements
It is important to note that the licensing regime has not commenced. For the purposes of this article, to be licensed as a property developer an applicant must:
- apply to the ACT Property Development Registrar (Registrar) in writing;
- include a rating report (see below) with their application; and
- satisfy the criteria of a suitable person (see below).
Rating Report
A rating report refers to a written report prepared by a rating entity, which provides an assessment of the applicant’s operational and financial capacity to act as a property developer.
Suitable Person (s 9(1))
The Registrar must consider information evidencing whether the applicant is a ‘suitable person’ before they can issue a license, including criteria such as:
- the applicant’s character;
- the applicant’s history of compliance or ability to comply with the Act including if they have been subject of regulatory action, or convicted of an offence under this Act;
- the applicant’s credit history and financial viability;
- whether the applicant has been insolvent, has been or is an executive officer of a corporation placed in administration, receivership or liquidation, or disqualified from managing a corporation.
Who needs a licence – an individual or organisation?
A person may apply to be licensed as a property developer (as defined in s46). Person includes corporate entities.
If an organisation is the applicant, then the suitable person criteria in s9(1) of the Act may be applied to a current and former associated entity, or key person of that organisation.
In the Act:
associated entity, of a corporation, means—
- a related corporation; or
- an entity prescribed by regulation.
key person, for a corporation, means—
- a director or secretary of—
- the corporation; or
- an associated entity of the corporation; and
- an individual who is in a position to control or significantly influence the corporation’s or an associated entity’s conduct and includes an individual who—
- directly or indirectly owns, holds or controls 25% or more of the shares in either corporation, or 25% or more of a class of shares in either corporation; or
- gives instructions to an officer of either corporation and the officer generally acts on those instructions; or
- makes, or participates in making, decisions that affect the whole or a substantial part of either corporation’s business or financial standing; or
- engages in conduct or makes representations that would cause someone else to reasonably believe the person controls, or substantially influences, either corporation’s business
Effect
No other State in Australia requires property developers to be licensed. In NSW for example, other parties in the development process, such as contractors or design practitioners must be licensed.
The stated objective of this licensing regime is to protect homebuyers. It may offer comfort to consumers, knowing that property developers will be held responsible and accountable.
However, the conditions that an applicant must meet to be eligible as property developer are extensive.
It is unclear how the licensing regime will apply to joint venture developers but one might expect each of the joint venture parties to be subjected to the review criteria unless one party is a passive nominal co-venture party.
Part 5 of the Act
Definition of Property Developer for the Purposes of Part 5
For the purposes of Part 5 of the Act, s46 of the Act broadly defines ‘property developer’ as meaning any of:
- a person who contracts or arranges for, or facilitates or otherwise causes (whether directly or indirectly) the building work to be done;
- the owner of the land on which the building work is undertaken when the building work is undertaken;
- the principal builder in respect of residential building work (that is, the builder in the Building Commencement Notice issued under the Building Act 2004);
- for a regulated residential building under a units plan—the ”developer”, as defined in the Unit Titles Act 2001;
- a person prescribed by regulation.
Effect
The scope of this definition allows a relatively broad scope as to liability as a ‘property developer’.
Notably, design consultants, subcontractors of property developers, for example, have not been included in the definition. This is not surprising as the purpose of the Act is to regulate the developers (and principal builders in residential developments) not the subcontractors or consultants.
Developers would be advised to ensure their own exposure and liability risk is spread by reviewing the risk allocation in contracts, take out further insurance and include more detailed indemnity provisions. This will likely increase standard contract prices and increase the negotiation period, potentially leading to increased cost and delays in property development.
Part 5 – Rectification Orders
Summary
If the Construction Occupations Registrar (COR) believes there is a serious defect in a residential building, or if the work was/is being carried out in a way that could result in a serious defect, the COR may issue a written rectification notice.
The COR may make a rectification order (s 49 of the Act) requiring any of the following:
- stated action to be taken to rectify the serious, or possible serious defect within a stated period not less than one month after the notice was given;
- stated information to be given to the COR about the required rectification work;
- any other thing reasonably necessary to ensure the required rectification work is done
The COR may only make a rectification order before the latest of the following:
- if the COR first became aware of the serious defect, or possible serious defect, within 6 months before the end of the 10‑year period—1 year after the registrar became aware of the serious defect, or possible serious defect;
- if the COR gives a proposed rectification order notice before the end of the 10-year period—1 year after the notice is given;
- in any other case—the day the 10-year period ends
Effect
The potential effect of this means that property developers can be required to go back in time, and rectify defective work, which was completed 10 years ago, placing an enormous burden on them.
It is unclear what will happen if the developer does not exist or is no longer in a financial position to respond to the rectification order, although any ‘phoenixing’ like activity by a developer may then impact on their licence renewal application.
Part 5 – Stop Work Orders
Summary
The COR may give a stop work order requiring the property developer to ensure the residential building work stops (s60 of the Act) if the COR believes that:
- residential building work is being, or is likely to be, undertaken by, or under an arrangement with, a property developer in a way that could result in—
- significant harm or loss to the public or occupiers or potential occupiers of the regulated residential building; or
- significant damage to property; or
- residential building work is being undertaken and a relevant provision requires a person to hold a licence in relation to the work and—
- no person holds a licence in relation to the work; or
- if a person holds a licence in relation to the work—
- regulatory action under part 4 is, or is proposed to be, taken against the licensee or an associated entity of the licensee; or
- the licence prevents the building work being undertaken.
Effect
Similar stop works mechanism are present in other States and similar effects may apply.
For example, in NSW, the Building Commission of NSW can issue stop work orders to property developers under the:
- Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW);
- Design and Building Practitioners Act 2020 (NSW); and
- Home Building Act 1989 (NSW).
If a stop work order is issued it will likely delay delivery of developments and property developers will incur significant costs and risks in those situations impacting holding costs and possible ‘sunset date’ obligations.
Part 5– Directors of Developer Company to be Held Personally Liable
Summary
Section 52 in Part 5 the Act provides that directors of property developers can be held personally liable for defects. This provision is similar to section 37 of the Design and Building Practitioners Act 2020 (NSW) and is not surprising.
A director can be personally liable even if they were not the director when the building work resulting in a defect was undertaken.
Effect
This means that:
- an individual not intricately involved in the day-to-day construction can be personally liable for defects in the work;
- an individual can be held personally liable where they have not been involved at all;
- that personal liability could relate to a serious defect in a residential building that was built up to 10 years ago; and
- it might incentivise third parties to pursue a corporate developer to insolvency to enable a liability pathway to open to the directors personally.
These provisions provide for a disturbing statutory piercing of the corporate veil, even if personal liability is only triggered if the property developer becomes the subject of a winding up order, is placed in administration, receivership or liquidation or is deregistered.
Latent Defects Insurance
While there is no specific obligation for individuals/corporations to have latent defect insurance (insurance), the manner in which various provisions of the Act are drafted makes it highly desirable that they do. Whether or not a director may be held personally liable, requires the Registrar to consider if the property developer has insurance which covers the defective work.
This is problematic, because there are not many insurers who offer the insurance. Further, the insurance does not insure the developer but rather the resident/owner’s corporation.
Conclusion
Property developers and their directors need to be aware of their liability under the Act as the rectification orders regime and stop work orders regime are already in effect.
Property developers should also consider their potential obligations to apply for a licence and the requirements and implications associated with doing so.
If you would like to discuss this article with us, please contact Mike Ellis, Partner, Yanlie Leung, Senior Associate or Rhianna Brooker, Paralegal, all on (02) 9261 5900.
This article does not constitute legal advice. It is merely for general information only and is not intended to be relied upon in any specific circumstances. If legal advice is required, please contact the above to make arrangements or your lawyer. You do not become a client merely because you telephone to discuss a matter.