It’s been more than 12 months since Sydney’s Mascot Towers were evacuated due to structural integrity concerns. The blame game and lawsuits carry on while residents and owners remain unable to access their apartments. As the saga continues, what can investors learn from this fiasco?
Mascot Towers, a residential high-rise in Sydney’s inner south, was evacuated on 14 June 2019. It was the second apartment block in NSW to be evacuated in six months because of fears about the safety of the structure. On Christmas Eve 2018, 3,000 residents had been moved out of the 36-storey Opal Tower in Sydney’s Olympic Park due to cracks in the building and reports of movement. Residents have since moved back into the complex, but a slew of legal actions are underway.
The cracks in Mascot Towers began to show the following June and residents were forced to leave the 132-apartment complex. Fourteen months on, the 10-storey building remains uninhabitable and apartment owners are facing a $53.5 million repair bill (about $400k for each unit). Options to sell the strata scheme are being considered and the body corporate is suing the developer and builder of the neighbouring Peak Towers complex claiming the excavation works resulted in the slab and structural beams at Mascot cracking. Mascot’s developer has since gone into liquidation and cannot be held responsible, and there is no builders’ warranty applicable because the structure is more than 10 years old.
While the finger pointing continued and lawyers geared up for legal tussles over both apartment blocks, the NSW Government launched an inquiry into the regulation of building standards, building quality and building disputes. This led to new legislation – Design and Building Practitioners Bill 2020 and Residential Apartment Buildings (Compliance and Enforcement Powers) Bill 2020 which is expected to come into effect on 1 September 2020. The new laws can force serious defects in a structure to be corrected. Other jurisdictions are also reviewing building standards, testing regimes and certification processes to better protect consumers.
Although the NSW Government is footing the rent bill for Mascot’s displaced residents for a further nine months, as rectification works go on, owners continue to face rising costs for an uninhabitable building. The impost includes strata fees, mortgage costs, utilities and the prospect of a massive repair bill – which only factors in current known defects. Independent experts have identified 500 new defects at Opal, which doesn’t bode well for Mascot. Owners are hoping the complex may be sold but, even then, they face further loss if the site goes for land value only.
A comprehensive study of strata properties in NSW, conducted by the UNSW City Futures Research Centre, found that defaults plagued 85 per cent of new units built since 2000, while 72 per cent of all apartment blocks in the State had defects.
Around the nation, structural and building defects at apartment complexes, compounded by issues with construction materials (including combustible cladding), are a big worry for both owners and residents. A national survey into apartment living, conducted by Griffith University Queensland, found the top concerns for unit owners were building defects and problems with construction.
Building defects can result from defective designs, faulty workmanship, dodgy materials, or failure to comply with the performance requirements of the Building Code of Australia. It is important to understand that building defects aren’t maintenance or repair issues, but issues that are a direct result of sub-standard construction, materials or design.
According to research from UNSW, the most common defects reported in new apartment blocks include issues with water penetration, cracking in walls, guttering faults, tiling problems, defective roofs, or plumbing and cracked balcony balustrades.
Defects are costly for owners. Mozo’s Property Pain – Building Defects Report 2019 revealed apartment owners had paid out $4.3 billion to rectify building defects over the past decade. The average apartment defect bill was $6,434 (though 4 per cent of owners had to pay in excess of $50k), with 60 per cent of owners having to contribute to a sinking fund and 24 per cent forced to pay special levies to fund repairs.
So just what can investors do to protect themselves and reduce the risk of being caught up in one of these expensive situations?
Due diligence is vital. Whether buying an established apartment or one off-the-plan, it pays to do your research.
- Conduct a body corporate records search. There should be minutes from recent AGMs and information on the sinking fund and any planned and completed capital works projects. Ask to see any reports that have been done or mentioned in the minutes. Engage a conveyancing lawyer to advise you which searches need to be done and to help decipher the reports. NOTE: A sinking fund is money raised from owners and put aside for repairs and maintenance of the building.
- Commission your own independent building inspection and property survey.
- Determine when the building was constructed. Is the building warranty still in effect?
- Consider the age of the building. What materials and construction/engineering practices were in use at the time of construction?
- Look into who built the complex and who developed it – speak to trusted industry insiders to get an expert view and use Google to see what comes up. Do they have a good reputation? What other similar works have they done? Any issues with any of those properties? Who are the actual owners of the building or development company (sadly ‘phoenixing’ is not uncommon)? NOTE: Phoenixing is when a new company is created to continue the business of a company that has been deliberately liquidated to avoid paying its debts.
- Talk to existing owners to get the inside scoop. Thoroughly inspect the property yourself (the apartment you are considering and all the common areas) and look for red flags.
- Confirm what insurance the body corporate has for the strata complex and that it meets the minimum requirements set out by legislation in your jurisdiction.
- Familiarise yourself with the legislation and regulations relating to apartment complexes. Do you have any legal recourse etc.?
- Investigate the developer. What previous projects have they worked on? Did any ventures fall through? What is their reputation? Make sure to look into the parent company and the directors. NOTE: The NSW Government launched a ratings tool in June this year which rates developers, builders and certifiers on their record of building failures, finances, complaints, insurance claims and other such factors.
- Investigate the builder too, if one has been appointed. What similar projects have they completed? What similar projects are under construction? Have there been issues with quality, materials, workmanship etc.? Have there been other issues with the building/construction (such as workplace issues)? Look into their licensing and see if they are a member of Master Builders. Who owns the company?
- Visit the developer’s and builder’s existing projects and chat to owners/residents about the quality of the building etc.
- Do desktop research into the builder’s/developer’s previous projects, look at the strata report paying attention to the sinking fund forecast and any remedial works that are planned or completed.
- Once constructed, have a building inspection completed before signing off.
- Familiarise yourself with the legislation and regulations relating to apartment complexes and in particular off-the-plan properties. Is there a statutory duty of care that allows owners to sue or seek compensation if there is a breach etc.?
The role of insurance
As the building defects saga has played out, questions have been raised about the role of insurers. Different parties are responsible for insuring an apartment complex at different stages.
- When the complex is being constructed, the builder is responsible for obtaining adequate insurance cover. Such insurance is compulsory. It should be noted that this insurance is not a product guarantee or a ‘get out of jail free’ purchase for builders who deliberately do the wrong thing. FYI: Emerging issues with major building defects and failures to meet safety standards has resulted in many insurers exiting the market. Insurance is designed to cover unforeseen events, not inevitabilities.
- Once the complex is able to be occupied, the body corporate is responsible for obtaining and maintaining adequate strata insurance which covers the building structure, common area contents and common property. Strata insurance is mandatory.
- Apartment owner-occupiers need to arrange their own contents insurance to cover their personal belongings and contents not covered by the strata policy. This cover is generally not obligatory unless the strata by-laws state otherwise.
- Investment property owners also need to take out insurance for contents not covered by the strata policy and to cover the unique risks associated with leasing a property. While landlord insurance is not compulsory (though some form of owner cover may be required by the body corporate), it is a very wise investment as it can also cover tenant-related losses such as rent default or damage. In addition to providing legal liability, cover may also be available for rent losses stemming from issues such as denial of access.
- Tenants need to arrange insurance for their personal possessions with a renter’s contents policy like TenantCover. Again, this is not a requirement but a great investment in peace of mind in case the apartment is burgled or possessions are damaged/destroyed due to fire or storm. It also covers the tenant’s legal liability.
It is important to note that faulty workmanship and building defects are generally exclusions and most insurance policies do not cover damage or losses caused by such. At EBM RentCover we look at claims on a case-by-case basis. For example, for our policyholders with investment properties at Mascot Towers, we endorsed claims for loss of rent due to denial of access.
The raft of issues coming to light in the apartment market is being addressed by industry and government so that buyers and residents can be better protected. The problems are complex and so too are the avenues to rectify them. Until such time as firm solutions are in place, buyers need to do all they can to safeguard their finances if they decide to invest in an apartment.
*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are there, contact 1800 661 662 if you have any questions.
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