Court ruling strengthens owners’ corporation rights to pursue building defect claims

In a recent County Court case, Judge Kirton published a decision confirming the rights of an owners’ corporation (OC) in Fitzroy to file a claim for the remediation of building defects and the removal of combustible cladding, without being required to having to guarantee the builder’s security for costs if it were to lose the eventual hearing.

The Court discussed at length about the unique nature and characteristics of an OC, which set it apart from other litigants such as companies or private citizens.

If the Court had ruled otherwise, the effect may well have been to discourage other OCs from embarking on its own litigation efforts. It is expensive enough to fund its own legal and expert bills, without also having to guarantee the costs of the identified defendants as well.

In Victoria, the position is that an OC “is the registered proprietor of a fee simple in the common property and it is the equitable or beneficial ownership but not the legal ownership of the common property which is vested in the lot owners.”

It is the OC which must sue for building defects in common property, rather than the private lot owners. OCs do not usually own property or other assets above what they need to fulfil their obligations to administer and maintain the common property.

There would be very few OCs which had sufficient assets to resist an application for security, if they were assessed solely on current assets. However, they are in a special position compared with general corporations, in that the legislation gives them the powers to levy their members.

Lot owners and the committee managing an OC are usually unsophisticated in building regulations, building defects, design and engineering issues, and appropriate methods of rectification.

Also, an OC has no privity of contract with subcontractors or consultants involved in the original building works. Its rights to claim in negligence for pure economic loss are extremely limited.

The presumption of equal bargaining power to allocate risk which is common in commercial building projects does not usually apply to the OC of a residential building. An OC is dependent on the warranties in the Domestic Building Contracts Act. The Victorian Government acknowledged that “often OCs are not adequately governed and resourced to deal with complex, large-scale building matters like cladding rectification.”

In response to the combustible cladding crisis in Victoria, the state government established the Cladding Rectification Program as a public safety measure. It put in place a process to identify non-compliant cladding, to issue Building Notices and Building Orders, and to assist OCs to rectify, so that “importantly all Victorians will benefit from a safer built environment, coupled with the confidence that the Government is also overhauling Victoria’s building legislative framework to ensure this never happens again.”

The government established Cladding Safety Victoria to (among other things) administer the Cladding Rectification Program, to provide financial assistance for cladding rectification work and register owners and OCs of those buildings, and to provide guidance to owners and owners corporations of buildings in relation to cladding rectification work in order to mitigate risk. •