The Territory Strikes Back…

Who is liable under the Property Developers Bill 2023 (ACT)?

The ACT government has introduced the Property Developers Bill 2023 (the ‘Bill’) into the Legislative Assembly. The ACT is the first jurisdiction in Australia to consider these reforms, the bill sets out both a licensing and regulation scheme for developers participating in residential property developments and also controversially seeks to impose liability on developers (and their directors) for building quality issues.

The new Bill

As a high level summary, the Bill will:

• require developers to have a license before they can obtain development approval under the Planning Act 2023 (ACT), building approvals and certificates under the Building Act 2004 (ACT), or to contract for or advertise the sale of off-the-plan Residential property under the Civil Law (Sale of Residential Property) Act 2003 (ACT);

• require the Registrar to publish a public register of developers;

• establish the framework for a Code of Practice for developers;

• require developers to obtain a rating report as part of their application;

• give the Government powers to have defects fixed by developers and their builders;

• provide the Government with broad powers to compel information to be provided and to enter into premises; and

• encourage developers to buy Insurance that covers a building for a period of 10 years after completion of the construction.

Before they can apply, developers will need to provide evidence of their suitability for a license, which will include a review of:

• the applicant’s character;
• its ability to comply with the legislation;
• its operational capacity; and
• its solvency.

In addition, the new Registrar will be able to request information regarding:

• key people related to the entity; and
• any of the outlined information regarding the applicant’s related entities.

What’s more, it will have an ongoing power to request further information over the life of the license.

In proving their solvency, the developer will need to obtain a rating report. The ACT will use this Bill to align with practices such as NSW’s iCIRT system, requiring applicants to obtain a specialised rating from agencies such as Equifax.

Developers can expect to budget a significant amount of time and costs for their license applications. If they do not yet have experience complying with this type of comprehensive reporting, they should seek appropriate advice and consider how their group will respond to request for information made by the registrar.

The silver lining for developers (if there is one) is that the Bill amends the Building Act 2004 (ACT) to allow Licensed Developers’ related entities to participate in a licenced developer’s developments, and correspondingly allows related entities to contract and advertise for off-the-plan contracts. This means that only one entity in a group needs to obtain a license.

It is important to note that the Registrar will have the power to issue licenses subject to conditions, including limiting which projects a licensed developer may participate in or which of the licensed developer’s related entities can participate in a development. It will also have the power to suspend or cancel licenses, though these decisions can be challenged in the ACAT.

Who is a developer?

The Bill proposes new Section 162A of the Planning Act 2003 (ACT), which requires a person who wishes to make a development application to undertake a ‘residential building development’ to be a licensed Developer with the definition of that term including:

• building or altering a residential building on land; and
• for the purpose of building a residential building on land—
• undertaking earthworks or other construction work on or under the land; or
• subdividing or consolidating the land; or
• varying a lease relating to the land (other than a variation that reduces the rent payable to a nominal rent); or
• demolishing a building on the land […] .

Hence, one highly controversial aspect of the Bill is its extremely broad application, including to work typically engaged in by ‘mum and dad’ landowners. This means that landowners who wish to engage in very common activities such as subdivision or structural alteration of their house may need to apply for a developer license. This is a surprising and excessive regulatory burden, as unsophisticated members of the public may be required to undergo the significant financial and legal disclosures involved in the licensing process. It remains to be seen whether this change will make its way into the legislation as passed by the Assembly.

Few carrots, many sticks – enforcement

The Bill’s second core effect is to broadly place joint liability on developers and builders (and in some cases, landowners) for most minor and serious defects. The aim of this approach is twofold: to promote cooperation between these parties to ensure developments are carried out appropriately, and to shift the onus of ongoing repair costs in respect of defects away from residents or Owners Corporations. The key enforcement powers are as follows:

Enforcement power	Effect
New Statutory duty of care, reverse onus of proof under Section 89F Building Act 2004 (ACT)	Builders and developers are liable for any defect where: loss or damage occurs that is reasonably foreseeable as a result of the defect; if a claim made within 2 years of the completion of the build, there is a presumption that the work is defective unless the builder / developer proves it to be otherwise. Claims are limited to 6 years after completion by the Limitation Act 1985 (ACT).
Registrar’s orders under Part 6 of the Property Developers Bill 2023 (ACT)	Applies to serious defects up to 10 years after completion: Registrar has power to enter buildings without notice during construction and up to 10 years after completion. If it finds a serious defect, the Registrar has power to issue a notice to developers requesting rectification. If the defect is not rectified, the Registrar may issue an order on any developer involved in the development to rectify the order for up to 10 years after completion of the building. (note that this 10 year period will also apply to buildings that were commenced or completed before the coming into effect of the new legislation.)   Applies to a very broad range of people and entities: A person who contracts for or facilitates the building work to be done. The owner of the land on which the building work is done. The principal builder.

What is difficult to understand is why, when the Government already has the ability to make builders and their directors personally liable for defective construction work it seeks the same powers with respect to developers. This is particularly so when it appears that the rights it already has against builders have not yet produced any discernible deterrent effect or beneficial outcome to owners and owner’s corporations in resolving defect disputes.

Liability for Directors

Where a developer has been wound up, or is in receivership or administration, the Registrar can issue an order against its directors or former directors personally. Surprisingly, this is the case whether or not those directors were directors at the time the defect was created, and also applies to new directors. It could therefore result in a director being liable for up to 10 years after a defect was incurred. Though this aligns the ACT with NSW’s Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW), this Bill is much harsher as the NSW law does not extend liability to directors which did not have any knowledge of a contravention.

Push for Latent Defects Insurance

The harshness of these provisions appears to be designed to encourage developers to purchase latent defects insurance (LDI). Indeed, the Registrar is empowered to decide not to make a rectification order against a director if the developer had purchased LDI. The government has also included dormant powers under the legislation which will enable it to draft regulations requiring developers to obtain LDI.[1]

Another way in which LDI is incentivised is through the operation of limitation periods. The Bill imposes liability on developers which extends further than that which applies to builders or other parties under other legislation. This means that developers may be unable to recover costs of rectification orders against other participants in a development, and that LDI will be the only protection available.

If the LDI regime were to take off, this would impose an additional compliance burden on developers, as insurers would themselves conduct stringent due diligence before providing such high-value insurance. It is also worth remembering that this cover does not benefit the developer in any way as the insurer will still have recourse against them and may seek to recover any loss they incur from developers accordingly.

Understanding the impact of the Legislation and looking to next steps

Some commentators believe that the registrar’s powers to enter buildings and construction sites are indicative of the ACT’s plan to emulate the NSW Building Commission by proactively inspecting buildings before they can be issued with certificates of occupancy.[2] It remains to be seen to what extent the ACT government will develop its capacity to proactively review and address Developers under the licensing scheme.

Overall, it is clear that the ACT government intends to create a comprehensive regulatory environment for developers, whereby developers are subject to strict guidelines and bear the majority of liability in respect of developments, even when defects are due to the fault of other specialised professionals. Whether this will have the desired effect of improving building quality remains to be seen. Acknowledging that developers may be unfairly burdened with liability for others’ mistakes, the ACT government has stated that it will ‘consider future reforms for the appropriate regulation of building designers and architects’, as well as ‘Future professional and trade licensing and/or registration’ in the context of the building regulatory system.[3]

The Bill has now been tabled for debate in early 2024. As the bill is sponsored by both Labour and the Greens, it is likely that it will be passed into law with minimal amendments before the October 2024 election.

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[1] Proposed section 95A in the Building Act 2004 (ACT).

[2] https://www.linkedin.com/pulse/act-punching-above-its-weight-bronwyn-weir-gomjc?trk=public_post

[3] https://thefifthestate.com.au/business/minister-bites-back-on-property-developers-bill-accusations/