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Frequently asked questions 

Home building law changes 

The following information addresses questions on the development and impact of the new home building laws.

Back to Major changes to Home Building laws page

Licensing
Defects
Statutory warranties and dispute resolution
Home Building Compensation Fund
Home building contracts

What is the purpose of the Home Building Act? 

The Home Building Act is the primary legislation regulating the home building industry in NSW. It does this through a licensing regime with rules of conduct, minimum standards and dispute resolution mechanisms. It also establishes a statutory warranties scheme and the Home Building Compensation Fund, which protects home owners where a builder dies, disappears, becomes insolvent or fails to comply with a compensation order made by a court or the NSW Civil and Administrative Tribunal (NCAT). 

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Why are the changes needed? 

The reforms aim to improve the operation of the laws by: 

  • reducing any unnecessary red tape
  • providing clarity to help reduce the number and cost of disputes 
  • providing appropriate levels of consumer protection.

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How do the changes reduce red tape? 

Red tape reduction helps to reduce unnecessary burden on industry so it can devote more energy towards investment and job creation. Among these measures are:

  • Increasing the threshold for when the legislation applies from $1,000 to $5,000 worth of building work. Consumers remain protected under the Australian Consumer Law and disputes about this type of work have access to low cost dispute resolution through the NSW Civil and Administrative Tribunal.
  • Focusing the requirements of the legislation on core building work. Stand-alone contracts for internal paintwork as well as work related to tennis courts, ponds and water features no longer need a licence, unless done as part of other home building work as consumers remain protected under the Australian Consumer Law.
  • From 1 March 2015 increasing the threshold for when the more detailed contract requirements are needed from $5,000 to $20,000. Home building work under $20,000 will still need a written ‘minor works’ contract.

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What consultation has taken place? 

The new laws draw on over 2 years of consultation with the building industry and consumer groups. All stakeholder suggestions and submissions were carefully examined and considered.

A range of stakeholders took part in roundtable discussions in 2012. These received a high level of support and assessed complex areas for reform such as statutory warranties, dispute resolution and home warranty insurance. Expert working groups were also formed on these key topics. This consultation process informed the resulting reforms.

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Licensing 

How will changes to licensing help to tackle ‘phoenixing’? 

Before 15 January 2015, if an applicant for a licence has had numerous complaints against them or been involved in companies that have gone bust, Fair Trading can only consider actions of people who were directors of the company when it collapsed.

The new changes ensure that the directors, close associates, or those who managed the former company before it was ‘phoenixed’ will be more closely scrutinised. The changes also allow Fair Trading to consider the conduct of directors, former directors, officers and associates for 3 years before the company was placed into administration.

These changes will help to prevent phoenix companies and other poor performing builders from operating in the industry under different names, or hiding behind different legal entities to evade their responsibilities.

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Do complaints about someone in the past prevent them getting a new licence? 

A trend of consumer complaints, cautions, penalty notices or home warranty insurance claims made against a builder may indicate that they were failing to provide services to an acceptable standard.

This can be taken into account when assessing licence applications. Safeguards and controls would ensure a licence application is only refused on these grounds if the applicant influenced the business conduct and if there was a risk to the public that they would not complete building contracts or do work to an acceptable standard.

Fair Trading will look at the circumstances in each case and consider what actions applicants took to meet their obligations.

A person who disagrees can refer the decision to the Administrative Decisions Tribunal, which will assess its relative merits.

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If a licence holder notifies the Commissioner within 7 days of their insolvency, will their licence be cancelled immediately? 

A corporate licence holder will need to notify NSW Fair Trading within 7 days of becoming bankrupt, or if they are the subject of a winding up order or are deregistered.

After receiving this notification, the Commissioner may suspend the licence if there is a risk to the public that the licensee would be unable to complete the building contracts. If consumer protection can be maintained or other circumstances suggest that a trader should be allowed to stay in business, then the licence may not be suspended.

Any decision to suspend or refuse a licence or certificate could be appealed on its merits to the Administrative Decisions Tribunal.

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Defects 

What is considered a defect? 

A defect must result from defective design, defective or faulty workmanship, defective materials, or a failure to comply with the structural performance requirements of the National Construction Code.

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What warranty periods apply for general defects and major defects? 

The new laws help to clarify what a major defect is. A major defect is covered by the 6-year warranty. General defects that don’t meet the major defect test will continue to be covered by the standard 2-year statutory warranty.

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How is a major defect determined? 

A two-step test will determine if a problem is a ‘major defect’. To be considered a ‘major defect’ it must meet the criteria of both the first step and then the second step.

The first step is whether the defect was in a major element of the building. A major element is a fire safety system, waterproofing or something essential to the building’s stability or structure such as foundations, footings, walls, roofs, beams or columns.

The second step considers the defect’s potential consequences. This includes whether the defect will cause or is likely to cause:

  • part or all of the building becoming uninhabitable or unable to be used for its intended purpose, or
  • the collapse or destruction of the building or part of it.

For example, the problem may be that fire sprinklers and hoses are not working at all. This passes the first step as it is considered to be a major element since it relates to fire safety systems. It should also pass the second step as it could cause, or be likely to cause, the destruction of the building or part of it. It is therefore likely to be considered a ‘major defect’ and as such covered under the 6-year warranty.

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Is it a major defect only if the building is uninhabitable?  

No. A major defect may be one that prevents, or is likely to prevent, part of a building being used for its intended purpose. The rest of the building may still be habitable for it to be a major defect.

For example if a defect in a waterproofing membrane caused water to leak into the ceiling space, resulting in that particular room being unable to be used for its intended purpose, then it would be a major defect. The whole building does not have to be uninhabitable or unable to be used for its intended purpose.

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What warranty applies to defects in waterproofing and fire safety systems? 

The Government’s reforms specify, for the first time, fire safety systems and waterproofing as elements of a building covered by extended 6-year warranties, if they are considered to be major defects under the two-step test.

Defective fire safety systems and waterproofing will be considered in their own right, based on the likely impact on the habitation or use of a building, or part of a building. If a defect in a fire safety system or the building’s waterproofing significantly impacted residents inhabiting or using the building or even part of the building for its intended purpose, then it should be considered a ‘major defect’.

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Why isn't there a single warranty and insurance period for defects? 

Since 1 February 2012, new building contracts provided warranties for defective work for 6 years for structural defects and 2 years for all other defects. This aligned the statutory warranties with those for home warranty insurance (soon to be known as the Home Building Compensation Fund). These arrangements ensure that a longer period applies to the most important problems that consumers may face. For example where there is a structural threat that may prevent them using part or all of the building for its intended purpose, or could cause part or all of the building to collapse or be destroyed.

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Why will builders have a legal defence for defective work when instructed by a professional engaged by the consumer (the new section 18F defence)? 

If a defect was the result of the owner's instructions, which were contrary to the written advice of the builder, then the builder can use that as a defence in any proceedings for a breach of the statutory warranties. When the new laws commence on 15 January 2015 this defence will remain however there will be an additional defence.  

The new laws will allow a builder to use reasonable reliance on the written instructions of a professional engaged by the owner as a defence in proceedings for a breach of the statutory warranties. The professional must not be engaged on a recommendation or referral from the builder, or have had any relationship with the builder.

The builder will not need to have advised against the professional’s instructions, because a builder cannot be reasonably expected to second-guess instructions from expert professionals (eg. an architect) with specialised knowledge.

Where a builder contracts with a professional themselves, the builder will continue to be responsible for pursuing their contractor for defective work that the builder had to rectify or compensate a consumer for.

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When is the section 18F defence applicable from? Is it applicable for contracts entered into before 15 January 2015? 

It is only applicable for contracts entered into after 15 January 2015. This is because it is a significant change from the status quo and it is essential that builders and relevant professionals are aware of their liabilities before entering into contracts to do home building work.

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How will the section 18F defence work in light of the proportionate liability amendments introduced in 2011? 

Due to amendments made in 2011, the proportionate liability provisions of the Civil Liability Act do not apply to statutory warranty claims under the Home Building Act.

The legislation sets a high bar as to when builders can use this defence. The professional must be truly independent of the builder and the defence would only be available when the instructions that the builder had relied on were provided in writing.

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Statutory warranties and dispute resolution 

Will builders be able to pursue subcontractors for defective work? 

Yes (as is currently the case). The changes that commence on 1 March 2015 simply clarify the responsibilities of the sub-contractor for the statutory warranties. The head contractor will continue to be fully responsible to the home owner and subsequent purchaser for the statutory warranties for all the work.

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What if a builder does not agree with a rectification order or penalty notice? 

A builder can talk to NSW Fair Trading to apply to have a rectification order amended under the new section 48E(4) of the legislation.

If a builder does not agree with a penalty notice, as with other penalty notice offences, they can appeal to Revenue NSW or have the matter dealt with by the Local Court.

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Must a home owner give access for rectification works if a builder has been threatening or violent? 

After 1 March 2015 the new laws mean home owners cannot “unreasonably” refuse access to a builder intending to rectify defects. Special circumstances where a home owner would not need to give access include threats or violence from the builder or the builder's licence being subsequently suspended or cancelled.

The courts or Tribunal would determine whether or not refusing the builder access was unreasonable based on the particular circumstances of the case. 

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Is facing prison for certain offences necessary? 

Repeated unlicensed trading and failing to provide any required home warranty insurance can jeopardise public safety and cause financial hardship. Significant financial penalties are not always sufficient to deter serious offenders.

Under the changes, a second or subsequent offence for unlicensed contracting or not having home warranty insurance would attract a sentencing option of up to 12 months in prison. This will provide a stronger, earlier deterrent for serial offenders and reflects the serious breach of consumer protections resulting from these offences. 

Imprisonment would be a non-mandatory sentencing option imposed at the discretion of the courts.

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Why is an order for rectification the primary order that courts or tribunals must consider making? 

The most efficient, cost-effective way to resolve home building disputes is to enable the original builder to satisfactorily fix the work, rather than having parties focus on profiting monetarily.

The courts and Tribunal will continue to exercise their discretion in making rectification orders. They will consider mitigating circumstances such as where the person is not appropriately licensed to carry out the work, or has made a failed attempt to fix the building work.

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If a consumer breaches their order to pay funds, is it still an offence for a builder to not rectify the work? 

If a home owner raises a dispute about a builder that results in a rectification order, the order may set out conditions (including the payment of money to the builder owed under the contract) that the home owner must comply with before the builder is obliged to do the work specified in the order.

The builder is not obliged to carry out the work until the home owner satisfies these conditions. While the Act does not penalise a home owner failing to comply with an order, this may be able to be taken into account in relevant further proceedings concerning the dispute.

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For strata schemes, what is the new date of completion of the building work (when statutory warranties start)? 

The date of issue of the occupation certificate that allows the occupation and use of the whole building will be the date of completion for strata buildings. This proposal was included in the Government’s Position Paper on Strata Title Law Reform and will support the proposed strata defects inspection regime.

Importantly though, this amendment will assist owners corporations, who were not a party to the original building contract, to easily establish the start (and end) of statutory warranty periods.

The Home Building Act 1989 contains the definition of ‘completion’ for residential building work. This definition has been amended to provide for a different completion date for new buildings in strata schemes.

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Why isn’t the date of registration of the strata plan being used as the date of completion of building work for strata schemes? 

NSW Fair Trading researched potential triggers that would signal completion of the building work for strata schemes. The trigger needed to be close to when lot owners began moving into the scheme and an owners corporation established.

The date of the registration of the strata scheme was rejected early on as a trigger. The NSW Department of Planning advised of cases where a strata scheme was registered 5 years after the completion of the building work. This would have left owners in a legal limbo.

Consequently, the date of the issue of the occupation certificate that allowed the use and occupation of the whole building was selected.

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Why can’t the date of completion of building work recommence when the builder returns to a site to fix a defect? 

The date of completion of building work importantly signals the start of the statutory warranty periods for the building work done. This helps to streamline the date of completion for inspection and identification of defects within the statutory warranty periods.

If the date of completion could restart when the builder returned to a site to rectify a defect, there would be multiple dates possible for identified minor and major defects as well as a date of completion for the main work. Builders would be subject to a rolling requirement over many years to return to rectify newly discovered defects. They would no longer be able to order their professional lives.

The Government is strengthening the Act to provide that builders returning to rectify defects can rely on the original insurance obtained for the build.

The laws also strengthen rectification order requirements placed on builders – a failure to comply with an order is a breach of a condition of their licence. Breach of a condition of a licence can be subject to a $4,400 fine for a corporation and $2,200 fine for an individual. A builder can also be asked to show cause as to why they did not comply with the order. A ‘show cause’ proceeding can lead to other appropriate disciplinary action such as the suspension or cancellation of the licence.

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Home Building Compensation Fund 

How will the new laws prevent builders from giving invalid 'insurance' to consumers? 

Home warranty insurance (soon to be known as the Home Building Compensation Fund) is a last resort scheme, allowing claims to be made when a builder dies, disappears or becomes insolvent (this includes when a licence is suspended for non-compliance with an order from a Court or Tribunal).

The reforms include measures to prohibit builders from taking out insurance under one name and contracting with consumers under another, which can result in consumers receiving invalid insurance certificates.

Penalties for not providing the requisite insurance have been strengthened and imprisonment for up to a year will be a sentencing option for repeat offenders.

So consumers may check if a certificate given to them is valid, the Self Insurance Corporation is establishing a public register of home warranty insurance certificates issued since 1 July 2010 which can be accessed at www.hbfc.nsw.gov.au.

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Home building contracts 

Why regulate progress payments and deposits that builders can charge consumers? 

From 1 March 2015 progress payments will be regulated to both help to disclose to consumers upfront what they have to pay and prevent unscrupulous builders demanding front-loaded payments that substantially exceed the value of work done.

Builders can still charge a deposit before starting work to provide working capital for building projects.

The amendments commencing on 1 March 2015 will double the maximum deposit for work valued over $20,000, so that up to 10% of the cost of the work can be charged as a deposit. This means that there is a blanket maximum deposit allowable of 10% for all work, regardless of the work’s value.

The model, developed in consultation with industry, avoids imposing unnecessary costs on the contracting arrangements used by reputable builders such as the commonly used ‘fixed price’ contracts.

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How will progress payments be controlled in practice? 

From 1 March 2015 the builder is responsible for managing their cash flow and including a progress payment schedule in the contract. Progress payments will be able to be claimed for:

  • stages of work set out (in plain language) in the contract (generally used for ‘fixed price’ or ‘lump sum’ contracts); or
  • completed work and purchased materials, which must be documented with invoices. (generally used for contracts where the final contract price is unknown).

Requiring a progress payment schedule upfront will assist financial planning and help ensure payments are not ahead of the work performed. Consumers will be better informed about their financial obligations under the contract and positioned to negotiate payments not in line with agreed milestones.

In a dispute arising between a home owner and builder where the builder did not follow the progress payment requirements, they can be liable for penalties of up to $110,000 for a corporation and $22,000 for an individual, or on the spot fines of $1,000 or $500.