home building act consultation paper - fairtrading.nsw.gov.au · Reducing red-tape for consumers...

Consultation Paper

A re-write of the Home Building Act 1989

February 2010

© State of New South Wales through NSW Fair Trading, a unit of the Department of Services, Technology and Administration, 2009 You may copy, distribute, display, download and otherwise freely deal with this information provided you attribute NSW Fair Trading as the owner. However, you must obtain permission from NSW Fair Trading if you wish to 1) modify, 2) charge others for access, 3) include in advertising or a product for sale, or 4) obtain profit from the information. Important: For full details, see NSW Fair Trading’s copyright policy at www.fairtrading.nsw.gov.au/copyright.html or email [email protected]

Consultation Paper Re-write of the Home Building Act 1989

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TABLE OF CONTENTS

1. Introduction................................................................................................................................2

1.1 WHAT IS THE ROLE OF THE HOME BUILDING ACT?..................................................................2 1.2 CHANGES TO THE HOME WARRANTY INSURANCE SCHEME .......................................................2 1.3 WHY IS A RE-WRITE OF THE HOME BUILDING ACT BEING PROPOSED?......................................2 1.4 HOW CAN I HAVE MY SAY ON THE REWRITE OF THE HOME BUILDING ACT? ...............................3

2. Making the Act clearer and more accessible .........................................................................4

2.1 KEY OPTIONS FOR CHANGE ...................................................................................................4 2.1.1 Including a statement of objectives in the rewritten Act .............................................4 2.1.2 Consolidating the key definitions used in the Act .......................................................4 2.1.3 Clarifying responsibility for statutory warranty obligations..........................................4

2.2 OTHER OPTIONS FOR CHANGE...............................................................................................4

3. Reducing red-tape for consumers and licensed contractors...............................................6

3.1 KEY OPTIONS FOR CHANGE ...................................................................................................6 3.1.1 Increase the monetary threshold for certain contractual requirements ......................6 3.1.2 Streamlining the assessment criteria for licence applications and renewals .............7

3.2 OTHER OPTIONS FOR CHANGE...............................................................................................7

4. Strengthening disciplinary and enforcement powers ...........................................................8

4.1 KEY OPTIONS FOR CHANGE ...................................................................................................8 4.1.1 Allowing NSW Fair Trading to issue fines where builders fail to comply with rectification orders ....................................................................................................................8 4.1.2 Preventing ‘phoenix’ company activity........................................................................8 4.1.3 Permitting NSW Fair Trading to cancel licences where certain undertakings relating to conduct are not honoured by a builder .....................................................................................9 4.1.4 Preventing builders demanding or receiving payments not related to the progress of work ………………………………………………………………………………………………..9 4.1.5 Linking rectification orders to existing statutory warranties ......................................10 4.1.6 Other options for change ..........................................................................................10

5. Providing greater certainty and transparency for both consumers and licensed contractors...............................................................................................................................11

5.1 KEY OPTIONS FOR CHANGE .................................................................................................11 5.1.1 Factoring building work delays into contract price disclosure ..................................11 5.1.2 Allowing builders to initiate certain dispute resolution processes.............................11 5.1.3 Improving supervision requirements for corporate licence holders ..........................12 5.1.4 Clarifying the point at which the statutory warranty period commences ..................12 5.1.5 Aligning periods of cover under statutory warranties and home warranty insurance12

5.2 OTHER OPTIONS FOR CHANGE.............................................................................................13

6. Clarifying and modernising home warranty insurance arrangements..............................14

6.1 KEY OPTIONS FOR CHANGE .................................................................................................15 6.1.1 Clarifying the impact of estoppel issues on home warranty insurance claims and recovery actions .....................................................................................................................15 6.1.2 Preventing home warranty insurance claims by “related” parties.............................15 6.1.3 Preventing claims relating to defects reasonably visible at the time of purchase ....15 6.1.4 Improving access to home warranty insurance in cases of insolvency ....................16

6.2 OTHER OPTIONS FOR CHANGE.............................................................................................16

Facilitating the shift to a uniform national licensing system...................................................18

6.3 BACKGROUND TO THE NATIONAL LICENSING SYSTEM ............................................................18 6.4 KEY OPTIONS FOR CHANGE .................................................................................................18

7. Minor and administrative changes needed to update and improve the Act .....................19

7.1 PROPOSALS .......................................................................................................................19


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1. Introduction

1.1 What is the role of the Home Building Act?

The Act establishes rules of conduct and minimum standards for residential building work carried out within NSW. This regulatory framework is designed to protect consumers and provide certainty for the building industry. The Home Building Act 1989 (Home Building Act) and Home Building Regulation 2004 (Home Building Regulation) seek to do this by:

• Establishing education, competency and supervision standards for those working within the home building industry.

• Setting contractual and disclosure requirements for those entering into contracts for residential building work.

• Providing statutory warranties which create legally enforceable, minimum standards for the quality of building work.

• Establishing effective mechanisms for the resolution of disputes between consumers and builders.

• Providing home warranty insurance to protect consumers in cases where a builder dies, disappears, becomes insolvent or fails to comply with a compensation order made by a court or the Consumer, Trader and Tenancy Tribunal.

1.2 Changes to the home warranty insurance scheme

On 8 November 2009, the NSW Government announced major structural reforms to the home warranty insurance scheme which will apply from 1 July 2010. These changes are discussed further in chapter 6 of this paper. While the scope of the new arrangements has been determined, other administrative details will be developed following separate public consultation to take into account the specific needs of consumers and industry. The reform options discussed in chapter 6 will be actively considered for inclusion as part of the new home warranty insurance arrangements from 1 July 2010.

1.3 Why is a re-write of the Home Building Act being proposed?

The Government intends to re-write the Home Building Act as a result of one of the recommendations of the 2006 Moss Review into Licensing in the New South Wales Home Building Industry. The Moss Review recommended: “That the Government re-write the Home Building Act 1989 to take into account the recommendations of this Review, to consolidate the various amendments to the Act that have occurred over the years, and to make it simpler and easier to understand for consumers and industry.” This re-write will consolidate the various amendments to the Act that have occurred over the years and to make it simpler and easier to understand for consumers and industry. Accordingly, the objectives of the re-write can be summarised as follows: • Making the Act clearer and more accessible.

• Reducing red-tape for both licensed contractors and consumers.


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• Strengthening disciplinary and enforcement powers.

• Providing greater certainty and transparency for both consumers and licensed contractors.

• Clarifying and improving home warranty insurance arrangements.

• Minor and administrative changes needed to update and improve the Act.

Further, all Australian Governments have agreed that a national occupational licensing scheme covering builders, plumbers and electricians will be commenced in 2012. The first tranche of building licences will be transferred to the national scheme in July 2012, with the final building licenses to be transferred in July 2013. National licensing will involve the enactment by each jurisdiction of uniform national licensing legislation which will cover matters including the scope of licensed work, licence eligibility requirements, enforcement and disciplinary arrangements. Licensing related provisions which are expected to transfer to the national scheme are currently dispersed throughout the Home Building Act and the Home Building Regulation. The rewrite of the Act will facilitate the future shift to national licensing. This paper has been developed based on input from industry, key stakeholder groups and consumers; through focus groups and face to face meetings, online surveys and feedback, letters and emails from the public and Fair Trading’s experiences with the operation of the legislation over recent years.

1.4 How can I have my say on the rewrite of the Home Building Act?

This paper outlines a number of options for changes to the Home Building Act and the Home Building Regulation. NSW Fair Trading is seeking the views of all stakeholders on the options for reform contained in this paper, in particular as to whether they are workable and effective and whether they would impose any unnecessary red tape. Submissions are due by Friday 19 March 2010. Submissions can be made: By email at [email protected] By fax to (02) 9338 8990; or By mail to: Re-write of the Home Building Act 1989 NSW Fair Trading Policy Division Department of Services, Technology and Administration PO Box 972 PARRAMATTA NSW 2124 If your submission contains information that you consider confidential or commercially sensitive, please indicate this clearly within the submission. NSW Fair Trading will then make every effort to protect that information, however it could be subject to appeal under freedom of information legislation.


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2. Making the Act clearer and more accessible The need to make the Home Building Act clearer and more accessible was a key recommendation arising from the Moss Review. The Act has been amended on many occasions but up until now there has not been an opportunity to review the Act as a whole. This has reduced the readability of the Act over time. There are a number of changes which could help correct this.

2.1 Key options for change

2.1.1 Including a statement of objectives in the re written Act The Home Building Act does not currently include a statement of objectives setting out the purpose of the legislation. It is appropriate for the re-written Act to include a statement of objectives. These objectives could include such things as addressing consumer, public health and safety risks arising from home building work. Other issues could also be included in the statement of objectives. A similar approach is taken in the Victorian Domestic Building Contracts Act 1995 which clearly sets out the objectives of that legislation. These objectives include the maintenance of proper building standards and ensuring fairness for consumers and builders. The re-written Act could include similar objectives to these.

2.1.2 Consolidating the key definitions used in the Act The Home Building Act and the Home Building Regulation contain definitions of a number of key terms and qualifications to these definitions which are scattered throughout the legislation. These terms include the definitions of “dwelling”, “specialist work”, “owner-builder”, “close associate”, “develop” and “residential building work”. Consolidating these existing definitions in one location in the new Act would help clarify their meaning and make the Act easier to use.

2.1.3 Clarifying responsibility for statutory warra nty obligations Section 18B of the Home Building Act indicates that warranties are implied in relation to the work done by “the holder of a contractor licence, or a person required to hold a contractor licence”. Licence holders1 are required to engage subcontractors who hold the relevant trade licence in their own right (per section 4 (2) of the Act). Even though it is clear that the licence holder, who contracted for the work, is responsible for statutory warranties, it isn’t always clear whether the subcontractor is responsible for the statutory warranties. One option to help clarify this aspect of the Act is to amend this section to make it explicit that subcontractors are also responsible for statutory warranties.

2.2 Other options for change

• Reword the definition for “residential building work” used in the Act by clearly linking it to the actual types and scope of work authorised by the various contractor licences and certificates.

1 The term “licence holder” is used to describe the holder of a contractor’s licence which authorises the relevant type of building or trade work.


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• Replace the term “qualified supervisor certificate” with a more specific and plain English term.

• Clarify the fact that those involved in installing fire protection equipment and

systems need to hold a licence authorising “water plumbing” work. • Provide clearer definitions in the Act of “contract price” and “domestic building

contract” by creating revised definitions based on those already used in the Victorian Domestic Building Contracts Act.

• Clarify that NSW Fair Trading’s discretion under clauses 25 and 39A of the Home

Building Regulation to reject licence applications or renewals where the applicant has been involved in the management of an externally administrated body corporate does not apply in relation to a members’ voluntary wind up under the terms of the Corporations Act 2001.

• More clearly restate the existing requirements for disclosure in cases where

insurable owner-builder work has been undertaken on a property and that property is sold within 6 years of completion of this work.

• Clarify the situations where a purchaser can void a contract for purchase where

an owner-builder fails to provide a certificate of insurance in relation to owner-builder work.

• Revise section 99 of the Act making it clear that a “building claim order” is an

order made by a court or the Consumer, Trader and Tenancy Tribunal in relation to a “building claim.”


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3. Reducing red-tape for consumers and licensed contractors The Moss Review noted that the regulatory and licensing regime established by the Home Building Act imposed compliance costs on business, administrative costs on Government, and that ultimately these costs were passed on to consumers in the form of higher prices. In order to minimise these costs the review recommended that any unnecessary red-tape in the Home Building Act be identified and removed. The current re-write of the Act provides an opportunity for regulatory requirements to be streamlined and modernised where possible and for redundant provisions to be removed entirely, without compromising the benefits which the scheme delivers.


3.1.1 Increase the monetary threshold for certain c ontractual requirements The Act currently makes all contracts for residential building work valued above $1000 subject to a number of requirements. These requirements include that:

• A written contract must be entered into.

• The contract must disclose a number of prescribed particulars including the

licence details of the builder, a description of the required work including any plans or specifications, the applicable statutory warranties, details of both the cooling off period and home warranty insurance for work valued above $12,000.

• A signed copy of the contract must be provided to the consumer within 5 business days.

• The licence holder must provide the consumer with prescribed information on the operation of the Home Building Act including dispute resolution process under the Act.

• Deposit restrictions apply, restricting initial deposits to a maximum of 10 per cent of the contract price for work valued at $20,000 or less, and no more that 5 per cent for work above $20,000 in price.

• A five day cooling off period applies where materials and labour is valued above $12,000.

It could be argued that requiring all of these for any job over $1000 imposes red-tape. One option for change would be to raise the threshold at which these requirements apply from $1000 to $12,000. This would not be intended to reduce consumer protection, but to remove unnecessary red tape and to reflect increases in the cost of building since these requirements were first introduced in 2001. Consumers entering into home building contracts valued below $12,000 would remain protected by general consumer legislation such as the NSW Fair Trading Act 1987 and could also seek redress through the Consumer, Trader and Tenancy Tribunal.


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In this option contractors would be required to provide written quotations for all residential building work below $12,000 in order to provide certainty for consumers and to assist in the adjudication of disputes between consumers and builders.

3.1.2 Streamlining the assessment criteria for lice nce applications and renewals

Clauses 25 and 39A of the Home Building Regulation give NSW Fair Trading a discretion to prevent an applicant or licensee from holding a licence under the Act where the Director-General considers there have been an “unreasonable number” of complaints, formal cautions, penalty notices or paid insurance claims against that person or entity. In practice it has proven difficult to determine what is an “unreasonable” number. An option to resolve this situation is to provide a regulation making power which would allow the regulations to stipulate the parameters of what is considered to be an “unreasonable” number.


• Combining licensing categories which are virtually identical in terms of the nature and scope of work performed. Categories that could be combined are “decorating” and “painting”. Similarly, “roof tiling” and “roof slating” share the same qualification and they could also be combined.

• Increasing the monetary threshold for owner-builder work which requires an owner-builder permit from $5000 to $12,000 to take into account increased building costs.

• Clarifying that licensed builders have the right to obtain owner-builder permits and in doing so must pay the prescribed fee, but are exempt from the education coursework associated with owner-builder permits.

• Deleting clause 23 of the Home Building Regulation 2004 which establishes a process for apprentices and trainees to do electrical wiring work under the supervision of a qualified supervisor. This clause is considered redundant as section 14(2) of the Act allows unqualified individuals to do electrical wiring work provided they are supervised by an appropriately qualified licensee.


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4. Strengthening disciplinary and enforcement powers The Home Building Act seeks to prevent sub-standard home building work by requiring that licensed contractors are well trained and by providing statutory warranties to establish minimum standards for the conduct of home building work. Despite this, disciplinary and enforcement powers remain necessary to help ensure that there are consequences for licensees who fail to meet statutory requirements. The current re-write of the Act provides an opportunity to consider the effectiveness of existing disciplinary and enforcements measures and make improvements where necessary.


4.1.1 Allowing NSW Fair Trading to issue fines wher e builders fail to comply with rectification orders

Recent online surveys suggest there is a high degree of support amongst both consumers and builders for the role played by NSW Fair Trading building inspectors in resolving building disputes.

This normally involves informal mediation with the parties reaching mutual agreement on the required corrective action. The advantages of this approach are that disputes can be resolved relatively quickly, without the time and expense that can be involved in formally pursuing a matter in the Consumer, Trader and Tenancy Tribunal or a Court. Where rectification works cannot be agreed between the parties, NSW Fair Trading building inspectors are able to issue binding rectification orders to builders requiring specified action within a set timeframe. However, at present, the incentive for compliance with rectification orders is significantly diminished by the inability of NSW Fair Trading to quickly deal with licensed contractors who blatantly disregard these orders. Currently, the failure to comply with such an order can only be dealt with through a complex and time consuming disciplinary process. An option to resolve this is to create an offence which could be pursued through a prosecution in court or dealt with by a fine issued by a Fair Trading building inspector. The offence could be added to Schedule 6 of the Home Building Regulation so that it could be dealt with by way of penalty notice, issued by a Fair Trading building inspector. Similar offences typically involve fines of $750 for an individual and $1500 for a corporation.

4.1.2 Preventing ‘phoenix’ company activity The Moss Review highlighted the consumer detriment that can occur as a result of ‘phoenix’ companies operating within the building industry. A ‘phoenix’ company typically involves a licensed building company which is deliberately established as a short term venture only. The company markets and receives funds from consumers, but then defaults on its obligations and extinguishes its liabilities through insolvency. The business is then re-established through another corporate structure, under the control of the same individuals, to repeat the fraudulent behaviour.


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An option to address this problem is to prevent licence applications or renewals from those who are undischarged bankrupts or in the previous three years had been involved in the management of a company under external administration. However, an individual can avoid being captured by this provision if they resign from a company prior to it entering administration or liquidation. This option would therefore involve the tightening of this requirement to include those involved in the management of a company within 12 months prior to the business entering external administration, excepting those involved in a members’ voluntary wind up under the terms of the Corporations Act 2001. Individuals captured by this provision would still be eligible to receive licences provided that they represent no evident risk to the public and took all reasonable steps to avoid bankruptcy or insolvency.

4.1.3 Permitting NSW Fair Trading to cancel licence s where certain undertakings relating to conduct are not honoured b y a builder

When considering an application for a corporate building licence, NSW Fair Trading may become aware of an individual who is connected with the proposed new building company, who would not be accepted as a director of the proposed building company, because of past conduct or infringements. On these occasions, the normal practice is to refuse the corporate licence application until assurances or undertakings are made that the individual in question will not be exercising any managerial control of the new entity. Currently, there is a small monetary penalty for failing to comply with any assurances or undertakings, but no provision for a licence to be cancelled if undertakings are not met. One option to rectify this situation is to amend the Act to provide that NSW Fair Trading can require written undertakings in relation to named individuals and has the discretion to cancel a building licence with notice if such undertakings are not honoured.

4.1.4 Preventing builders demanding or receiving pa yments not related to the progress of work

Consumers face significant risks where they make payments to licensed contractors in advance of the actual progress of building work. The size of advance deposits are capped under the Home Building Act 1989 specifically to address this issue.

However recent research suggests that disputes over payment issues between builders and consumers remain relatively common. Many consumers remain susceptible to demands for additional payments to ensure work continues on their particular building project, even where these payments do not equate to the work performed. An option to address this issue is to make demanding or receiving payments, other than deposits, an offence unless the payments relate directly to the progress of work carried out or managed under a contract. A similar provision applies in Queensland under section 65 of the Domestic Building Contracts Act 2000.


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4.1.5 Linking rectification orders to existing stat utory warranties Under section 48E of the Home Building Act 1989, an order may be issued for a licensee to rectify work which is “defective”, “incomplete”, or which has caused damage to any work or structure. Currently there is no explicit link between the defective work referred to in section 48E and the statutory warranty provisions in section 18B of the Act. The statutory warranty provisions give further definition as to what could be considered defective or incomplete work by explicitly mentioning matters such as work being carried out in accordance with plans and specifications, materials being suitable for purpose and work being performed in a proper manner. Clarifying the link between rectification orders and statutory warranty provisions would contribute to greater understanding of builder obligations and assist in addressing disputes.

4.1.6 Other options for change • Increase the maximum penalty for corporations who fail to comply with licence

conditions imposed under section 36 of the Act from $4,400 to $11,000.

• Clarify the powers of NSW Fair Trading to immediately revoke authorities in cases where the licence or authority has been issued on the basis of fraud or misrepresentation by an applicant.

• Provide that individuals are ineligible to receive a second building licence through a new company or partnership while they are subject to outstanding Court or Tribunal orders through an existing corporation or partnership.


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5. Providing greater certainty and transparency for both consumers and licensed contractors

Residential building work is technical and specialised in nature, with the result that many consumers may be placed at a disadvantage when negotiating with licensed contractors. Consumers may lack sufficient information about building work and may not be aware of their rights or the availability of dispute resolution mechanisms when things go wrong. Poor communication and a lack of information can also result in disputes even when the builder is not actually at fault. There are a number of possible options which may help to improve the certainty and transparency of contractual relationships between consumers and licensed contractors and strike a fair balance in terms of the rights of all parties involved in residential building work.


5.1.1 Factoring building work delays into contract price disclosure Under section 7 of the Home Building Act, a contract for home building needs to specify the contract price, if known. At present there is no requirement for the likelihood of delays to be considered or factored into the contract price. However, recent surveys conducted by NSW Fair Trading suggest that work delays are a significant source of disputes between licensed contractors and consumers. To help minimise these disputes, licensed contractors could be required to take account of the following factors when determining a contract price or estimating the number of days needed to complete a project: • The effect of inclement weather, having regard to the time of the year when the

work is likely to be carried out. • A reasonable allowance for weekend days, public holidays, rostered days off and

other foreseeable breaks in the continuity of the work. • Provision for any other delays that is reasonable having regard to the nature of

the contract. It is noted that both Queensland and Victoria already require licensed contractors to consider similar factors when determining contract prices.

5.1.2 Allowing builders to initiate certain disput e resolution processes NSW Fair Trading is aware of instances where licensed contractors attempt to comply with orders from the Consumer, Trader and Tenancy Tribunal but are unable to do so because they are denied access to the building site by the consumer. This may occur, for example, because the consumer did not obtain the kind of order which they originally sought and may want a money order instead. However, this can place the licensed contractor in an invidious position, where he or she is simply unable to comply with a Tribunal order, despite their best efforts. An option to alleviate this situation is for the Tribunal to be given the power to specify that an order to rectify work is nullified if the consumer does not allow the licensed contractor site access. The Tribunal would also be given the power to specify that a money order cannot be granted if a consumer has denied the licensed contractor access to the site.


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In this option contracts would be required to address the issue of site access rights for consumers and licensed contractors. Prescriptive standards are not suggested, instead this option would require that the terms of access be negotiated by the parties to the contract based on the specific requirements of the project.

5.1.3 Improving supervision requirements for corpor ate licence holders At present each corporation holding a contractor licence under Act is only able to contract for different types of building work if it employs a nominated supervisor who holds an individual contractor licence or a supervisor certificate. The requirement for a qualified person to supervise the work done by others is intended to address risks in relation to the safety and competency of the work being performed. The endorsement of an individual contractor licence or the obtaining of a supervisor certificate means that the individual has met the requirements to contract in his or her own right under a particular licence category. However, the existing administrative regime for nominated supervisors is cumbersome, particularly when nominated supervisors leave the employment of the contractor and the contractor does not provide updated details to NSW Fair Trading. The current arrangements do not promote effective accountability and supervision. The issue of supervision could be addressed by requiring a director of a corporation licensee to hold either an individual contractor licence or qualified supervisor certificate. This would stabilise the company identity in a manner which is used successfully in other licensing regimes such as for property agents under the Property Stock and Business Agents Act 2002. A similar approach to licensing contractors for home building is also taken in jurisdictions such as Queensland and Victoria.2

5.1.4 Clarifying the point at which the statutory w arranty period commences In cases where home building work has been completed, statutory warranties in relation to defects in the work must be enforced within 7 years after the completion of the work. However, exactly what constitutes the point of completion of building work is not defined in the Act and remains subject to interpretation and debate. Various triggers are often cited by licensed contractors and consumers, such as the date of practical completion of the work, the point at which either an interim or full certificate of occupancy is issued, the date at which a strata plan is registered or the point at which a constructed dwelling is occupied. An option to address this may be to include a definition of what constitutes completion of residential building work as this may provide greater certainty for consumers and licensed contractors. NSW Fair Trading is specifically seeking input on whether this is practical, and if so, how the completion date should be defined.

5.1.5 Aligning periods of cover under statutory war ranties and home warranty insurance

The statutory warranty for structural building work currently applies for 7 years from the date of completion. However, home warranty insurance currently only provides 6

2 See section 31 (2) (b) of the Queensland Building Services Authority Act 1991 and section 29(c) of Domestic Building Contracts Act 1995 (Victoria)


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years coverage for structural defects. The lack of consistency contributes to confusion regarding the length of coverage. Making the statutory warranty period in NSW consistent with the period of home warranty insurance cover would provide clarity and eliminate misunderstandings.

5.2 Other options for change • Requiring home building contracts to specifically address issues of progress

payments and termination under the contract. These are issues which should be dealt with in the contract in a manner determined between the parties, rather than imposing a certain formula or prescribed standards.

• Removing the statutory warranty under section 18B (b) relating to the suitability of materials in cases where these materials are supplied by the consumer rather than the licence holder. Similar arrangements apply in Queensland under section 42 of the Domestic Building Contracts Act 2000.

• Requiring those selling residential properties to disclose as a part of the sale contract whether statutory warranties under the Home Building Act have been previously enforced in relation to defects in the particular property. Under section 18D (2) of the Act, a statutory warranty on a defect cannot be enforced if it has been the subject of a previous warranty claim. However, if such previous claims are not disclosed, then a purchaser is unlikely to be aware of this issue.


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6. Clarifying and modernising home warranty insurance arrangements

Home warranty insurance is designed as a safety net where a licensed contractor does not honour their fundamental responsibilities to consumers – that is, the builder is unable to begin or complete a building contract or return and rectify defective work. Home warranty insurance is mandatory for residential building work above a prescribed contract value – currently $12,000 and is required to be taken out by the builder on behalf of consumers. The insurance must be of a kind approved by the Minister and also must be provided by insurers approved by the Minister. Today, home warranty insurance provides cover of up to $300,000 to consumers in the case of defective or incomplete home building work. Claims can be made when a licensed contractor dies, disappears, becomes insolvent or has their licence suspended by NSW Fair Trading for failing to comply with a compensation order made by the Consumer, Trader and Tenancy Tribunal or a Court. There are a number of changes that could be made to the home warranty insurance provisions in the Act to better protect consumers, clarify existing arrangements and provide greater certainty to licensed contractors and insurers.

Changes to the home warranty insurance scheme The NSW Government recently announced major structural reforms to the home warranty insurance scheme. A key aspect of the changes will be that the NSW Government will take responsibility for underwriting and capitalising the scheme from 1 July 2010. Claims handling, collection of premiums, and the issue of certificates of insurance will continue to be administered by the private sector, following selection by competitive tender. These changes were made necessary by recent contractions in the home warranty insurance market, which made obtaining insurance more difficult for many licensed contractors. The Government will take over the underwriting of the scheme to help give certainty to licensed contractors, apprentices, sub-contractors, suppliers and others working in the home building industry. The underwriting criteria and administrative arrangements for the new scheme will be determined by the Government acting on the advice of the Home Warranty Insurance Scheme Board with input from consumers and licensed contractors. However, existing consumer benefits under the current arrangements will be maintained. The process for initiating the Government’s involvement in the scheme will take place parallel to the process of re-writing the Home Building Act. The reform options discussed in chapter 6 will be actively considered for inclusion as part of the new home warranty insurance arrangements from 1 July 2010.


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6.1.1 Clarifying the impact of estoppel issues on h ome warranty insurance claims and recovery actions

The legal doctrine of estoppel is where a person is prevented from asserting a position which is inconsistent with a position he or she has previously taken, especially where a representation has been relied on or acted on by others. In the past it appears that some home warranty insurers, after considering an original claim, have declined subsequent claims by the beneficiaries of the insurance policy in relation to the same building, on the basis that the insurer may be unable to seek recovery from the builder due to estoppel issues. An option to resolve this is to amend the Act to confirm that beneficiaries to a home warranty insurance policy have the right to lodge claims in relation to defects and are not prevented from doing so because of an earlier claim that related to a different defect. Under this option the Act would also be amended to clarify the rights of insurers to seek recovery against licensed contractors in such circumstances.

6.1.2 Preventing home warranty insurance claims by “related” parties A recent legal case has highlighted the inadequacies of the current definition used in the Act of a “related party”. The case involved a developer who, in the course of constructing a retirement village, became aware of a number of building defects. Once construction was completed, the village was sold to a company “related” to the development through a common director. The company claimed against the home warranty insurance policy in relation to the defects. This was challenged by the insurer in court. However, the NSW Court of Appeal held that the company owning the village was not “related” to the developer within the terms of clause 55 of the Home Building Regulation. Clause 55 provides a narrow definition of a “related” party by limiting only entities which are subsidiaries or holding companies to a particular builder or developer from being beneficiaries under a home warranty insurance policy. To ensure that the intent of the Act in this regard is maintained the definition of the parties “related” to a builder or developer could be expanded to include common directors, spouses, relatives and members of the executive committee of an owner’s corporation.

6.1.3 Preventing claims relating to defects reasona bly visible at the time of purchase

Home warranty insurance policies typically exclude claims relating to, “…any defects in the works which would have been reasonably visible at the time any successor in title acquired the dwelling”. This exclusion dates from the original Government run home warranty insurance scheme which was introduced in 1972. The rationale for this exclusion is that purchasers should be aware of defects that are obvious on a reasonable inspection and therefore the rectification cost for the defect should be factored in to the purchase price. On this basis a rational consumer should not incur unforeseen costs in relation to visible defects. Despite this, in a recent NSW Court of Appeal ruling, the court held that as this exclusion was not expressly stated in either the Home Building Act or Regulation, it was void, despite being included in the terms of the actual insurance policy.


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An option to resolve this is for the Act to be amended to provide that defects reasonably visible on a physical inspection of a property are able to be excluded from the terms of home warranty insurance.

6.1.4 Improving access to home warranty insurance i n cases of insolvency Because members of a partnership are jointly and severally responsible for the contractual obligations of the partnership, home warranty insurance claims triggered on the basis of insolvency are normally only accepted when each member of a partnership can be shown to be insolvent. This can present real problems for a homeowner left with no access to home warranty insurance where the partnership may have ceased work on a building job, with one member bankrupt and the other member(s) refusing to complete or rectify the work. An option is to amend the Act to provide grounds for consumers to make home warranty insurance claims in relation to work contracted by a licensed partnership where one member is insolvent and other member(s) have refused to comply with a rectification order made by the Consumer, Trader and Tenancy Tribunal or Court.


• Clarifying the application of the home warranty insurance exemption under clause 74 of the Home Building Regulation 2004 to multi-storey buildings that have a mix of residential and commercial usage.

• Amending the Act and/or Regulations to clearly set out all of the terms and conditions which home warranty insurers are able to include in their policies.

• Providing for deemed approval for all claims not determined by an insurer within 90 days from lodgement. Deemed approval already applies to all home warranty insurance policies issued from 1 September 2005 onwards. An option is to extend this to cover all policies issued prior to 1 September 2005.

• Clarifying that an application for an exemption from the requirements of home warranty insurance under section 97 of the Act must be made prior to the commencement of work.

• Stating that home warranty insurance provisions requiring home warranty insurance be obtained and attached to building contracts (per section 92 of the Act), do not apply to homeowners (being an owner-builder, licensed contractor or developer) or successors in title including mortgagees in possession or receivers.

• Providing that the requirement to obtain home warranty insurance does not apply in situations where the original licensed contractor (or another licensed contractor on behalf of the original licensed contractor) returns to the site to rectify defects under the original contract.

• Clarifying that home warranty insurance cover in relation to a residential multi dwelling building, such as strata, community scheme or company title home units, does cover common property.

• Raising the minimum level of cover for common property in residential multi dwelling buildings from the current $200,000 to $300,000 to make the level of cover provided consistent with that provided under home warranty insurance for other types of home building work.


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• Amending the Home Building Act to provide that an owners corporation can lodge a claim in respect of common property (or where defects are common to multiple dwellings) on behalf of individual unit owners.

• Clarifying the meaning of the terms “Notification of a loss”, “Lodgement of a claim” and “Enforcement of statutory warranty” in both the Act and Regulation These terms need to be clarified to avoid confusion for insurers and beneficiaries. For instance, many consumers are unaware that notification of a loss to an insurer is not the same as lodging an insurance claim. It is also proposed that notification of a loss be required to be provided to insurers in writing (including email) to help avoid disputes.

• Expand the information required to be disclosed to homeowners on a certificate of insurance to include: insurer and NSW Fair Trading contact details, information on period of cover and timeframes for notifying a loss and lodging a claim, information on the need to enforce a statutory warranty, any major limitations under the policy and the total price (including commission) charged to the licensed contractor for the insurance cover.

• Clarifying the meaning of “taking action to enforce a warranty” as per clause 58A of the Home Building Regulation, by providing that the lodgement of a building claim in the Consumer, Trader and Tenancy Tribunal would constitute the taking of action to enforce a statutory warranty for the purpose of making a home warranty insurance claim.

• Clarifying the date from which home warranty insurance cover is required for residential building work undertaken by owner-builders.


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Facilitating the shift to a uniform national licensing system

6.3 Background to the national licensing system

This re-write is being conducted against a background of reforms at the national level. One of these is an inter-governmental agreement to develop a national licensing system for a range of occupations including builders, plumbers and electricians. This new system will commence as soon as possible after 1 July 2012 for plumbing, electrics, gasfitting, airconditioning and refrigeration and 1 July 2013 for all remaining building trades and builders. National licensing will involve the enactment by individual States and Territories of uniform national licensing legislation which will cover matters including:

• Governance for the national licensing regime.

• Scope of licensed work.

• Licensing eligibility requirements (e.g. probity and competency requirements).

• Disciplinary arrangements.

• Appeal rights and mechanisms.

• Licensing enforcement.

• National licensee register requirements.

At present, it is expected (although not certain3) that the following matters will continue to be part of State based licensing legislation including:

• Conduct requirements imposed on licensees (such as contractual requirements, statutory warranties and home warranty insurance arrangements).

• Complaint handling and investigation.

• Dispute resolution mechanisms.


Given the creation of a national licensing system, an option for change would be for provisions which will be determined in future at a national level to be located within their own section in the new Act. In this option all legislative provisions would remain within the Home Building Act, however, some form of separation would allow the relevant section of the Act to be entirely repealed once the transition to the national scheme occurs.

3 It should be noted that in May 2009, the Ministerial Council on Consumer Affairs agreed to a project which aims to harmonise licensing conduct requirements. There is also capacity under the Inter-governmental Agreement for the Ministerial Council overseeing the agreement to include conduct requirements for licensees under the national licensing system in the future.


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7. Minor and administrative changes needed to update and improve the Act

It is proposed that a number of minor, administrative and machinery type changes be made to the Act. These are designed to improve the clarity and readability of the legislation, consistent with the recommendations of the Moss Review.

7.1 Proposals

• Updating the definition contained in the Act relating to work authorised by the “structural landscaping” licence to reflect the fact that under NSW Housing Code, minor forms of development, such as garden sheds, pergolas, fences, earthworks and retaining walls will no longer need specific development consent.

• Rephrasing and clarifying clause 39A of the Home Building Regulation 2004

which gives NSW Fair Trading discretion to renew or restore a licence to an undischarged bankrupt or director of a company under administration, provided certain conditions are met, including that the individual poses no evident risk to consumers. It is proposed to simply rephrase and clarify this provision, whilst retaining its overall intent.

• Delete section 20(5) of the Act thereby ensuring that an applicant for the issue,

alteration, renewal or restoration of an authority aggrieved by any decision of the Director-General relating to the application can apply to the Administrative Decisions Tribunal for a review of the decision.

• Replace the term “successor-in-title”4 which is used in the Act with the term

“warranty beneficiary” to provide greater clarity. • Include a specific provision in the Act to prohibit unqualified plumbing, drainage

and gasfitting work. • Requiring corporate licence holders to advise NSW Fair Trading within seven

days where the corporation enters voluntary administration.

4 The term “successor-in-title” to refer to someone who is entitled to the remainder of the statutory warranty period on building work if a property is sold during the warranty or insurance period.

home building act consultation paper - fairtrading.nsw.gov.au · Reducing red-tape for consumers...

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