New South Wales

Recent bushfires, earthquakes and floods have inflicted millions of dollars’ worth of damage to buildings.  Now owners are realising the vital importance of an accurate, up to date Insurance Replacement Valuation

The recent fluctuation in the market for building materials and skilled tradespeople has resulted in many buildings currently being underinsured. Being underinsured can ultimately cost owners a lot more money.

Too many get it wrong…

Many Insurance Valuation providers use simple and quick calculations method.  Work out the floor area of the whole building and then multiply it by one rate per square metre…

Simple, but not even close to accurate.

Under the Work Health and Safety Act 2011, the maximum penalty for non-compliance is a $3 million fine. There is also further potential risk of civil litigation.

Here is an accurate valuation calculation approach

To get the right value, a professional will divide the different areas of the building and multiply them all at different rates based on differing levels of finish, area uses and types and quantities of construction materials used.

For example there are massive differences in construction costs for different areas like open balconies compared to closed fire escapes & common hallways, or cross-flow ventilation car parks compared to enclosed or underground car parks.

Buildings with other improvements and assets need to be calculated too; like the type, speed & floors covered by a lift, levels of fire safety barriers and equipment.

Allowances for cost escalation caused by floods, cyclones and other disasters

There have been a number of natural disasters throughout Australian history and the data collected from these allow calculations to be made that account for the affects. When a disaster happens, there is usually a massive increase in demand with limited supply. The economic drivers of supply and demand kick in, and re-construction costs rise. The three events that we use as a benchmark for our cost escalation calculations are:

• Post Cyclone Tracey (Darwin 1974) – 28%
• Post Newcastle Earthquake (1989) – 32%
• Post ACT Bushfire (2003) – 50%

The cost of new building codes while re-developing

Another contributing factor to increased costs in the redevelopment of buildings after devastation are the new building codes (fire and floods in particular) introduced over the past few years. Whist the majority of new strata buildings, both low and high rise, conform to these new codes, many older buildings do not.  As a result, there is the possibility that replacement costs can be higher. All must be taken into account if you want an accurate Insurance Replacement Valuation.

A comparison with building design

There is a parallel with engineering design, a lazy engineer can simply over allow for tonnes and tonnes of extra concrete and reinforcing steel costing the eventual owners tens or hundreds of thousands of dollars each. If an Insurance Replacement Valuations is completed by a lazy Quantity Surveyor or Valuer they use massively excessive rates per square metre for all parts of a building regardless of finishes, height above or below the ground or amenity.  Lazy over calculations end up costing the building’s owners money and ultimately makes the person who engaged them look bad.

On the other hand, when engineering building design is done properly the engineer accurately calculates the wind, weight and design loads so that the structure incorporates the required building strength with a safe margin above it. A quality Insurance Replacement Valuation is approached in exactly the same manner.

An Insurance Valuation, completed by a Solutions in Engineering Pty Ltd APIV valuer, is limited in its liability by a scheme approved under the Professional Standards Legislation.

Building owners and managers are required to identify all Asbestos Containing Materials (ACM) within their buildings and include it on an onsite register – What’s your plan to ensure all of your buildings are compliant?

All buildings that were built before 1^st January 2004 must comply. Why this date? It may surprise you to know that while asbestos in the form of Crocidolite was phased out from 1967, asbestos in the form of Amosite & Chrysotile (white) asbestos was used until late 2003.

What are the penalties?

Under the Occupational Health and Safety Act 2011, the maximum penalty for non-compliance is a $3 million fine. There is also further potential risk of civil litigation.

Do residential buildings need to comply?

Yes. While the regulation has an exemption for residential buildings, the exemption is very limited and will not apply if your owners or your tenants, engage in any work from home, direct any employee or contractor on the common property, or operate any commercial activity. This also means the exemption is inapplicable if your building has a manager, even if they are contractors that are off-site. You also have a duty of care under common law to ensure workers or visitors are not exposed to airborne asbestos fibers.

Who has a duty in regards to asbestos?

The How to Manage and Control Asbestos in the Workplace Code of Practice provides guidance on minimising asbestos-related risks for PCBUs with management or control of a workplace, such as the common property in a strata scheme. The Code provides that the person with management or control will usually be the owner of the workplace or a representative of the owner and may:

• Own the workplace and engage workers to carry out work there; or
• Have management or control over the workplace, for example, a property management group or agent!

Therefore, in the case of a Strata Title Body Corporate, both the Owners Corporation and Manager are potential duty-holders under the law. All share responsibility and will likely be liable for statutory fines.

How often does common property need to be re-inspected?

If asbestos is not removed but is left intact onsite in a stable condition, then we recommend that the common property is re-inspected every 12 months. The legislation requires every five years, however there are a number of reasons why asbestos must be monitored, including:

• ACM is particularly dangerous, and risks can change rapidly;
• ACM continually degrades and must be regularly monitored and maintained safely;
• ACM is often damaged by activities around a building

What is the risk from civil litigation?

The biggest concern for Committees and Managers is the risk from a civil claim from a person who has contracted a life threatening illness as a result of residing, working in, or visiting a building containing asbestos which has not been properly managed. For an Owners Corporation to have any chance of defending itself from such a claim, it would need to show that it had properly identified, managed and, where necessary, eliminated any asbestos risks.

Safety is more than just Workplace Health and Safety

The Work Health and Safety Act 2011 has dramatically affected the manner in which an Owners Corporation or an owner must consider their duties under the law, especially in regard to the health and safety of any workers engaged on their common property.

 What are the penalties under the legislation?

 Under the Work Health and Safety Act 2011, the fines are:

$3 million for Owner’s Corporations $600,000 for individuals (committee members & managers) and/or 5 years jail.  These fines are the maximum possible and would apply to serious accidents. There is also a high risk from personal injury litigation.

Strata scheme common property obligations?

Building Owners and Managers have an obligation to ensure that the common property is safe environment for workers (including those conducting maintenance/repair), tenants, owners and visiting members of the public.

Who are responsible person(s) under legislation?

The Act places duties upon a ‘person conducting a business or undertaking’ (PCBU) which are owed to a ‘worker’. Per the definition of a PCBU in the Act, a PCBU could be:

1. An Owners Corporation;
2. The occupier of the lot;
3. A caretaking service contractor or letting agent;
4. A Strata Manager.

Likewise, a ‘worker’ under the Act could be:

1. An employee;
2. A contractor or subcontractor;
3. An employee of the contractor or subcontractor;
4. Any person who receives direction whilst onsite.

As persons undertaking or conducting a business, you have obligations to ensure the risk of injury or illness is minimised for persons coming into or leaving the property, visitors and workers alike.

In most cases there will be more than one person with management or control. All share the responsibility and will be drawn into any fines or prosecutions for non-compliance. It is hard to conceive that both the building owners/committee and the strata and building manager will not fit into one of the definitions above.

Do all buildings need to comply?

There is a highly conditional exemption that will rarely apply to residential strata buildings under Section 7 of the Work Health and Safety Act 2011. This exemption does not apply if:

• The Owners Corporation has engaged a service contractor or letting agent;
• One or more of the occupiers of the lots conduct a business (including a home business) from their lot, which is accessible via the common property;
• One or more lots are used for short-term accommodation;
• Owners directly employ people. E.g. Cleaners and baby-sitters.

It is almost impossible to ensure that occupiers do not conduct business from their lots (which may include working from home in any capacity, e-bay selling activities and multi-level marketing) so the reality is that this exemption has very little application and should not be relied upon at all.

What are the litigation risks?

Often a bigger concern than WHS for building owners and managers is the risk of a civil claim from a person who incurs an injury or illness as a result of residing or working in, or visiting a building which has not properly managed the WHS obligations.

For an Owners Corporation to have any chance of defending itself from such a claim it would need to show that it had properly identified, managed and where necessary eliminated any WHS risks.

What do you need to do to meet your obligations?

Engage a suitably qualified and experienced company to conduct the following steps based on the relevant Australian Standards:

Inspect the common property and provide a report that clearly identifies any breaches of compliance;

1. Assess the risks that may result from those hazards;
2. Provide recommendations on control measures to prevent or minimise the level of risks present
3. Monitor and review the effectiveness of these measures annually.

What are Allocations of Costs?

Many developers request an Allocations of Costs before the scheme is completed. This assessment of the shared facilities and associated costs for future stakeholders is often used as a marketing tool. Prospective purchases can clearly see what their anticipated outgoings will be helping them commit to pre‐purchase.

Many a time we’ve been called in years later to try and clean up the mess left by developers not having undertaken this report before selling the units. This is especially prevalent mixed use schemes.

Our Quantity Surveyors workout the percentages of use that each shared facility item would endure per lot owner e.g. a retail lot is twice as likely to use the compactor more than a commercial lot would.

Distribution of costs could be based on the number of lots or the total net lettable area of each lot, or the numbers of maintainable plant and equipment units in the plant room, factored to represent the respective benefit of each stakeholder.

Usually it’s the residential schemes end up reimbursing costs that the retail and commercial lots should be paying e.g. passenger Lifts located in the commercial area. Providing there’s no access from the commercial/retail lots, the pool, gym, sauna and other such facility costs should be borne by the residential lots.

So you can see the opportunity for accusations towards the developer and ensuing arguments to arise! Just another way we can take the Monkey off your back, helping make you look good and increasing the likelihood of cementing your relationship with your clients.

What is the legislation?

Section 115 of the new Strata Schemes Management Act 2015 requirement is that the original owner (developer) must have an Initial Maintenance Schedule (IMS) prepared for the ongoing building maintenance of the common property of the strata scheme.  The developer must provide it to the Owners Corporation at least 48 hours prior to the first AGM being held. It is an offence if the schedule is not delivered and the NSW Civil and Administrative Tribunal (the Tribunal) can make orders for the developer to provide the schedule to the Owners Corporation.

The purpose of the IMS is to provide information to the Owners Corporation (i.e. all owners in the scheme at the time) about the obligations and costs relating to the maintenance of common property. The schedule must adhere to section 29 of the Strata Schemes Management Regulation 2016. The initial maintenance of the common property of a strata scheme must contain maintenance and inspection schedules for any item that is on common property if the maintenance and inspection is reasonably required to avoid damage to the item or a failure to function properly for its intended purpose.

Items to be included in the IMS, maintenance and inspection schedules must be included for the following:

• Exterior walls, guttering, downpipes and roof;
• Pools and surrounds, including fencing and gates;
• Air conditioning, heating and ventilation systems;
• Fire protection equipment, including sprinkler systems, alarms and smoke detectors;
• Security access systems; and
• Embedded networks and micro-grids.

Also included are all warranties, manuals, and the name and contact details of the manufacturer and installers. The schedule may be in hard copy or in electronic form that is accessible by the Owners Corporation. The Owners Corporation may also choose to include other items to be included in the schedule. The schedule, and all of its inclusions, should be kept in a safe place and must be considered by the Owners Corporation at its first meeting.

The maintenance schedule should be kept up to date and work in conjunction with the Capital Works Fund. While this seems like a dry obligation, it adds a new layer of protection for new buildings. The IMS if utilised as intended can provide peace of mind to both the developer and future owners from defect claims.

So how does the IMS work in with the Building Defects Bond Scheme?

Something that Strata tenants should be aware of is the building bond scheme, which, alongside initial maintenance schedules, allow properties to hold careless developers accountable. Previously, it was ‘buyer beware’ for new buildings, but under the building bond scheme, off the plan buyers can have peace of mind that the developer has contributed to fixing defects as they emerge.

In the first two years, when the majority of defects arise, the developers’ compulsory bond is used to repair defects at no cost to the Owner’s Corporation. Beyond two years, the Initial Maintenance Schedule working in harmony with the Capital Works Fund Plan, should provide a record of the state of the building, and assist holding all stakeholders to account.

In help ensure your scheme is being vigilant with enforcing the recommendations in their IMS, Solutions in Engineering offer quarterly inspections of the Owners Corporation for the two years of the Building defects bond scheme. Contact us now for a free quote on how we help you keep you schemes compliant.