How to reduce costs on defect claims
A common complaint from strata committees and owners in newer buildings is the cost of running defect claims. What might start as a simple minor defect claim, often lodged with time running out just to enable negotiations, is turned into a large and costly minor and major defect claim. Owners corporations, unnecessarily, obtain all sorts of reports, under the impression that they have to sue for everything now, even though they may have years to run for major defects.
This is simply not correct. If a different major defect arises later, you can deal with it then.
Why large and expensive defect claims are not the best solution
There are any number of reasons why running a long and big-budget defect claim against a builder/developer is almost always not the best solution, including:
- The Building Commissioner’s statistics are that these types of claims are successful around 5% of the time. The notion of success here is not just winning a case, it also involves having the defects fixed at no cost and recovering the costs of litigation.
- Substantial special levies will need to be struck, to get the matter going and to cover the cost of expert litigation-compliant reports and legal fees on the way through. Inexorably, those special levies continue to soar when more reports are recommended, reply evidence is needed, barristers are engaged and the matter is prepared for final hearing.
- The existence of the claim and the possibility of further special levies devalue all units in the short to medium term.
- The necessary repairs will take much longer than they would if an agreement was entered into with the builder/developer.
- With the delays, any claims from owners for damages due to their units being fully or partially uninhabitable are increased.
- A claim can be made with the Building Commissioner or Project Intervene, who will arrange reports (at no cost to the OC) and either obtain a voluntary undertaking to rectify the defects from the developer or issue a BWRO (building works rectification order) against the developer, which is a significant black mark.
- When you get further into the claim and the legal and expert costs ramp up, builders and developers may decide those costs have made it unfinancial to defend the claim and cover the OC’s spiralling costs and do the repairs, so simply go insolvent.
- Some OCs are under the misconception that put simply, they will win the case and have all their costs paid. This is rarely if ever the case. As per the above the builder may go insolvent, but even in a best case scenario and the OC wins the case with a costs order and the builder is solvent, the OC’s costs will be “assessed”, and the OC will only recover a portion of them (usually around 70%). The OC will, even in this best-case scenario, remain out of pocket for the rest – the gap. So if the costs of running the proceedings are $400,000, an OC’s best case scenario is recovering $280,000 of them.
- There is usually no need to run these proceedings, as builders will usually agree to repairs early on.
- Resolving early may involve some level of compromise from the OC. However, given the costs and uncertainty of litigation, making practical compromises early, before costs skyrocket is usually the smart move, for the reasons set out above.
Strategies to reduce costs in defect litigation
- Instead of each party paying for their own experts, and disrupting owners and tenants 2-3 times for inspections, the parties can do one inspection with all their experts present together. This may enable a joint report at the start, setting out the agreed defects and the defects in dispute (with a mechanism for resolving them). In long and expensive claims, this joint inspection or report happens at the end of litigation (called a conclave), after hundreds of thousands of dollars have often already been spent. It is difficult to see the logic in running it that way around.
- For an even more cost-efficient solution from the start, the OC and builder can agree on one joint expert to do the inspections and prepare the report, follow their recommendations, and split the costs.
- Settlement deeds are how a negotiation would hopefully end. An ideal settlement deed has an agreed list of items with a scope of works, and a time to complete those works. However, it takes some time to get to that point and a settlement can be reached much earlier on, whereby:
- There is an agreed list of defects with a scope of works for each defect.
- There are some defects in the OC’s report it won’t press.
- For the rest which of the defects, which are in dispute, there are further investigations, opportunities to discuss and a dispute resolution process, ending with the parties appointing a joint expert to make the decision, and having to abide by that umpire’s decision, with the cost of the expert split equally.
- Complaints can be lodged with the Building Commissioner, whether through Project Intervene or otherwise, and the Commissioner can be allowed to go through its process at little cost to the OC.
If you would like to discuss any of these strategies, or need help being guided through this process, please contact us by clicking here.
