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Victoria’s combustible cladding crisis, the importance of due diligence when buying an apartment.

Victoria’s combustible cladding crisis, the importance of due diligence when buying an apartment.

The extent of Victoria’s cladding crisis is overwhelming. 2,227 individual buildings have been inspected, and 1069 have been found by Victoria’s Cladding Taskforce to have non-compliant cladding. In actuality, the total number of buildings containing non-compliant cladding in Victoria is higher, because those numbers do not include those buildings outside the remit of the Taskforce, such as industrial and commercial buildings.

The risk presented by many of these buildings is significant. 7% of the buildings inspected to 5 July were rated ‘extreme’ risk and 40% were rated as ‘high’ risk.

Owners of affected buildings, many of whom are owners corporations, have been unable to fund the cost of cladding rectification works, which in many cases such works are in the millions of dollars. The cladding rectification agreement mechanism, introduced by the Victorian Government in late 2018, in an attempt to facilitate funding for such work, has had limited take up.

Can purchasers rescind the Contract if combustible cladding exists?

The Vendor Statement (commonly referred to as the Section 32) is a required legal document accompanying a contract of sale which must be factual and complete. It is an offence for a vendor to knowingly or recklessly provide false or even incomplete information within the vendor statement. In some instances it is possible for a purchaser to withdraw from a contract of sale if it is determined that the Vendor has not provided a full disclosure. If a report or notice in the Vendor Statement discloses that the building is clad in combustible cladding, the purchaser has the right to terminate the contract within the usual cooling off period.

What to look for in the Vendor Statement?

Information that must be disclosed in a section 32 statement includes any reports, notices or orders issued either by the Victorian Building Authority or local council that relate to the existence of combustible cladding installed on the building. If none are present, the owners corporation Certificate (otherwise known as the Section 151) should contain information relating to the presence of combustible cladding in the minutes if it is installed.

In a recent matter where McDonald Legal were acting on behalf of a purchaser, the Section 32 included no report concerning the presence of combustible cladding, however we noted when reviewing the contract that within the Owners Corporation Minutes a mention of Combustible Cladding was discussed in the Maintenance Section of the minutes:

“A review of the building plans indicates that a small area of the building may have ACP installed.”

What exactly is ACP cladding?

ACP cladding comes as panels and is made with polyethylene (PE) pressed between two aluminium sheets. PE is a thermoplastic material, and is often a main component in ACP cladding which can also include minerals such as magnesium hydroxide or aluminium hydroxide.

The Victorian Building Authority (VBA) has noticed the ‘PE’ variety was mostly used on buildings constructed before 2012 and is less prevalent on recently constructed buildings.

Poor fire-resistant cladding is a fire hazard. Expanded polystyrene and aluminium composite panels with a polymer core increase the risk of fire spread, particularly on multi-storey buildings. Generally, these products are not permitted to be used on the exterior of a building.

Most aluminium composite cladding consists of a layer of plastic sandwiched between two aluminium sheets. It’s the plastic layer, usually made of polyethene (also called polyethylene), that’s the highly flammable element in the Cladding.

The above example would likely require a Magistrate to determine whether the mention of ACP in the Owners Corporation Minutes could be considered an adequate disclosure, the example however highlights the importance of having a building inspection undertaken and ensuring that any contract is subject to a determination by a inspector that ACP is not present in the Cladding of the building.

The aforementioned cladding was discovered by the building inspector engaged by the purchasers lender after the lender had already approved the purchasers loan and the contract had become unconditional. The lender requested the Building Managers Essential Safety Measures report and upon receipt of that report was satisfied that the cladding posed no threat to the building and approved the purchasers loan.

Issues for purchasers buying apartments in buildings with ACP

Public safety is the number one reason why the cladding needs to be fixed. However, it is likely that building owners will face increased insurance premiums while combustible cladding remains on the building. The presence of combustible cladding will impact on the value of the building, the owner corporation fees and the ability to sell the apartment.

On 16 July 2019, Premier Daniel Andrews announced the establishment of a funding package of $600 million to fix privately owned buildings with combustible cladding in Victoria. Pressure has been mounting on governments Australia wide to help to solve the swiftly escalating crisis presented by the number of buildings containing non-compliant combustible cladding uncovered in the last 3 years.

The announcement by the Premier has been strongly anticipated over the last year and comes after the Victorian Government committed earlier this year to fund cladding rectification work on public buildings as the cost of rectification works as a result in some circumstances will not be borne entirely by the lot owners.

 

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