Cladding crisis: Who pays for rip down and replacement?

The flammable cladding crisis is not going away any time soon and very different approaches from our two most populous states don’t make the solution any clearer.

More than 400 high-rise buildings in NSW have been deemed to be at “high-risk” from flammable cladding, according to a state government announcement last week.

And in Victoria, more than 250 blocks have been identified as being in serious or significant danger from the material.

Reacting, some might say over-reacting, to the Grenfell fire in London last year, the governments in both state are saying the cladding must be replaced. The question is, who’s going to pay for it?

In Melbourne, there’s a more immediate issue where the Lacrosse block – site of the only major cladding fire in Australia so far – is the focus of a court battle over who is responsible for installing the highly combustible material.

But three years after the blaze, the owners corporation has taken out an $11 million loan to get the problem fixed.

Why?  Because they have to do it, regardless of who is ultimately found to be at fault. And the longer they wait, the greater the risk and the higher their insurance premiums.

Although strata laws vary greatly from state to state, there is one universal rule – owners corporations must fix common property, especially when there’s a question of resident safety. They can start pointing fingers and demanding compensation later.

But that’s where the similarity ends. In NSW, in buildings that are less than six years old, flammable cladding has been defined as a “major defect” and should be rectified by the developers.

In Victoria, according to a Government spokesperson, owners have up to 10 years to claim against builders or developers who have used the wrong materials and/or installed them inappropriately in a building.  Flammable cladding on residential high rises would tick most of those boxes.

However, with the cladding bill for medium to large blocks running to the tens of millions of dollars, the temptation for smaller developers, especially, to declare insolvency and leave the owners to foot the bills may be irresistible.

In the short term, the owners of those 435 blocks in NSW now have to hire experts to discover whether their cladding is the truly nasty stuff that burns ferociously in a fire.

In Victoria, the state’s Cladding Taskforce has identified 45 buildings at serious or immediate risk, where owners have been advised to check all their fire safety services and even remove barbecues from balconies

A further 200 or more buildings have been identified as being at risk, requiring further investigation. Meanwhile Melbourne legal firms are gathering together apartment owners with a view to launching class actions against developers, “changing David versus Goliath battles into Goliath v Goliath contests,” as one lawyer put it.

There is another difference between the approaches of the two states. Innovation and Better Regulation Minister Matt Kean issued a press release last week saying that NSW had taken a more comprehensive approach to the cladding issue than any other state.

A member of Victoria Cladding Taskforce described the comment as “sweet”, pointing out that in Melbourne they haven’t just been identifying buildings at risk but have been going into them and advising them on what to do.

However, Mr Kean has said that he believes developers should pay to replace dangerous cladding but so far NSW hasn’t offered financial help to owners who are hit by cladding bills and who fall outside the six-year claim period.

The Victorian government, in contrast, announced in July that it was introducing a low-cost loan scheme that would allow owners who can’t get compensation by other means to pay back the crippling costs of replacing cladding over 10 years, through their council rates.

It’s hard to predict what will happen to older apartment blocks faced with huge cladding bills. One way or another, their values will take a hit.

The Victorian loans are a start, and commercially available finance can fill the gap while the courts are doing their thing, but long term there must be some way of sharing the pain, especially with those who caused it in the first place.

A version of this column first appeared in the Australia Financial Review.

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