Cladding Rectification Agreements: Are You Covered?

The recent television footage of the Spencer Street apartment block fire in Melbourne brought back traumatic memories of the Grenfell Tower disaster in England, and comes amidst a wave of media coverage of combustible cladding problems. Nobody wants their investment – or indeed their home – caught up in this controversy.

Since October last year, Victorian Councils have had the power to require building owners to enter binding agreements that cover rectification of combustible cladding, or impose a levy to fund such rectification.

“Nobody wants their investment – or indeed their home – caught up in this controversy.”

These new measures are focussed on residential properties, however, thought should be given not only to high-rise homes, but also to businesses that own or occupy commercial premises. If you fall into either category, rectification may impose costs on you as owner, or be passed through to you as tenant through the outgoings under your lease.

The reforms were aimed at funding the cost of removing dangerous combustible cladding from properties. Amendments to the Local Government Act 1989 (Vic) (the Act) have created Cladding Rectification Agreements (CRAs), which will enable owners to rectify the cladding on their property voluntarily, and pay it off via their council rates. On the face of it, it’s a simple, affordable scheme to deal with a dangerous situation.

“On the face of it, it’s a simple, affordable scheme to deal with a dangerous situation.”

But let’s look a little closer. The amendments provide for:

  • Councils to enter into CRAs with an owner or owners corporation to facilitate a loan from a third-party lender to land owners or owners corporations to pay for the cost of rectifying combustible cladding on buildings; and
  • Councils to declare and levy a cladding charge for the loan to fund the rectification.

The loan to fund the rectification is treated as a “cladding rectification charge” (Charge) under the Act, with owners to be given at least 10 years to pay off a Charge through their council rates. As with any other rates and taxes applying to land, the current land owner is liable to make payment, even if that owner did not own the land when the CRA was entered into, and the Charge created. In other words, the debt runs with the property. Practically this means that if an owner sells its property during this period, the outstanding Charge will be transferred with the property to the next owner, as an obligation that endures with the land until satisfied.

CRAs are not mandatory for Councils. Interestingly, an ABC News investigation recently revealed that very few Councils have agreed to participate in the scheme and to date, no Charges have been created in Victoria. But if Councils choose to enter them, they must first ensure certain conditions are satisfied. For instance, specified debts on the property must not exceed the value of the property after the rectification works. This means that the total burden of taxes, rates, charges and mortgages over the property, when combined with the Charge, must not exceed the value of the property after rectification works are completed. Bear in mind, prior to completion of the works, there maybe an impact on the property value and increased insurance premiums. 

For an owners’ corporation to enter a CRA, 75% of its members must vote to enter into the CRA. The Charge is then applied pro rata across individual lots or occupancies.

When buying or selling a property, it is important to check if the property is affected by a Charge. If it is, the Charge will be found in the council rates notice. A potential purchaser should factor the obligation to repay the Charge into the cost of their investment and also ensure that their financier is aware of the CRA as this may impact lending. Tenants or occupiers of the property will not be liable to pay the Charge unless they have agreed to do so – landlords of residential properties cannot compel their tenants to repay a Charge as a condition of a tenancy agreement, though attempts may be made to factor that cost into the rent.

“When buying or selling a property, it is important to check whether the property is affected by a Charge.”

The Legal Practitioners Liability Committee (which, as the name suggests, keeps a weather eye out for liability risks to lawyers) has already identified dangers here. Late last year, the LPLC urged practitioners to consider whether to include special conditions in any contract of sale dealing with CRA issues such as:

  • how to adjust the outstanding loan amount;
  • provision of CRA documents at settlement; and
  • the conduct of the vendor prior to settlement in complying with any CRA.

Vendors should instruct their lawyers to include a special condition in their sale contract that covers the Charge and ensure that the Charge is disclosed in the section 32 statement. If not disclosed, the purchaser may be able to rescind the contract.

“The Legal Practitioners Liability Committee…has already identified dangers here.”

Keep in mind that there are other options for funding cladding rectification works, including self-funding, obtaining an ordinary strata loan, refinancing an existing mortgage or taking out a personal loan.

So whether you’re a buyer, seller or current occupier or owner, it would be wise to seek expert advice about your building’s cladding and, if necessary, develop a position regarding CRAs. There is much to consider here, from all viewpoints, and our real estate team would be pleased to answer any questions you may have.