By Russell Cocks, Solicitor
First published in the Law Institute Journal
Recent amendments to the Local Government Act mean that solicitors acting for buyers and sellers of real estate will need to take into account any charges recorded against the property relating to funding for cladding rectification.
Recent concern about defective cladding used in the construction of high-rise residential buildings has resulted in the government adopting a legislative solution that may provide some solace to the unfortunate unit owners who are faced with massive rectification costs, but it also has an impact on third-party purchasers of such properties. After a lengthy inquiry in relation to the cause and consequences of the defective cladding material it became clear that any solution that depended upon allocation of blame would involve years of legal proceedings and an immediate solution had to be found to allow the owners of units affected by the defective cladding to move on with their lives.
Responsibility for administration of the solution has been allocated to municipal Councils, with a new Part 8B inserted into the Local Government Act. This authorises Councils to enter into a ‘cladding rectification agreement’ with the owner of rateable land (or an Owners Corporation) and a lending body, presumably a conventional financier. Council may also be the lending body, but it is difficult to imagine, in the short term at least, that Councils will assume this entrepreneurial role. Thus, the standard agreement will be tripartite, between the owner (or Owners Corporation), the Council and a lender.
The agreement will provide that the lender will advance the funds to pay the rectification works and Council will levy a charge on the land to recover the loan advance, interest and fees associated with the levy by instalment over a period of not less than 10 years. Thus, in a perfect world, the owner (or Owners Corporation) will be happy as the cladding will have been rectified, the lender will be happy as the loan, plus interest will have been repaid and Council will be happy as it will have charged an administrative fee. But we do not live in a perfect world.
Owners will still feel aggrieved by being required to bear the cost of rectifying a building defect, lenders will inevitably face some bad debt scenarios and Councils will be regarded as the bad guys by all other parties simply because Councils put the deals together. How dissatisfied owners relate to each other in an Owners Corporation environment is another can of worms and time may reveal that the solution turns out to be worse than the problem.
Given that Councils must be satisfied about the amounts due pursuant to any rates, taxes or levies and any mortgage relating to the land before entering into an agreement, it is difficult to see, particularly in an Owners Corporation environment that requires 75%-member approval, these agreements being particularly easy to set up, let alone administer for 10 years. The Act is silent as to whom the loan amount is paid and when repayments are to be made to the lender, presumably leaving it to each particular agreement to deal with these ‘site specific’ details.
However, the property lawyers concern is not so much as to how the agreements will work between the original parties, but how they will affect departing and incoming owners. Presuming that a 10-year levy has been struck, with quarterly instalments link to normal rates, what are the duties of the vendor and expectation of the purchaser in relation to the treatment of the amounts due under the levy?
The Act (s.185L) treats the cladding rectification levy as a “service charge”. Section 162 authorises the imposition of a service charge and s.185L(6) requires a cladding rectification charge to be paid by instalments. A vendor is obliged to disclose statutory charges pursuant to s.32A(b) Sale of Land Act and also charges “for which the purchaser will become liable in consequence of the sale” pursuant to s.32A(c). Disclosure of current charges (and any arrears) may be achieved by annexing a rate notice, a land information certificate or giving a not-more-than estimate, but the vendor is also obliged to disclose future liabilities due under the cladding rectification charge and information provided by Council may be crucial in this regard.
Any arrears under the levy will be the vendor’s responsibility, the current instalment will be adjusted between the parties at settlement and the outstanding levy will become the responsibility of the purchaser as a charge on the land (s.156(6)).
By s.175, a purchaser may continue to pay charges by instalments. A purchaser will therefore need to adjust the price that the purchaser is prepared to pay for the property to take account of the outstanding cladding rectification levy that the purchaser will become liable for and full disclosure in this regard is essential so as to allow the purchaser to set its price.
Tips
- cladding rectification charges may apply to multi-storey units
- cladding rectification charges must be disclosed by vendors
- purchaser will be liable for charges due after settlement