Victoria announces A$600m fund to replace combustible cladding

Although we will have to wait for a bill to be introduced into parliament to confirm the details of how the fund will operate and what conditions may apply in order to access funding, the report of the task force established to review the extent of the problem (56-page / 813KB PDF) gives us some idea of what we can expect – and raises questions about whether the funding allocated by the government will be sufficient to bring existing buildings up to the necessary standards.

The Victorian Cladding Taskforce has audited 2,227 buildings across Victoria as of 5 July 2019, and identified that 1,069 of those buildings have combustible cladding. Of those 1,069 buildings:

• 72 (7%) have been assessed as being "extreme risk";
• 409 (38%) have been assessed as being "highest risk";
• 388 (36%) have been assessed as being "moderate risk"; and
• 200 (19%) have been assessed as being "low risk".

According to the report, all buildings with combustible cladding which is deemed to be moderate to extreme risk will require cladding removal works in some shape or form. Buildings assessed as low risk by the task force are unlikely to require removal works. Therefore, presumably, low risk buildings will not qualify for access to the new fund, notwithstanding that the owners of these buildings may still be subject to difficulties around obtaining insurance or increased premiums and reduced property values if they do not replace the combustible cladding.

Assuming that low risk buildings are excluded from the fund, this still leaves 869 private buildings across Victoria that will require rectification works to address the risk associated with the use of combustible cladding. This begs the question: is the fund sufficient to cover the cost of all the rectification works?

The answer, according to a report in The Age, is a resounding "no". That report referred to an estimate by planners at RMIT University earlier this year, which found that the repair bill for all buildings in Victoria covered in combustible cladding would be up to A$1.6 billion. Whist it must be acknowledged that complete replacement may not be necessary to bring the buildings down to the "acceptable level of risk" envisaged by the task force, significant replacement works are likely to be required - particularly on the 481 buildings which have been categorised as "extreme risk" or "highest risk". This means that, at its current level, the fund will likely cover significantly less than 50% of the overall replacement cost for affected buildings - reducing to only 37.5% if full replacement is required on all affected buildings.

Presumably this shortfall, which could be as much as A$1bn, will be pushed onto building owners in the first instance. While building owners could have recourse to the as-yet untried 'cladding rectification agreements' scheme implemented by the state government last year, it is not yet clear how this will be structured in practice.

In addition to covering the portion of the costs which the newly-announced fund cannot finance, it is likely that there will be further conditions placed on owners seeking to access funding for cladding replacement works.

One condition which will almost certainly be included is in relation to the recovery of replacement costs from other parties. In its report, the task force recommended that the state government seek to offset the costs of setting up the fund through recovery from those responsible for the cladding being used on these buildings.

While the task force suggested that the state government could achieve this by requiring owners to transfer their legal rights to the state as a condition to receiving the rectification funding, we do not consider that this approach is likely given that it would transfer the cost and inconvenience of pursuing recovery onto the state. We think it is more likely that a condition will be imposed similar to that introduced in the UK as part of its funding scheme in May this year, requiring those who receive funding to take "reasonable steps" to recover the costs from those responsible for the cladding's presence. This leaves the onus on building owners to purse builders and building practitioners to recover the replacement costs, whilst allowing the rectification works to be carried out in the interim.

However, both of these approaches presuppose that the building owners can establish a cause of action against one or more of the parties responsible for the use of the cladding on the building. Although the report refers to a recent decision by the Victorian Civil and Administrative Tribunal (VCAT) in relation to the Lacrosse building as a basis for asserting that these causes of action exist, it is important to note that the judge clearly stated that his reasons for his decision "should not be read as a commentary generally on the safety or otherwise of [aluminium composite panels] and their uses".

Every building is different. As such, each building will have to be assessed separately to determine if there has in fact been non-compliance with the Building Code of Australia and also whether, and to what extent, there is actually a fire risk posed by the use of the combustible cladding on the building.

Although liability may be able to be established in certain circumstances, it is in our view highly unlikely that the liability of builders, design consultants or building surveyors will be able to be established in all cases where the Victorian Building Authority (VBA) says that cladding needs to be replaced. This is particularly so given that there were clear pathways under the Building Code of Australia that permitted the use of combustible cladding where certain conditions were satisfied prior to the amendments in 2018. As such, we anticipate that many builders, design consultants and building surveyors will have a sound legal basis to deny liability.

However, regardless of these difficulties, one thing is certain: the funding scheme will include a mechanism through which the state can seek to offset the funding costs of the scheme through claims against builders, design consultants and building practitioners. As the task force notes in its report, such claims are subject to limitation periods, which means that they will need to be expedited if the state is to recover these costs. Consequently, the industry should brace itself for a significant spike in claims being brought against those parties involved in the design and construction of affected buildings across the state once this scheme is implemented.

Melbourne-based Greg Campbell and Nicholas Whitmore are experts in building regulations and resolving disputes in the infrastructure sector at Pinsent Masons, the law firm behind Out-Law.