Who is responsible when external cladding fails in an apartment tower during a fire?

In early 2019, in a judgment that ran to 647 paragraphs, County Court Judge Woodward, sitting as a Vice President at VCAT, had to deal with a claim following a fire at a residential tower in Melbourne that occurred due to faulty cladding (see: Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd (Building and Property) [2019] VCAT 286). 

This was the first major decision in Australia in relation to the respective liability of parties involved in the design and construction of a building which included combustible cladding.

Facts

The case concerned the well-publicised fire at the 21 storey Lacrosse Apartment Tower in La Trobe Street, Docklands (near Marvel Stadium) on 24 November 2014. 

That fire (as well as the Grenfell Tower fire in England and the Sydney Opal Tower cracks) prompted widespread critical analysis of the adequacy of building regulation by governments across Australia.

The commencement of the fire was quite simple – the tenant at the apartment returned from a working holiday in France, dropped his backpack, and decided to smoke a cigarette on the apartment balcony. He left his cigarette butt in a plastic food container that served as an ashtray.

At 2.23am, the smoke detector in the hallway outside his apartment activated and notified the Metropolitan Fire Brigade. A fire crew arrived minutes later, by which time the fire had travelled rapidly up the external wall cladding to the fourteenth floor and spread to the balcony on each level. Six minutes later the fire had reached the roof of the Tower.

The fire lead to losses exceeding $12 million.

The unextinguished cigarette butt was held to be the ignition source but the rapid spread of fire up the side of the building was facilitated by the aluminium composite panels (Cladding) used on the southern wall. The Cladding had a 100% polyethylene core.

In late 2018, the builder of the Tower, L U Simon Pty Ltd (L U Simon) agreed to replace the Cladding. 

The claim in VCAT focused on the allocation of responsibility between the remaining respondents.

The proceeding

The owners corporations and apartment owners brought a claim in VCAT against the following:

• L U Simon;
• the building surveyor and his employer (Gardner Group);
• the architect, Elenberg Fraser Pty Ltd (Elenberg Fraser);
• the fire engineer Tanah Merah Pty Ltd, trading as Thomas Nicolas (Thomas Nicolas);
• the occupier of apartment 805, Gyeyoung Kim (Mr Kim);
• the resident who lit the cigarette, Jean-Francois Gubitta (Mr Gubitta); and
• the Superintendent, Property Development Solutions Pty Ltd (PDS).

None of the Respondents had a direct contractual relationship with the Owners.

The case was heard over 22 sitting days, with 91 volumes of tribunal books and 10 barristers and 5 firms of lawyers representing the parties. Evidence was given by seven lay witnesses and 13 expert witnesses. Mr Kim (the apartment occupier) and Mr Gubitta (the tenant who lit the cigarette that caused the fire) did not participate in the proceeding. 

PDS reached a settlement and withdrew their involvement before the hearing.

Judge Woodward’s findings

His Honour found that:

1. The external cladding specified in the original design, namely Alucobond, failed to comply with the Building Code of Australia (BCA). The substitute aluminium composite cladding (ACP) ultimately installed also failed to comply with the BCA and accordingly, the Building Regulations 2006 (Vic).
2. In installing the cladding, L U Simon breached the implied warranties of suitability of materials, fitness for purpose and compliance with the law set out in section 8 of the Domestic Building Contracts Act 1995 (Vic) (the DBC Act) and is therefore liable to pay damages to the Owners. However, his Honour found that L U Simon did not fail to exercise reasonable care in the construction of the Tower.
3. Each of the consultants (Gardner Group, Elenberg Fraser and Thomas Nicolas) breached their obligations to L U Simon under their respective consultant agreements (which were novated to L U Simon by the developer) by failing to exercise due care and skill in that:
   • Gardner Group issued a Building Permit for the relevant stage of the building approving the specification by Elenberg Fraser of the ACP. Gardner Group also failed to notice and query the incomplete description of the cladding system in a report produced by the Thomas Nicolas.
   • Elenberg Fraser failed to remedy defects in its design (namely the specification of ACP and design drawings providing for extensive use of ACPs at the Tower) which caused the design to be non-compliant with the BCA and not fit for purpose. Elenberg Fraser also failed as head consultant to ensure the ACP sample provided by L U Simon was compliant with Elenberg Fraser’s design intent as articulated by its specification and the BCA.
   • Thomas Nicolas failed to conduct a full engineering assessment of the Tower in accordance with the International Fire Engineering Guidelines and failed to include the results of that assessment in its fire engineering report. Thomas Nicolas also failed to recognise that the ACP used at the Tower did not comply with the BCA and did not warn L U Simon (or Gardner Group, Elenberg Fraser or PDS) accordingly.
   • The resident, Mr Gubitta, had breached a duty of care owed to the Owners by failing to take care in the disposal of his smouldering cigarette, but concluded that his responsibility for the loss and damage was minimal.

The Result

While his Honour concluded that L U Simon was liable to pay damages to the Owners, he then determined that the damages payable by L U Simon were to be reimbursed by the other Respondents as ‘concurrent wrongdoers’ pursuant to Part IVAA of the Wrongs Act 1958, in the following proportions:

• Gardner Group: 33 percent
• Elenberg Fraser: 25 percent
• Thomas Nicolas: 39 percent
• Mr Gubitta: three percent

Because Mr Gubitta had taken no part in the proceeding and no party had sought judgment against him, no order was made against Mr Gubitta and L U Simon was not reimbursed the three percent damages it is liable to pay to the Owners that was apportioned to Mr Gubitta.

The Owners originally claimed at least $12,765,812.94 in damages; of that amount, $4,851,937.19 was agreed as payable between the parties.

Including the agreed sum, his Honour awarded damages in the sum of $5,748,233, finding that damages in the sum of $194,414.01 were not proven by the Owners and were disallowed. The remainder of at least $6,823,165 are to be the subject of further submissions and remained unresolved at the date of the decision.

In his reasons, his Honour takes care to note that his comments ‘should not be read as commentary generally on the safety or otherwise of ACPs and their uses’. His Honour notes that there may be circumstances (such as signage or decorative use) where the use of ACP can be compliant, including where made subject to a performance-based solution under the BCA, or where types of ACP with a lower polyethylene content is used. His Honour notes that his findings relate only to the particular use of ACP at the Tower and are informed by the particular contracts between the parties in the case.

The judgment focuses on the selection, approval and installation of the ACPs that enabled the fire spread. Critically, his Honour found that the ACP did not satisfy the Deemed-to-Satisfy provisions of the Building Code of Australia (BCA).

As noted, His Honour also found that the builder breached the warranties implied into the design and construct contract under section 8 of the DBC Act. Those are the warranties as to:

• suitability of materials (section 8(b) of the DBC Act);
• compliance with the law (which includes the BCA) (section 8(c) of the DBC Act); and
• fitness for purpose (section 8(f) of the DBC Act).

His Honour confirmed the well established position that the builder’s liability for design and construction was not merely an obligation to use reasonable care and, in particular, the warranty for fitness for purpose was “absolute”. Further, the obligation of the builder must be measured by reference to the purpose for which the building was required under the conditions likely to be encountered (i.e., Lacrosse was a multi-storey residential apartment building).

The builder was found to have breached the warranties and, therefore, held primarily liable to the owners.

However, his Honour found that the builder did not fail to exercise reasonable care in the construction of Lacrosse by installing the ACP's.

Instead, his Honour found there was no evidence that the builder failed to take reasonable care and no evidence adduced from any party to the effect that the builder did not act reasonably or in accordance with what would be expected of a reasonably competent builder in the circumstances of the case. The critical point here (at paragraph 307):

... for a large and complex project, [the builder] has sought to cover acknowledged shortcomings in its own expertise by engaging highly skilled professionals to (in a variety of different ways) direct and supervise its work.

Implications 

The Victorian State Government has undertaken an audit of buildings with Cladding issues. 

According to "The Age" on 26 November 2019: 

More than 1200 buildings with risky levels of flammable cladding are included on the state government's list – which is not publicly available – but the [Master Builders's] Association believes there are potentially many more buildings around Victoria that could be dangerous.

Cladding is clearly an issue that will have ramifications for a long time to come, and that needs a concerted effort by all parties concerned (Builders, Architects, Engineers, Building Surveyors, Owners Corporations, Residents, Owners, Regulators and Insurers) to resolve. 

The Andrews government has committed $600 million to remove the combustible material used on hundreds of high-risk buildings. However, it seems that money has all been allocated and it is most likely to be used for extremely high-risk buildings housing the frail, elderly and very young (such as hospitals, child care centres and nursing homes). 

The State government has also stated that it will 'crack down' on dodgy builders and building products. 

The solution to this major problem seems to be that existing buildings with dangerous Cladding will need to be rectified, and as soon as possible. 

The problem of who will pay for the cost of doing this remains to be resolved. However, Judge Woodward's decision points to the direction that is likely to be followed. 

In other words, the professionals involved in the choice of Cladding, and its installation, will be held responsible if negligence against them can be established. 

Primarily, the DBC Act obliges builders to meet certain minimum standards (among others) as to the suitability of materials and fitness for purpose. 

As this case has shown, builders can defray that responsibility if they employ suitable professional advisors who in turn fail to meet their professional obligations. 

WG Stark

Hayden Starke Chambers

What are the recent amendments to the Owners Corporations Act, 2006 relating to short term accommodation arrangements?

1.     Air B’N’B/ Stayz/the short term rental industry in general have attracted considerable media attention in Victoria and Australia over the last several years. 

2.     Attempts to curb the ability of apartment owners/tenants to let their property out by short-stay accommodation arrangements had proved largely unsuccessful in the Victorian Building Appeals Board, Victorian Civil and Administrative Tribunal, the Victorian Supreme Court and the Court of Appeal. For example, see: Owners Corporation PS 501391P v Balcombe [2016] VSC 384, an appeal to Riordan J from VCAT, which concluded that Owners Corporations could not prohibit short term leasing. See also Genco & Anor v Salter & Anor [2013] VSCA 365, an appeal to the Court of Appeal from (originally) the Building Appeals Board, relating to an attempt by the City Of Melbourne to allege that the use of apartments for short stay arrangements was a breach of the Building Code.

3.     However, see Swan v Uecker [2016] VSC 313 in which the landlord was actually successful, arguing the tenant was in breach of the lease by sub-letting to ‘Air B’N’B. 

4.     I wrote a 3 part blog about this issue in August 2016 (see: https://melbournepropertylaw.blogspot.com/2016/08/).

5.     In late 2018, the Victorian Labor Government introduced amendments to the Owners Corporations Act, 2006 in an attempt to give Owners Corporations the power to regulate these types of arrangements. Act No 34 of 2018 received Royal Assent on 14 August 2018. The Act came into effect on 1 February 2019.

6.     Among other things, the Act establishes a complaints procedure relating to short-stay accommodation. 

7.     The new provisions purport to allow complaints to the relevant owners corporation about a breach by a short-stay occupant of the conduct proscriptions applying to short‑stay accommodation arrangements. 

8. The relevant conduct proscriptions include —

a.    Unreasonably creating noise likely to interfere substantially with the peaceful enjoyment of another lot;

b.    Behaving in a manner likely to interfere unreasonably and substantially with the peaceful enjoyment of another lot;

c.     Using a lot or the common property so as to cause a substantial hazard to the health, safety and security of any person or an occupier;

d.    Unreasonably and substantially obstructing the lawful use and enjoyment of the common property by an occupier or a guest of an occupier; and

e.    Substantially damaging or altering a lot or the common property, intentionally or negligently.

Action

9.     If an owners corporation decides to take action in respect of a complaint, it:

a.    Must give notice in writing, specifying the alleged breach and stating that the breach must be rectified; and

b.    May apply to VCAT to resolve a short-stay accommodation dispute in relation to the breach.

10.     Under the new Section 169, VCAT may make any order it considers fair including one or more of the following orders—

a.    A prohibition order under section 169D (preventing the future use of the premises for short term accommodation arrangements);

b.    A loss of amenity compensation order under section 169E;

c.     An order for a civil penalty not exceeding $1100 under section 169G; and

d.    Any applicable order that VCAT may make under section 165.

11.  The owners corporation must report to the annual general meeting in relation to the number of complaints made; the nature of the complaints; the number of matters on which action was taken under this Division; the nature of the matters in respect of which action was taken; and the outcome of each action.

12.  It will be interesting to see how successful the amendments are. 

13.  I believe there are some relatively large scale short stay operators in Melbourne, whose businesses may be affected (severely) by the legislation, and as a result who may attempt to overturn the legislation as unconstitutional. For example, there does not appear to be any compensation available to those operators whose businesses are severely impacted by the amendments to the legislation.

WG Stark

Hayden Starke Chambers

Are there any recent cases in 2016 about short stay apartments in Victoria? - Part three

1.     In the final post in this series, I will examine a case about a landlord who leased an apartment in Fitzroy St, St Kilda to a tenant, who then sub-leased that apartment to short stay tenants. The landlord applied to VCAT for an order for possession of the apartment, to evict the tenant, alleging the sub-lease was a breach of the lease.

Tenant allowing property to be used for Air B’N’B is a breach of the lease

2.  In Swan v Uecker [2016] VSC 313, the Supreme Court of Victoria (Croft J) (on appeal from VCAT pursuant to s 148(1) of the Victorian Civil and Administrative Tribunal Act 1998) was called upon to decide whether the use of a property by a tenant for letting to Air B’N’B clients was a breach of the tenant’s lease. 

3.  Ms Swan owned a two bedroom apartment in Fitzroy Street, St Kilda (“the Apartment”). In August 2015, she leased the Apartment to the Respondents pursuant to a residential tenancy agreement for a term from 20 August 2015 to 19 August 2016 (“the Lease”).

4.  The Applicant sought an order for possession in VCAT on the basis that the Respondents had sublet the Apartment in breach of the provisions of the Lease. The Applicant’s case was that the Respondents granted leases to third parties (“AirBnB guests”) who stayed in the Apartment. The Respondents conceded before the Tribunal that AirBnB guests stayed at the apartment for short-term stays, booked through the AirBnB website.

5.  The AirBnB listings for the Apartment offered two distinct occupancy options. The first involved making the entire Apartment available for AirBnB guests at the rate of $200 per night, and the second involved making only one bedroom available for AirBnB guests at the rate of $102 per night. It is, however, only the AirBnB agreement for occupation of the entire Apartment that is relevant for the purposes of the appeal. The minimum stay under this agreement was three nights and the maximum five nights.

6.  S 253(1) of the Residential Tenancies Act, 1997 provides that:

A landlord may give a tenant a Notice to Vacate rented premises if the tenant has assigned or sublet or purported to assign or sublet the whole or any part of the premises without the landlord’s consent.

7.  The tenants argued that the agreement between them and the AirBnB guests did not mean that the latter were granted “exclusive possession” of the Apartment.

8.  VCAT agreed, and dismissed the application on the basis that the Respondents had only granted licences to occupy to the AirBnB guests, but not leases. Consequently, the Tribunal found that they had not sublet the Apartment and were therefore not in breach of the Lease/Act.

9.  On appeal, Croft J analysed the test to determine whether the AirBnB guests occupied the premises pursuant to a lease or a licence.

10.  He noted (at paragraph 31, quoting from several relevant cases): 

It is well accepted that, as a matter of law, the test to be applied to distinguish between a lease and a licence is whether or not what is granted is exclusive possession.…In deciding, in such cases, whether what has been granted is the right to exclusive possession, the court, in the process of construction, has in practice looked, inter alia, to two things: the nature of the rights which, in terms, have been granted; and the intention of the parties. Party intention in this context is to be determined objectively on the basis of the terms of the particular agreement under consideration and having regard to surrounding circumstances to the extent that is permissible according to the ordinary rules of construction. Whether the transaction creates a lease or a licence depends upon intention, only in the sense that it depends upon the nature of the right which the parties intend the person entering upon the land shall have in relation to the land … And how is it to be ascertained whether such an interest in land has been given? By seeing whether the grantee was given a legal right of exclusive possession of the land for a term or from year to year or for a life or lives. If he was, he is a tenant. And he cannot be other than a tenant, because a legal right of exclusive possession is a tenancy and the creation of such a right is a demise.

11.  In the circumstances of the case, Croft J held that, yes, the exclusive use of the property by Air B’N’B clients was properly characterised as a lease; this made the arrangement a sub-lease, and therefore in breach of the lease between the tenant and the landlord, allowing the landlord to terminate the lease.

12.  It is notable that Justice Croft made some remarks about the effect of this decision on AirBnB more generally; he stated that the case was determinative only of the particular arrangement between these parties. At paragraph 80, he noted:

First, this is not a case on the merits of AirBnB arrangements. Neither is it a case on whether or not AirBnB arrangements might be said to be “illegal” — either in some particular or some general, non-legal, sense. Rather it is a case, on appeal, which raises for determination — directly or indirectly — the legal character of this particular AirBnB arrangement and any consequences this characterisation may have in the context of the terms of the lease of the apartment concerned. Secondly, the context provided by the terms of the particular apartment lease are important. Although this apartment lease is a residential lease, many commercial leases restrict the tenant from sub-leasing, assigning the lease, granting any licence to occupy all or part of the leased premises or otherwise parting with possession without the landlord’s prior consent. Broad terms such as this would prevent, for example, sub-letting or licensing without the landlord’s consent and would avoid the need — as in the present case — to characterise the nature of the same arrangement like the AirBnB arrangement for occupation of the whole of the leased premises as a sub-lease or a licence.

13.  This case is possibly of relevance to the Watergate operator, as they utilise 14 apartments, although they apparently only own one (apparently 9 are leased, with 4 available on a commission basis). Therefore, the owners of the 9 leased apartments may now try to terminate their leases.

14. Of the three methods tried to control short stay apartment usage in Victoria, this seems to be the most likely to succeed. However, it will not apply to owners of apartments who let their properties out for short term stays. 

15. I understand that the Victorian government is currently considering whether to amend the relevant property legislation to allow Bodies Corporate to have some control over this type of apartment usage within the buildings under their control. Stay tuned for further developments! 

WG Stark 

Hayden Starke Chambers

Are there any recent cases in 2016 about short stay apartments in Victoria? - Part two

Short stay accommodation

1. In the second post in this series, I will look at the attempt by the Body Corporate at the Watergate Apartments to outlaw so called ‘short stay’ use of apartments within the building complex under their control.

Body Corporate Rules – can they outlaw short stay accommodation?

2. Apparently in respect of the same operators as I wrote about in part one of this series, in Owners Corporation PS 501391P v Balcombe [2016] VSC 384, the Supreme Court of Victoria (Riordan J) (on appeal from VCAT) was called upon to decide the validity of Body Corporates rules that outlawed ‘short stay’ use of apartments within the building complex under their control.

3. Justice Riordan sets out his conclusion in summary in paragraph 1 of his reasons, as follows (emphasis added):

The main question in this appeal is whether owners corporations (previously called bodies corporate) have the power to make a rule prohibiting short-term letting of apartments. I have found that, under both the Subdivision Act 1988 (Vic) (see paragraphs [99] to [124] below), the Owners Corporations Act 2006 (Vic) (see paragraphs [145] to [188] below) and the regulations made under those Acts, Parliament did not demonstrate an intention to confer such extensive powers on owners corporations principally for the following reasons:

(a)   A review of the development of strata title legislation indicates the principal role of the body corporate or owners corporation was to manage and administer the common property of a strata subdivision.

(b)  The relevant legislation does not disclose any intention for owners corporations to have power to substantially interfere with lot owners’ proprietary rights; or for owners corporations to effectively have an unappellable right to overrule uses permitted under planning legislation.

(c)   A parliamentary intention to provide to owners corporations powers that could substantially inhibit the conduct of lot owners on their own lot would need to be expressed in clear and unambiguous language.

I have further found that the relevant rule, in this case, was not deemed to be valid by s 27(2C) of the Subdivision Act 1988 (Vic) (see paragraphs [128] to [132] below), or the transitional provisions of the Owners Corporations Act 2006 (Vic) (see paragraphs [136] to [144] below).

4. Justice Riordan then embarked on an extensive historical review of bodies corporate under the relevant Victorian property legislative enactments.

5. At paragraph 114, Riordan J concluded:

If this construction is correct, then the appellant had no power to make conduct rules and its power, with respect to conduct matters, was limited to enforcing the Standard Rules. In those circumstances … the appeal must fail.

6. Riordan J went on to examine the particular rule in question, and then determined (at paragraph 123):

In my opinion, the breadth of Rule 34 has caused it to exceed the scope of what was intended by the subdivision legislation and, in particular, the Subdivision (Body Corporate) Regulations 2001 (Vic) …

7.  And at paragraph 124:

In summary, I do not consider that the Parliament conferred powers on bodies corporate for the Statutory Purpose of substantially interfering with rights and privileges usually attendant upon freehold owners. … Accordingly, I consider that Rule 34 was not sufficiently directly or substantially connected with the Statutory Purpose to be a real exercise of the rule making power.

8.  In those circumstances, Riordan J concluded that the VCAT decision was correct, and that the Body Corporate rule that purported to outlaw short-stay letting of apartments within the building complex was invalid.

9.  As a result of this decision, it is unlikely that this will be an effective method of stopping AirBnB usage within apartment complexes in Melbourne and Docklands.

WG Stark

Hayden Starke Chambers