Residential building restraining orders could make insolvency a realistic prospect – Construction and planning

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A restraining order in place on a development in Hassall Street, Parramatta, NSW, serves as a useful reminder to developers, builders and financiers of the importance of complying with the requirements of the Design and Construction Practitioners Act 2020 (NSW) (DBP Act) and the Residential Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) (together, the Acts) (and the consequences of non-compliance).

As a previous overview explored, the New South Wales Building Commissioner actively uses broad auditing rights and enforcement powers to deal with unsafe, faulty or non-compliant developments.

As Parramatta’s restraining order shows, the consequences of failing to comply with the laws are becoming increasingly apparent as builders and developers (and their financiers) agree to manage the financial implications of restraining orders. prohibition, stop work orders and construction rectification orders. .

Parramatta’s restraining order

The NSW Building Commissioner has issued a prohibition order in relation to the development at 9 Hassall Street, Parramatta (Parramatta Project) on July 22, 2021 which prohibited the issuance of an occupancy certificate until the revocation of the decree (Parramatta restraining order).

Parramatta’s restraining order was issued on the grounds that rectification work had failed to adequately address serious defects identified during inspections carried out by authorized NSW Customer Service Department officers in 2020. Parramatta’s restraining order remained in effect for over 10 months and caused significant problems for the project and the developer.

As reported by Australian Financial Review, receivers and managers have since been appointed to the Parramatta project by lead financier Wingate, due to significant delays in development. Receivers and managers will now have to consider how to complete the work required by the NSW Building Commissioner to enable the Certificate of Occupancy to be issued and to settle any pre-sale contracts.

Legislative power to issue restraining orders

Under Section 9(1) of the RAB Act, the Secretary may issue a restraining order if any of the following apply:

  • the notice of planned completion to be given to the secretary has not been given or has been given less than six months before the filing of the application for a certificate of occupancy;

  • a Notice of Change of Scheduled Completion of a new scheduled date to be delivered to the Secretary has not been delivered or has been delivered less than six months prior to the application for the Certificate of Occupancy;

  • the secretary is convinced that there is a serious defect in the building;

  • a rectification bond required under an undertaking given by the promoter relating to the residential complex has not been provided to the secretary;

  • any construction bond required under Section 207 of the Strata Management Act 2015 has not been delivered to the Secretary; Where

  • a developer, in respect of the construction work of the apartment building, fails to comply with an instruction of an officer authorized under section 17 or 18 of the RAB Act.

Consequences of restraining orders

Prohibition orders can have significant financial implications for builders, developers and their financiers.

In particular, restraining orders can:

  • cause promoters to breach the covenants of their financing documents and be liable for additional financing costs and interest. Financiers can enforce their security and take control of the development if developers are unable to remedy the breach of these covenants caused by significant delays in project completion resulting from a cease and desist order;

  • trigger the liability of builders for damages under the relevant construction contract. Orders are usually imposed when there has been a significant non-compliance and/or violation of the law. Such non-compliance and/or violation will take considerable time to correct and will therefore result in substantial damages. It can also force developers to fire and replace builders who are unable to complete late projects, which only amplifies the significant delays already experienced;

  • in certain cases, give buyers of off-plan apartments the possibility of terminating their sales contracts if the certificate of occupancy has not been issued by the expiry date of these contracts;

  • raise reputational concerns about the developer and the project subject to the prohibition order and discourage interest from potential buyers, which impacts the financial viability of the project and other projects to which the developers or builders are associated; and

  • be registered in the General Register of Deeds with NSW Land Registry Services

Executive responsibility of directors and management

Directors and persons who participate in the management of the company and who are in a position to influence the conduct of the company of developers and builders will also be liable for breaches of relevant legislation (including the DBP Act, Housing Construction Act 1989 (NSW) and the Construction Products Safety Act 2017 (NSW)) (see our previous overview for more details). This liability of officers will continue to apply to such directors and individuals even if the developer or builder concerned has become insolvent. Penalties under the relevant legislation can be up to $330,000 for corporations and $110,000 for individuals for each violation.

Implications for Financiers and Investors

The Parramatta project should serve as a warning to financiers and investors (whether at the senior, subordinated or mezzanine debt level) of the consequences that may result from a promoter’s failure to comply with the requirements of the relevant legislation.

The substantial delay of a project resulting from a cease and desist order will have a significant impact on the developer’s ability to meet the completion deadline stipulated by the sales contracts (failing this, buyers may seek to terminate these contracts) , which, in turn, will impact the viability of the project, including the ability of developers to repay their loans.

Alternatively, promoters or, in the event that promoters become insolvent, receivers and administrators, may need to enter into enforceable undertakings to rectify non-compliances to the satisfaction of the Secretary in exchange for orders to be lifted. Lenders will then have to determine whether they wish to increase their exposure to these projects.

Lenders and investors in such situations may not be able to recoup the loans and equity provided to such promoters. Better governance and oversight by financiers and investors is needed to avoid the consequences of non-compliant projects and the impact of any imposed order on development.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.





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