Construct NSWImproving consumer confidenceResearch report on seriousdefects in recently completedstrata buildings across NewSouth WalesSeptember 2021

Message from the NSW Building CommissionerIt is with great pleasure that I present this research report into the experience thatNSW strata communities have had with serious building defects. It forms part of theConstruct NSW transformation strategy to establish a customer-facing building andconstruction industry by 2023.This research is the result of a partnership between the Office of the BuildingCommissioner and Strata Community Association NSW to produce clear data on theproblem of serious building defects in NSW strata buildings.It is a ‘first of its kind’ research project, demonstrating a new approach to gatheringhigh-quality evidence for the benefit of government and industry stakeholders, stratamanagers and, most importantly, strata owners.There are many opportunities for us to apply the outcomes of this work to helptransform the experience of living in a strata community. Key opportunities includethe design of legislation, responding to skills and capability gaps among stratamanagers and strata committees, options for digital innovation and the role ofresearch within sector reform. Notably, these opportunities align with our focus areasof the Construct NSW transformation strategy.I wish to thank Chris Duggan and the SCA (NSW) Board for their support, and thestrata managers who took the time to complete the survey and provide us with sucha rich dataset.Finally, I wish to thank the NSW Government and the Hon. Kevin Anderson MP,Minister for Better Regulation and Innovation, for their ongoing commitment torestoring public confidence in the quality of NSW’s residential apartment buildings.David Chandler OAMSerious defects in recently completed strata buildings across New South Wales September 20211

Message from the President of Strata Community Association(NSW)SCA (NSW) have been working in partnership with the NSW Government to delivera better experience to the thousands of people that are housed and employed bystrata communities. They are a vibrant part of our State’s built environment,supporting our economic and social prosperity in many different ways.One of the more challenging aspects of strata living is the resolution of defects. Thebuildings are complex, the impact on residents can be wide-reaching and theirresolution typically involves many different stakeholders. Unfortunately, the practicalreality is that the entire experience can be very challenging. It’s time-consuming,expensive and emotionally taxing for everyone involved, particularly homeowners.We can all benefit from a better process.That is why I’m so proud to have our members playing such a big role in theConstruct NSW transformation strategy. This research aligns with our organisation’sevolution, reflecting our new status as a professional organisation and embeddingour focus to lead with cultures and practices that produce customer-centricoutcomes. It is simple - we want to help deliver better buildings and happier stratacommunities.Thank you to the NSW Government and Office of the Building Commissioner forrecognising the value of strata communities, and thank you to my amazing membersfor your support.Chris DugganSerious defects in recently completed strata buildings across New South Wales September 20212

1. Contents1.Contents32.Executive Summary52.1Incidence of defects62.2Availability of key building records72.3Impact and resolution of serious defects73.4.Introduction93.19Research approachSurvey results and findings134.1Strata building profile134.1.1Location of responses134.1.2Size of buildings144.1.3Type of strata scheme144.1.4Insured value of the building154.1.5NABERS rating164.1.6Building management174.1.7Documentation174.1.8Building age184.1.9Type of Occupation Certificate (OC) issued194.24.1.10 Profile of principal certifying authority204.1.11 Profile of developers204.1.12 Profile of builders214.1.13 By-law consolidation224.1.14 Fire Safety22Serious Defects in the Common Property254.2.125Incidence of serious defectsSerious defects in recently completed strata buildings across New South Wales September 20213 of serious defect264.2.3Probability of serious defects arising264.2.4Strata manager attitudes to off-the-plan strata purchases274.2.5Comparison of survey results with Fair Trading’s OC Audits27Customer journey in resolving serious defects304.3.1Defect resolution method304.3.2Duration of resolution process314.3.3Identifying the defects324.3.4Type of scheme where serious defects were located324.3.5Reporting serious defects to Fair Trading334.3.6Alternative methods for reporting defects354.3.7Barriers to effectively dealing with serious defects36The costs for owners corporations374.4.1Cost categories374.4.2Cost recovery374.4.3Sources of funding for defect rectification38Case Studies394.5.1Case Study ‘A’404.5.2Case Study ‘B’435.Results and Conclusions466.Appendix496.149Survey questionsSerious defects in recently completed strata buildings across New South Wales September 20214

2. Executive SummaryThe NSW Government is committed to restoring consumer confidence in the residentialbuilding and construction industry through the Construct NSW transformation strategy. A keycomponent of this strategy is the use of data and research to inform policymakers, industryand the wider community about the pain points and drivers of poor performance across theconstruction sector. As part of Construct NSW, the Office of the Building Commissioner(OBC) and SCA (NSW) partnered to produce baseline data on the prevalence and impact ofserious defects in recently completed residential strata buildings.Serious defects were defined as those which related to the five key building elements waterproofing, fire safety systems, structure, enclosure, and key services. This definitionapplied the same objective criteria that is used in NSW’s most recent building-relatedlegislation. It was important for this research to focus on these particular defects as theyexist in the common property of buildings and can have a significant impact on safety,amenity and value. The report also includes analysis of non-compliant cladding.Building Commissioner and team members observing constructionThe research sought to survey buildings that had been completed in the last six years andwere over four storeys. This profile was chosen because it aligns with the statutory warrantyperiod of six years for major defects and these buildings are not covered under the HomeBuilding Compensation Scheme.1A questionnaire was issued to over 1,400 strata managers and many questions received asufficiently large response for their results to be statistically significant at the 95% confidenceinterval with a 5% margin of error. There were also follow-up interviews conducted with two1The Home Building Compensation Scheme does not cover new builds but does apply to certain types of additions andalterations to multi-dwelling buildings. For more information visit s defects in recently completed strata buildings across New South Wales September 20215

strata managers to gather deeper insights into the experience of managing buildings withserious defects.Summary of findings from the research2.1Incidence of defectsThe research found that 39% of strata buildings in the sample had experienced seriousdefects in the common property. The majority of serious defects related to waterproofing,affecting 23% of all buildings surveyed. Other serious defects related to fire safety systems(14%), structure (9%), enclosure (9%), key services (5%) and non-compliant cladding (6%).Most of these defects (51%) were identified through independent expert advice which hadbeen commissioned by the owners corporation.Serious defects in recently completed strata buildings across New South Wales September 20216

The incidence of defects observed in the research was compared to data collated by FairTrading from the first 12 months of the Occupation Certificate (OC) Audit program, aninspection regime introduced under the Residential Apartment Buildings (Compliance andEnforcement Powers) Act 2020 (the RAB Act). This comparison showed a 29% reduction inthe incidence of waterproofing defects, potentially pointing to improvements in the industry’sperformance since the audit program was established2.2Availability of key building recordsStrata managers were generally able to identify the developer, builder and certifier involvedin the construction of each building. However, most managers reported that they did notpossess many of the key documents that should have been held by an owners corporation.For example, less than half were in possession of the building’s as-built plans. This suggeststhat the NSW Government’s implementation of enhancements to the NSW Planning Portalwhich will collect and store key building records digitally will provide significant benefits tostrata communities.2.3Impact and resolution of serious defectsThe incidence of serious defects generally led to significant financial and emotional stress forhomeowners, tenants and strata managers.Around half of the defective buildings in the sample had been rectified, and when thisoccurred it was generally achieved through an agreement with the developer or builder(27%). Legal action via the NSW Civil and Administrative Tribunal (the Tribunal) or Courtswas likely to be inefficient, resolving defects in around 3% of buildings.Building Commissioner talking with owners about defects in their apartment buildingSerious defects in recently completed strata buildings across New South Wales September 20217

The most common barriers to resolving defects were sourcing funds (15%), lack ofawareness about rights and responsibilities (14%) and disagreement amongst the ownerscorporation on the approach that should be taken (10%). Funds were commonly raisedthrough special levies or increases in the scheme’s capital works budget, with very fewfinancial loans acquired.It was estimated that around 331,829 per building was spent by owners corporations toresolve serious defects. Very few owners corporations reported being able to recover theircosts. The time taken to resolve defects varied greatly across the sample, with around 38%of buildings taking over 12 months and 25% taking less than 6 months.Strata schemes preferred not to involve Fair Trading in resolving defects, only lodging acomplaint in around 15% of cases. The very low number of complaints likely reflecteddissatisfaction with previous interactions, desires to preserve statutory rights and limitationsin the agency’s legislative powers. However, since the introduction of the RAB Act inSeptember 2020, there have been significant enhancements to Fair Trading’s technicalcapabilities, complaint handling processes and regulatory powers. Considering thesechanges, and the observations of this research highlighting the cost, time and outcomes ofself-led action, the owners corporations who lodge complaints with Fair Trading in the futurecould expect to achieve better outcomes.The research suggests that strata owners and strata managers would benefit from educationon how to effectively resolve serious building defects and manage their buildings. Sucheducation could be prepared by Fair Trading and implemented across the strata sectorthrough a mix of voluntary and mandatory initiatives, such as continuing professionaldevelopment for strata managers, lawyers and builders.Beyond the management of defects, the research suggested that managed residentialbuildings are generally complying with their fire-related maintenance responsibilities2. Of theschemes able to provide details of their last Annual Fire Safety Statement (AFSS), mostwere current and a very small proportion (1%) appeared to be overdue by 6 to 12 months.There are many possibilities for additional studies to expand upon the knowledge andinsights provided by this research. For example, it is suggested that the survey is replicatedevery 2 years to build a longitudinal dataset to monitor residential strata performance overtime. There would also be substantial public benefit in other Australian jurisdictionsundertaking similar surveys to establish a nationally consistent quantitative dataset onserious building defects.2For example, clause 106 of the Strata Schemes Management Act 2015 provides that owners corporations have a duty tomaintain and repair common property.Serious defects in recently completed strata buildings across New South Wales September 20218

3. IntroductionStrata buildings are a vital part of NSW’s built environment and provide a valuable andgrowing contribution to the economy. There are currently over 83,000 strata schemes inNSW that provide housing for around 15% of the population.3 These numbers have grownsignificantly in recent years, with more than 40% of all strata schemes established in the last20 years. The total insured value of strata schemes in NSW is now worth more than 400billion.4Strata living can offer many benefits to residents and the broader community. They provide acommunity-style environment and enhanced affordability through the sharing of commonservices. They also offer increased density to support growing community demand forhousing across the State. Also, they are increasingly becoming part of the fabric of regionalcommunities in areas such as the Hunter, Illawarra and Tweed.This research was an initiative within the data and research pillar of the Construct NSWtransformation strategy.5 It sought to establish a baseline for the type and impact of seriousdefects in strata buildings. It also intended to better understand the experience of ownerscorporations and strata managers in resolving defects.3.1Research approachThe research sample was limited to residential strata buildings that appointed a stratamanager from SCA (NSW), were 4 or more storeys above ground and were completed afterJuly 2014. This building profile was chosen because it aligns with the statutory warrantyperiod of six years for major defects under the Home Building Act 1989, and these types ofbuildings are not covered under the Home Building Compensation Scheme. Figure 1illustrates the location of the total expected survey sample across NSW.The OBC partnered with SCA (NSW) to help increase the accuracy and reach of thesurvey.6 Around 60% of owners corporations in NSW appoint a strata manager as thedelegated authority responsible for managing the strata scheme. In the case of seriousdefects existing in a strata building, the appointed strata manager typically acts as the maincontact point to manage interactions with all involved parties (i.e. owners, builders,developers, consultants, legal services, etc). For these reasons, having strata managers assurvey respondents sought to benefit from their higher awareness for defect-relatedexperiences within buildings and their ability to access relevant data.3NSW Government data, Office of the Registrar General (July 2021).UNSW City Futures, Australasian Strata Insights 2020, page 9.5For more information on Construct NSW visit (NSW) members manage around 75% of all strata managed buildings across NSW.4Serious defects in recently completed strata buildings across New South Wales September 20219

It is also important to recognise that SCA (NSW) identified that the research aligned with itscharter as a professional organisation and commitment to supporting initiatives that benefitstrata communities.7 The partnership and responses provided to this survey were thereforeundertaken voluntarily and at no cost to owners corporations.Figure 1: Location of total expected survey sample across NSW and the Sydney Metropolitan AreaTo determine the total expected sample size a series of assumptions were applied to NSWGovernment’s strata scheme registration data.First, the number of lots in each scheme was used as a proxy for the building height, with 20lots estimated to equate to a building of four storeys (i.e. total of 10,393 buildings). Thisassumption was required as strata scheme registration data only records the number of lotsin each scheme. Second, the strata scheme registration data was filtered to remove allschemes that were below the 20 lot threshold. This calculation found that around 20% of allschemes registered in the last six years would be relevant to the survey (i.e. total of 2,079buildings). Third, the sample population was further reduced by 25% to account for schemesnot likely to be managed by SCA (NSW) members. Collectively this methodology estimatedthat the total sample size would be 1,559 buildings.The project was progressed in three phases (Figure 2). In the first phase the surveyquestionnaire was created. This process included reviewing previous research and seekingfeedback from key industry stakeholders involved in the Construct NSW data and researchworking group.8 The final questionnaire was designed to seek the following information: The nature and profile of each scheme The identity of the developer, builder, certifier involved in the building’s approval andconstruction7In June 2021, SCA (NSW) was approved to operate a Professional Standards Scheme.Over 20 organisations were represented in these discussions, including the Owners Corporation Network (OCN), HousingIndustry Association (HIA), Master Builders Association (MBA), Insurance Council of Australia (ICA), the Australian Institute ofArchitects (AIA), Engineers Australia (EA), the Urban Development Institute of Australia (UDIA) and the Property Council ofAustralia (PCA).8Serious defects in recently completed strata buildings across New South Wales September 202110

The existence of serious defects in key building elements in the common property The resolution pathway followed by the owners corporation, and The cost and impact of the serious defects.Several questions related to the nature and profile of each strata scheme were included asthey were expected to be included in a new online strata registry that was being developedat the same time. Named the ‘Strata Hub’, it is an online register of key strata informationwhich it is intended to improve and modernise the way the NSW Government collects, usesand stores information about strata schemes. The first version of the Strata Hub was publiclyreleased in July 2021 and responses to this research survey were used to pre-populatefields where possible.1Previous researchSurvey designStakeholderfeedback23Online surveypublishedSCA(NSW) stratamanagers surveyedPreliminary analysisStakeholderfeedbackCase studyinterviewsFinal analysisStakeholderfeedbackFinal ReportFigure 2: Research methodologyThe definition and classification of the five types of serious defects applied in this researchreplicated the key building elements defined in both the Design and Building PractitionersAct 2020 and RAB Act (Figure 3). This approach was taken to ensure that the researchidentified only those defects that impact the common property and are defined as ‘seriousdefects’ under the two residential building laws most recently implemented in NSW.Serious defects in recently completed strata buildings across New South Wales September 202111

WaterproofingFire safety systemsStructuralBuilding enclosuresKey servicesFigure 3: Serious defects were those that related to one of the 5 key building elementsIn the second phase of the research an online survey was published on the NSWGovernment’s ‘Have Your Say’ website. 1,450 strata managers from SCA (NSW) were theninvited to participate. In the first half of 2021 the initial results were established and thenshared with stakeholders for discussion and feedback.Responses were received from many strata managers with valid data provided for 492buildings. Although the response rate varied across the survey questions, most questionsachieved a sufficient number of responses for the findings to reflect a statistical confidencelevel of 95% with a 5% margin of error.9In the third phase, case study interviews were undertaken with two strata managers whoresponded to the online survey and whose strata buildings were affected by serious defects.These buildings were chosen as they provided contrasting experiences of dealing with andresponding to defects. It was not possible to undertake additional interviews with buildings inthe time available to complete the project.The draft report was circulated for final rounds of stakeholder feedback and then published.9Considering the total expected survey population (1,559 buildings), where there were over 309 responses to a question thosefindings are estimated to reflect a statistical confidence level of 95% with a 5% margin of error. The sample size (n) is stated foreach of the findings (e.g. ‘n 412’ means that there were 412 responses).Serious defects in recently completed strata buildings across New South Wales September 202112

4. Survey results and findingsThe main findings are related to strata building profile, approval and constructioninformation, serious defects in the common property, and resolution pathways and impacts.4.1Strata building profile4.1.1Location of responsesResponses were received from buildings located along the east coast of NSW, with themajority within the Greater Sydney Region (Figure 4). The most northerly response was fromTweed Heads and the most southerly from Merimbula, with a small cluster of responsesfrom the Upper Hunter region.Figure 4: Location of the strata buildings schemes that responded to the surveyThe spread of responses aligns with the location of all NSW strata schemes,10 with themajority coming from schemes in the Greater Sydney Region.10NSW Government data, Office of the Registrar General (July 2021).Serious defects in recently completed strata buildings across New South Wales September 202113

4.1.2Size of buildingsThe survey sought to capture data on the number of storeys and lots in buildings to betterunderstand the nature of the buildings in the sample. The responses to these two questionsappeared to be of lower quality compared to other questions. Some responses indicatedbuildings were shorter than 4 storeys which was outside the scope of the research.11 Otherresponses appeared to be inaccurate, such as the number of lots and storeys appearinginconsistent with a visual inspection of the building.Responses that identified the building has less than 4 stories were removed from the data.However, based on the data that was returned, the median number of storeys was 5, andthe median number of lots was 58. The largest number of storeys was 56 and largestnumber of lots was 599. Despite the concerns noted about the accuracy of responses, theseoutcomes appear to broadly align with the strata scheme registration data which estimatesaround 50% of all schemes across NSW have fewer than 50 lots.124.1.3Type of strata schemeThe majority (98%) of lots were residential, with a total of 42,619 lots (Figure 5). There werevery few lots from other land use types, with the next most common being commercial (385lots), followed by retail (228 lots), accommodation (195 lots) and then industrial (90 lRetailAccomodationIndustrial0ResidentialFigure 5: Number and type of lots in the sample (n 476)11Reponses that stated a building was below 4 stories were deemed not valid and no other responses from that building wereincluded in the final data.12NSW Government data, Office of the Registrar General (July 2021).Serious defects in recently completed strata buildings across New South Wales September 202114

Most schemes (60%) were not members of any official body or subdivision (i.e. acommittee). 30% of schemes were part of a building management committee, with a smallproportion (6%) being involved in a community association (Figure 6).60%50%40%30%20%10%0%Building management committeeCommunity associationPrecinct associationDon't knowNone of the aboveFigure 6: Type of subdivisions that applied to each scheme (n 462)4.1.4Insured value of the buildingThere was a wide spread of insured values (Figure 7), with most of the responses (over50%) being below 200 million and the highest reaching 1.4 billion. The median insuredreplacement value of buildings in the responses was around 25.5 million. 1,400,000,000 1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 01050100200300400Figure 7: Spread of current insured replacement values across the sample (n 492)Serious defects in recently completed strata buildings across New South Wales September 202115

4.1.5NABERS ratingIt is voluntary for buildings to participate in the National Built Environment Rating System(NABERS) scheme.13 Ratings for apartment buildings quantify the building’s energy andwater performance within shared services (not individual lot usage) and provide a result fromone to six stars.60.0%50.0%40.0%30.0%20.0%10.0%0.2%1%6 stars5 stars0.2%0.4%1%3 stars2 stars1 star0.0%4 starsNot NABERSratedUnsureFigure 8: NABERS ratings (n 445)Around half (56%) of the responses stated their building had not acquired a NABERS rating.A large proportion (42%) of strata managers were unaware if a NABERS rating existed fortheir building. These results likely reflect both the voluntary nature of the scheme and verylow awareness amongst strata communities (Figure 8).13For more information on the NABERS scheme refer to defects in recently completed strata buildings across New South Wales September 202116

4.1.6Building managementAround half of the schemes (52%) that responded to this question stated that they employeda building manager (Figure 9). It is noted that as all schemes in the survey were managed bya strata manager, this finding means that those schemes had employed both services.Unsure0.4%No48%Yes,52%Figure 9: Appointment of a building manager (n 491)4.1.7DocumentationReponses to the type of documents and building records held by strata schemes variedgreatly as illustrated by Figure 10. The most common documents held were the Certificate ofTitle, the Fire Safety Certificate and the strata roll, with over 80% of strata managersindicating they held these records). However less than 30% of strata managers indicatedthey held other key building records including the Development Approval, sewerage servicediagram and the depreciation schedule.The responses provided to this question suggest that the implementation of the Strata Portalis likely to provide substantial record-keeping benefits to strata schemes.Serious defects in recently completed strata buildings across New South Wales September 202117

Strata rollFire Safety CertificateCertificate of Title for the common propertyAs-built drawingsConstruction Certificate (CC)Building manualDevelopment Approval (DA)Sewerage service diagramDepreciation scheduleAll building re 10: Key building records held by each strata manager (n 371)4.1.8Building ageThe survey requested that strata managers provide the date that an occupation certificate(OC) was issued, with this information requested to determine each building’s age. Figure 11shows a relatively even spread of building ages across the gure 11: Year that an Occupation Certificate was issued (n 492)Serious defects in recently completed strata buildings across New South Wales September 202118

The survey was only available to schemes completed after 2014 (i.e. within the last 6 yearsof the survey date) as the research is intended to provide baseline data on recentexperiences. It is noted that there were some responses received for buildings completedbefore 2014 which were excluded as they were outside the scope of the research.144.1.9Type of Occupation Certificate (OC) issuedFigure 12 illustrates that there was low awareness for the type of OC issued, with a largeproportion (25%) of strata managers unsure whether the scheme had acquired either a finalor interim OC. These outcomes are feasible because the issuance of either OC allows abuilding to be legally occupied.Figure 12: Type of Occupation Certificate issued (n 492)It was expected that the responses would show a mix of final and interim OCs (57% and18% respectively) due to changes made to the NSW Planning laws in 2017, which meantthat interim OCs could not be issued for buildings certified after 1 December 2019.15The results appear to highlight low levels of awareness for the technical difference betweentwo types of OC, and for the legal requirement for buildings to achieve a final OC once thedevelopment is completed.14Reponses that stated a building was completed before 2014 were deemed not valid and no other responses from thatbuilding were included in the final data.15For more information on the 2017 reforms to Occupation Certificates refer to tes-2019-08-30.pdf?la enSerious defects in recently completed strata buildings across New South Wales September 202119

4.1.10 Profile of principal certifying authorityThere were a small proportion (2%) of responses from buildings that had been issued withan OC by a Council certifier, with the remainder involving a private certifier (98%).Figure 13: Certifiers that were involved in multiple schemes in the sample (n 259)A total of 82 private certifiers were identified in the sample. Figure 13 illustrates theproportion of certifiers that were involved in multiple schemes within the sample. It showsthat around 40 certifiers were only involved in 1 scheme and around 10 were involved inbetween 5 and 10 schemes.Additional

4.1.9 Type of Occupation Certificate (OC) issued 19 4.1.10 Profile of principal certifying authority 20 4.1.11 Profile of developers 20 4.1.12 Profile of builders 21 4.1.13 By-law consolidation 22 4.1.14 Fire Safety 22 4.2 Serious Defects in the Common Property 25 4.2.1 Incidence of serious defects 25