Recent changes to Security of Payments Regulations a game changer for NSW Residential Builders’ ability to Resolve Disputes and recover Progress Payments Promptly.

On 1 September 2020 the NSW Government released the Building and Construction Industry Security of Payment Regulation 2020 (“the Regulation”) which, among other things, will drastically change the way residential builders and homeowners resolve disputes about progress payments after 1 March 2021.

The Regulation, which otherwise made minor changes in relation to Retention Money Trust Accounts (for contract work over $20m) and eligibility requirements for Adjudicators, will remove from 1 March 2021 the long-standing exemption from the security of laws that owner occupiers have enjoyed. Interestingly, the change in relation to the application of security of payment laws to owner occupier of residential building work was not included in the draft version of the Regulation when it was released for public consultation in July this year.

Currently, a residential builder who carries out construction work or supplies related goods or services for an owner occupier cannot utilise the streamlined provisions of the security of payment laws to resolve disputes by Adjudication or invoke the significant statutory rights to payment that arise where a home owner does not dispute a progress claim promptly. This will all change from 1 March 2021, a date that residential builders should be excited about, and will apply to all residential building contracts regardless of whether they are made before or after 1 March 2021.

Why Residential Builders should be excited!

Many residential building disputes relate to substantial sums and involve multiple complex issues relating to defects and informal contract variations.

When an owner occupier of new or renovated residential premises disputes a progress claim from a residential builder the current preferred forum for resolution of the dispute is the NSW Civil & Administrative Tribunal. However, proceedings in the Tribunal can be protracted and expensive meaning that residential builders will typically experience a significant impact on their cash flow as a result of the dispute in addition to facing ongoing legal costs and Barrister’s fees. In many cases, the experience of being involved in drawn out proceedings in the Tribunal is enough to deter builders from continuing to operate a residential building business.

The changes to the Regulation mean that from 1 March 2021 a residential builder will be entitled to apply for independent adjudication of a disputed Payment Claim and obtain an enforceable Determination usually within 21 days of lodging the Adjudication Application.

In addition, and perhaps even more significantly, a builder will accrue a statutory right to payment of an amount claimed in a Payment Claim and will be able to enforce that right through the Courts where a homeowner does not provide a Payment Schedule disputing the amount within the allowed time of service of the Payment Claim.

What Does this Mean in Practice for Residential Builders?

In practice, residential builders’ cash flow will be improved by their ability to enforce a statutory right to payment or apply for Adjudication of a disputed Payment Claim. Because of these rights, legal costs and financial hardship flowing from withheld payments will also be significantly reduced.

Another important benefit of these significant rights is that residential builders‘ bargaining power in relation to the negotiation of settlements and/or scopes of rectification work will be greatly improved where a genuine dispute exists.

Whilst a homeowner will still be entitled to bring a building claim in the NSW Civil & Administrative Tribunal, such a claim will not defeat or delay the builder’s entitlements under the security of payment laws and homeowners will be required to pay amounts payable by virtue of a statutory right to payment or Adjudication Determination prior to determination of any Tribunal proceedings.

Adjudication Applications

Residential builders should review pages 24 to 28 of our Security of Payment Guide and our Ms Felicity Donald’s article on ‘How an Adjudicator is Required to Value Construction Work‘ for more information about Adjudication Applications.

One issue that is likely to arise in relation to Adjudicators’ evaluation of Payment Claims will be the extent to which the contracting requirements under the Home Building Act  will operate to relieve homeowners of liability for payment where a contract or contract variation does not meet the minimum contracting requirements.

Where a residential builder has failed to make a contract or contract variation that satisfies the requirements of Section 10 of the Home Building Act 1989 (NSW) denies the builder any entitlement to damages or right to enforce any other remedy in respect of a breach of the contract. In these situations, residential builders’ claims are typically pursued in the Tribunal under the common law principles of restitution by an action on a quantum meruit.

However, as an Adjudicator is only able to assess amounts payable under a Construction Contract, it is likely that Adjudicators will refrain from determining that any amount is payable where the minimum contracting requirements have not been met by virtue of Section 10.

See here for more information about the Contracting Requirements under the Home Building Act.

What should Residential Builders do to be ready for 1 March 2021

Like all matters under the Building and Construction Industry Security of Payment Act 1999 (NSW), all rights flow from the service of a valid Payment Claim. Residential builders should, therefore, now be:

  • Seeking legal advice from experienced Building & Construction Lawyers in relation to the subtleties of utilising security of payment laws effectively including in relation to:
    • the dates from and methods by which a Payment Claim can be served,
    • the identification of Payment Schedules, and
    • the strict time limits that apply in relation to Adjudication Applications.
  • Reviewing their contracting procedures, standard form contracts and Special Conditions to ensure they satisfy the minimum contracting requirements under the Home Building Act and include relevant provisions that will enhance their ability to utilise security of payment laws should the need arise.
  • Adopt complying forms to ensure service of valid Payment Claims with accompanying Supporting Statements.
  • Review and improve practices and procedures for administering contracts and formalising Contract Variations that meet the minimum requirements of the Home Building Act.

What does the Regulation mean for home owners?

The security of payment laws have always applied to work for developers or investors who did not reside in or propose to reside in the completed residential premises. However, those developers or investors will generally be familiar with building practices and security of payment laws and have existing access to construction lawyers.

However, mums and dads and first-time homebuilders will now need to be aware of the significant statutory debt that they will be liable to pay after 1 March 2021 simply if they do not respond to a Payment Claim with a Payment Schedule disputing the amount claimed within the allowed time.

Homeowners should also be conscious of the need to respond swiftly to Adjudication Applications (typically within 5 business days) to avoid Applications being determined based purely on a residential builder’s submissions.

Conclusion

If you operate a residential building business, speak to one of our Building & Construction Lawyers today and begin preparing your business to be able to utilise security of payment laws effectively come 1 March 2021.

If you have signed or about to sign a residential building contract with a builder where work will either commence or be ongoing after 1 March 2021, you should obtain legal advice from one of our Building & Construction Lawyers in relation to security of payment laws prior to 1 March 2021 or commencement of work.

For an overview of the security of payment laws as they currently exist, click here to download our popular Security of Payment Guide (fourth edition).

As a result of these changes we will be updating and releasing the fifth edition of our Security of Payment Guide in the coming weeks. To ensure you receive our Guide when it is updated, simply download our current version via the link above.

By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)