Your rights if apartment is a lemon

Apartment owners can face a hefty bill when high-rise buildings reveal their defects

Chances are if you bought a high-rise apartment in recent years you’ve bought a property with defects. Some would be much more significant than others: think the recent Opal Tower cracking fiasco in Sydney and the Lacrosse apartment building in Melbourne, which experienced a cladding fire in 2014.

Research conducted by the UNSW City Futures Research Centre in 2012 found that 72% of apartment blocks in NSW had defects, as reported by owners. For newer units it’s even worse, with 85% of apartments built since 2000 having defects.

As Australia’s apartment construction boom raged – in Sydney, for example, there’s been a fourfold increase in high-rise apartments in the past 10 years – standards have been compromised in favour of keeping construction costs low, delivering developers bigger profits.

So what rights do you have if you’ve bought an apartment that turns out to be a lemon? Not a lot is the short answer.

In NSW, consumer protections were watered down in 2012, when the warranty period for major defects was reduced from seven to six years. It’s just two years for other defects.

And the Home Building Compensation scheme doesn’t cover buildings over three storeys. In 2018, a strata building bond of 2% was introduced to cover high-rises. But some experts dispute whether this would be enough to cover Opal Tower's rectification costs; others question whether the defects will be classified as major.

Different warranty rules apply in other states. For example, in Victoria you can take legal action against a builder for buildings up to 10 years old. But, as in NSW, domestic warranty insurance doesn’t cover buildings over three storeys high.

One problem for apartment buyers is that many defects can be difficult, and sometimes impossible, to detect and the consequences of a defect can often take years to become apparent.

Another problem is that it’s relatively common for builders to use a single project company to manage a development and wind it up on completion to avoid footing the bill for fixing up any mistakes.

The upshot of all this is that in many instances the apartment owner ends up being responsible for fixing and paying for almost all faults.

Reputational damage can also be a headache for both owner-occupiers and investors holding properties in a building such as Opal Tower, with real estate commentators saying these apartments are now likely worth between 16% and 50% less than their original price. For example, in the Lacrosse building there has been an average loss on resale of 16% from the original price since the November 2014 fire. This is based on 51 sales, says the valuation firm Preston Rowe Paterson.

And on top of that, buildings with a bad name are likely to experience a drop in rent, increase in insurance payments and reluctance by some lenders to provide mortgages for resales.

In the wake of the Opal case, there is a push to establish a statutory duty of care for owners, creating a liability for the actions of developers and builders.

“It’s time for governments to adopt a policy ensuring that people who buy off the plan have better consumer protection than they have when they buy a fridge. That’s not what’s happening now,” Stephen Goddard, a solicitor and chairman of the lobby group Owners Corporation Network of Australia, told The Australian Financial Review.

In the meantime, if you have bought a high-rise apartment with defects, explore what you can do to have it rectified under your state’s warranty rules. If you get no joy from your builder, enlist the help of your state consumer body, such as Fair Trading in NSW. If you decide to take legal action, be aware this can be costly. A class action is also a possibility in extreme circumstances and there are suggestions that some Opal Tower owners are considering this course.

Buildings with reputational damage can be a real turn-off for tenants. One solution for investors is to use the property for short-term rentals – if this is allowed under the strata rules – as a building’s reputation is much less of a problem for casual tenants.

Reputational damage can be a headache for owners and investors