Changes to development industry to affect ability to raise finance - August 2020

By Guest Blogger: Peter Faludi, Peter Faludi Consulting

www.peterfaludiconsulting.com.au

As you will be aware, in early June the NSW Government passed the Design and Building Practitioners Act 2020 (NSW) (“DBPA”) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW)(“RABA”).

These laws will significantly change the development landscape in relation to Class 2 residential buildings (and potentially other types of buildings).

For example, a new duty of care under the DBPA has been in place since 11 June 2020 which may result in action being taken against developers, builders and others by a broad range of people (not just the original or subsequent owners of the building) for defects in buildings up to 10 years old.

Under the RABA (which commences from 1 September 2020) and the DBPA (which commences from 1 July 2021 other than in respect of the above duty of care, which is already in force) failure to comply with the Act can lead to expensive penalties of up to $330,000.

Under the Acts, the power of the Secretary of the Department of Customer Service or the Building Commissioner to prohibit the issue of occupation certificates can potentially lead to buyers rescinding sale contracts for off-the-plan purchases.

In addition to these new laws, the NSW Building Commissioner is in the process of developing:

• An online registration and information systems to enable all information relating to individual buildings as well as developers, builders and others involved in the construction industry (including information regarding previous projects in which they have been involved) to be stored on one database; and
• A rating system in relation to developers, builders and certifiers under which they will be rated between A+ and E, with A+ being the best rating and E being the lowest.

The availability of such database will enable both purchasers and financiers to undertake more detailed due diligence on developers and others involved in a project prior to committing to be involved in the project. For those developers who have had litigation against them, been subject to Fair Trading claims, have had insurance denied or claims against them or have not paid taxes, such matters are likely to be noted in the new database.

We assume this information will form the basis on which ratings will be awarded to participants in the industry.

Adverse impact on financing

Each of the above matters may affect the ability of developers to finance projects. The consequences for financing include:

• The greater risks associated with low rated developers and builders and the higher risk of potential delays in completion (and resulting purchaser rescission's) may negatively affect the value of projects and decrease their future marketability. This may lead to greater losses for the developer and financier involved.
• Developers (with which financiers have existing facilities) may be subject to damages claims under the new statutory duty of care in respect of previous projects (potentially up to 10 years old). This may trigger:
  • events of default under loan documents for current facilities resulting in default interest costs and potential enforcement by the financier, or
  • review rights of financiers under such facilities.
• Due to the expanded information which will be available, financiers may not wish to deal with developers that do not achieve the required quality rating or where the information on the database relating to the developer or any of the key contractors and consultants involved in a project discloses potential problems.
• Loan documents may be amended to include additional conditions precedent, information and other undertakings, events of default and/or review rights, making them more onerous for developers.
• Loan to value ratios and loan to development cost ratios may be reduced, resulting in developers having to find more equity for projects.
• A greater number of financiers (both bank and non-bank lenders) are likely to limit the developers and design and building practitioners they wish to deal with to those with a good track records, who are fully compliant with the new regime and are attributed a good rating under the new regime.

Although the reforms are important, the financial costs of compliance and the potential liability to which developers, builders and others involved will be exposed in respect of projects (up to 10 years old) may, given their already fragile financial position, create difficulties for some participants in the industry.

It is important for developers to gain a full understanding of the new laws as well as how they will be accounted for by their existing and future financiers.

We have developed a simple Guide as to whether the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) applies to a project.

For your complimentary copy please email Peter on: peter@peterfaludiconsulting.com.au

       Peter Faludi Consulting: https://www.peterfaludiconsulting.com.au

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