Cladding rectification agreements: How have we come to this

Last week, we have posted an exciting update regarding over $3.1M saved for our customers for their cladding rectification funding. To better understand cladding rectification agreements, we are reposting an article from our previous website archives, published on Mar 12, 2020.


The prevalent use of combustible cladding throughout the Australian construction industry over the last 15 or so years has presented a number of challenges in recent times.


Two fires in Melbourne, most recently on Monday 5 February 2019 on Spencer St in the CBD, as well as the deadly Grenfell Tower fire in 2017 which claimed the lives of 72 people have highlighted the imminent danger the use of this cladding represents to buildings and the people who use them. The Victorian government has set up a Cladding Taskforce which, via local councils and the Victorian Building Authority, has been busy auditing buildings and issuing notices to those found to have such combustible Aluminium Composite Panel (ACP) cladding on them.


One of the biggest challenges facing the Taskforce and all stakeholders involved in making the changes required to make buildings safe again.

The difficulty in enforcing such changes is that the responsibility lies with current owners of the building – usually an Owners Corporation. The members of that Owners Corporation were – more often than not – uninvolved in the decisions made during the construction process yet are ultimately responsible for the safety of their building.


To many, it seems unfair that the people who own the property today would need to pay for the errors of those who built the building, however, inaction is not really an option because as long as a building notice hangs over the property, it may be difficult for lot owners to sell or lease their individual lots.

It may also be difficult to insure the property, which is a legislative requirement of the Owners Corporation.


To try and make the replacement of cladding a little easier, the Victorian government passed amendments to the Local Governments Act which created Cladding Rectification Agreements (CRA).

WHAT IS A CLADDING RECTIFICATION AGREEMENT?

 

A CRA is an agreement between the Owners Corporation, local council and an approved lender to give Owners Corporations access to finance specifically for the purpose of cladding rectification.


To better understand these agreements, Strata Plan spoke to lawyer Elizabeth Chase from Owners Corporation legal experts Madison Marcus.


“As a result of the prevalence of combustible cladding across Victoria, a new part of the Local Government Act provides that loans will be offered to assist in rectifying flammable cladding,” Ms Chase said.


“They are a three-way voluntary agreement between the council, the owner or the Owners Corporation and a lender.”


The lending body will advance the required funds to the building owner or Owners Corporation with repayments being made via council rates.


An Owners Corporation would require 75 percent of lot entitlements to enter into a CRA on behalf of its members, however, the responsibility for repaying the loan through council rates will lie with the individual owners.


WHAT IS THE PROCESS FOR ENTERING INTO A CLADDING RECTIFICATION AGREEMENT?


Where an Owners Corporation is concerned, the process for entering into a CRA can be quite strenuous.


In short, the Owners Corporation will need to:

  • Gain approval from 75 percent of owners to undertake cladding rectification works and enter into a CRA to fund those works
  • Liaise with the local council or the VBA to agree on what the works should be
  • Discuss the feasibility of such a loan with a lender
  • Notify the council of its intention to enter into a CRA and provide a register of owners and contact details


“A minimum of 75 percent of lot owners must agree to undertake rectification works and enter a Cladding Rectification Agreement, and this agreement must be in writing – either via meeting minutes or ballot,” Ms Chase explained.


“If that is achieved, the Owners Corporation must liaise with lenders to determine eligibility for the loan to work and advise the council of the Owners Corporation’s intention to enter into a CRA and provide the council with a list of lot owners and their contact details.


“The OC is also responsible for liaising with lending, managing the CRA on behalf of the owners and overseeing the rectification works until they are completed.


“The Owners Corporation will also need to work with the local council or the VBA to agree what the rectifications works should be.”


While this process is enshrined in the Local Governments Act, Ms Chase said there were still plenty of unknowns.


“The process is clearly defined, but what we don’t know is how difficult it might be for an Owners Corporation to gain 75 percent of approval,” she said.


WHO IS ELIGIBLE FOR A CLADDING RECTIFICATION AGREEMENT


While it is somewhat unclear if all councils will be participating in CRAs, Ms. Chase said councils would be required to carry out due diligence on the owners or Owners Corporation’s ability to pay back the loan.


“There’s been no indication that councils won’t be entering into CRAs, but councils will be required under the Act to carry out their own due diligence with respect to the owner or Owners Corporation’s ability to service the loan,” Ms Chase said.


“If there’s not sufficient equity in the property, a CRA loan won’t be offered.”


Further to this, the VBA’s fact sheet on CRA’s says, “A council won’t be able to enter into a CRA if the total amount of taxes, rates, charges and mortgages owing on the property, plus the cladding cost, exceeds the improved value of the unit when the work is done.”


Check out the full fact sheet HERE.

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