Victorian Municipal Councils to facilitate for finance rectification costs of combustible cladding

The Building Amendment (Registration of Building Trades and Other Matters) Bill 2018 introduces reforms to the Victorian Local Government Act 1989 to allow residential owners and owners corporations to access low cost finance to fund the cost of removing combustible cladding.

Following the recommendations of the Victorian Cladding Taskforce, these reforms will introduce Cladding Rectification Agreements (Rectification Agreements). A Rectification Agreement will allow owners of residential property to remove existing non-compliant cladding affixed to their building and pay off the cost of removal through their council rates.

The Rectification Agreements are not mandatory for councils. Additionally, before entering into Rectification Agreements, councils must ensure certain conditions are satisfied including that specified debts on the property do not exceed the value of the property after the rectification works. This means that the total amount of taxes, rates, charges and mortgages owned on the property when added to the cladding rectification charge cannot exceed the value of the property after the rectification works are completed. This might affect an owner’s ability to rectify their cladding under this scheme.

If councils agree to enter into a Rectification Agreement, it will be an agreement between owners of rateable land (including owners corporations), lenders (unless the council is the lender) and council that will facilitate long-term, low-interest loans to pay for cost of rectifying non-compliant cladding. The affected cladding will be those specified by the Minister, and this will include aluminium composite panels (with a polyethylene core) and expanded polystyrene. These agreements will function to allow owners to receive funding from a lender, then the council will place a levy (cladding rectification charge) on the property. The proceeds from the charge will then be used to repay the original loan amount from the lender, including any interest and agreed administrative charge.

In the case of owners corporations, 75% of members must vote to enter into a Rectification Agreement and the charge will be apportioned based on the separate lots or occupancies. This is in line with current threshold requirements under the Owners Corporations Act 2006.

Tenants or occupiers of the property will not be liable to pay the rectification charge unless they have agreed to pay the charge. Property owners cannot require an occupier to pay a cladding rectification charge as a condition of a residential tenancy agreement.

Owners will be a given a minimum of 10 years to pay off the loans through their council rates. If the owner sells their property during this period, the outstanding or remainder costs will be transferred with the property to the next owner. This means that the liability to repay the loan will be passed from owner to owner which allows properties to be sold and the cost of rectifying the cladding to be spread out over a number of years.

Councils must use their best endeavours to recover a cladding rectification charge. However, neither council nor an owners corporation is liable to pay for any failure by an owner or occupier to pay a rectification charge. In this case, the charge will remain as a charge on the land and can be recovered, along with penalty interest, as if it were a service charge.

These provisions are proposed to come into operation 30 October 2018.

Authored by: 
Andrew Denehy, Partner
Adrian Clifford, Senior Associate
Sandy Jassal, Lawyer