Building defects

Something else for the banks to worry about

March 31, 2023

The banking and finance world might have enough on their plate for now, but I’m going to add something else to their watch list: lending on apartments in buildings at risk of catastrophic failure.  

The red flags are everywhere:

  • Poor building standards and regulation over more than 20 years,
  • Mounting insolvencies in the building and construction sector leaving owners without recourse and half-built blocks to be completed under financial pressure, and;  
  • Opaque building product information and building code compliance standards lacking clarity.  

And that’s just the supply side.

Owners are also under pressure with cost of living increases and rising interest rates. Levies will be going unpaid and strata budgets will be stretched as the world braces at the possibility of another economic crisis.  

The failed ‘towers’ of the world prove the point: Grenfell Towers (London), Champlain Towers (Florida), Opal Tower and Mascot Tower (Sydney). Are these just the worst of the worst, or the tip of the iceberg? Only time and will tell, but research is beginning to point to the existence of an iceberg.  

The American mortgage insurer, Fanny Mae, learnt from the GFC to require due diligence about the finances of condominiums as Condo Associations went broke. In the wake of the Champlain Towers collapse, colleagues in the USA tell me that Fanny Mae is now looking closely at the governance records of condominiums for signs of poor decision making about defect remediation, repairs and maintenance, under insurance, and funding reserves for capital expenditure.  

If, perhaps when, this happens in Australia one wonders how many will pass the test. This is a matter that should concern us all. I have seen the list of those that have contributed to the US$ 1 Billion compensation fund for the victims and families of those that died in Champlain Towers. It makes compelling reading. Apart from the usual suspects of engineers and consultants, the list includes the lawyers for the Condo Association ($31 M), the onsite security company for not triggering a building wide alarm ($518 M), the general contractor of the site next door ($157 M) and the neighbouring development site owner ($29M).

Champlain Towers South Condominium Association had just $ 777,000 in the reserve fund to cover $16.2 M of repairs that didn’t get done for reasons yet to be determined. The cost in the end was $1.02 Billion and 98 lives.  

This is serious. Companies like the major banks, and for that matter developers and suppliers, that have signed up to Environmental, Ethical, and Social Governance standards must take action to honour their commitments and the lives of those that live in the buildings they finance.

Michael Teys

Strata expert

Michael is a strata expert with over 30 years experience in strata law and management. He is a strata researcher with City Futures Research Centre UNSW, a consultant to strata industry suppliers, and conducts executive education for strata managers and property processionals.