The Court of Appeal has confirmed that the State can be subrogated to the rights of individual lot owners, not just an owners corporation, when it is pursuing subrogated recovery proceedings against those involved in the installation of combustible cladding. The decision will give yet further encouragement to the State of Victoria to continue to commence subrogated recovery proceedings to recoup the extraordinary State outlay on cladding safety works in Victoria.
INTRODUCTION AND PROCEEDINGS
- Section 137F of the Building Act 1993 (Vic) (Building Act) provides for the State to be subrogated to the rights of an owner of a building, where financial assistance has been paid by or on behalf of the State to that owner in relation to cladding rectification work. If the State provides financial assistance to an owners corporation, and this payment benefits not just the owners corporation but also individual lot owners, is the State entitled to be subrogated to the rights of the lot owners as well as the owners corporation? Yes, according to the Victorian Court of Appeal, in the unanimous decision of State of Victoria (Department of Transport and Planning) v L.U. Simon Builders Pty Ltd & Ors [2025] VSCA 52 (the Reasons).
THE LEGISLATIVE CONTEXT
2. Section 137F was inserted into the Building Act in late 2019. It was inserted following a report prepared by the Victorian Cladding Taskforce, which oversaw an audit of buildings fitted with combustible cladding in the wake of the Lacrosse building fire in 2014. A cornerstone recommendation from the taskforce’s report is that owners corporations and individual property owners are ill-equipped to undertake the complex defect rectification work which cladding cases require. Instead, the taskforce recommended that the State take action to rectify buildings with high-risk cladding and establish a dedicated cladding agency. In order to support the State’s efforts in this respect, section 137F was enacted to enable the State to recover the costs of rectification from those responsible for the installation of combustible cladding via a right of subrogation.
THE FACTS
3. The facts of this case illustrate one potential problem faced by the State when pursuing subrogated recovery actions.
4. This case concerned the construction of the Atlantis Towers Building, a 36-storey tower located at 284–300 Spencer Street. It had been built by the defendant builder, L U Simon, pursuant to a contract entered into with a developer in June 2007. It was a mixed-used building, containing 205 residential apartments along with a commercial hotel. L U Simon had installed aluminium composite panels (ACP), both on the common property and on lots owned by individual lot owners. On or about 11 June 2020, the Victorian Building Authority entered into a Funding Agreement with the Owners Corporation, providing for financial assistance to carry out the removal and replacement of the ACPs, both on the common property and also on the individual lot owners’ properties.
5. The State commenced a proceeding against L U Simon and its two directors in the County Court of Victoria. Its allegation was that, by operation of section 137F of the Building Act, it is subrogated to the rights of the individual lot owners and the Owners Corporation. The claim itself was a simple one, alleging that L U Simon had breached various warranties implied by ss 8(b), (c) and (f) of the Domestic Building Contracts Act 1995 (Vic) (which warranties run with the land under s 9 of that Act). The allegation was that the builder warranted that the materials used in the construction would be good and suitable for the purpose for which they were used, and fit for the purpose of the Building, which included residential apartments; and that the work would comply with all laws and legal requirements, when in fact they were not.[1]
6. In its defence, L U Simon denied that the State had become subrogated to the rights of the individual lot owners on the basis that the State had entered into the funding arrangement with the relevant owners corporation in its own capacity and denied that any individual lot owners had entered into that funding agreement.
7. Judge Wise stated a special case asking questions of law for the opinion of the Court of Appeal. The special case involved three questions. The first two were of primary relevance, with the third concerning costs. The crux of the case was whether, by this funding agreement, the State became subrogated to the rights of the lot owners and not just the owners corporation.
LEGAL PRINCIPLES AND ANALYSIS
8. The substance of L U Simon’s submissions was two-fold. First, it submitted that a payment made to an owners corporation was not in fact a payment made to the owners corporation on its own behalf and on behalf of the individual lot owners. Second, if it was such a payment, then L U Simon’s submission was that s 137F, properly construed, did not contemplate the Authority making a payment in such a way. Instead, s 137F required separate payments to the owners corporation and the individual lot owners in their separate legal capacities.
9. The Court of Appeal, in a unanimous judgment of Emerton P, Beach JA and Harris AJA, rejected those submissions.
10. The Court of Appeal held at [81] that, as a matter of statutory construction, “[i]n the context of a building affected by a subdivision, comprised of common property and individual lots, s 137F(1) in terms does require the payment of an amount by way of financial assistance in relation to cladding rectification work to owners of individual parts of the building.” That is, the State could provide financial accommodation to an owners corporation on behalf of both the owners corporation and the lot owners. Their Honours noted at [83] that were reinforced in that conclusion by the fact that owners corporations are conferred with power under the Owners Corporations Act 2006 (Vic) (OC Act) to take certain actions on behalf of their members, being the owners of individual lots. They found, at [92]-[94], that the owners corporation had legal power to enter into the funding agreement, and had power to enter into it on behalf of both itself and the individual lot owners. This conclusion arose by reason of the owners corporation’s powers under the OC Act, as well as general agency principles.
11. Having made that conclusion as a matter of statutory construction, the Court of Appeal also found, at [96], that the Funding Agreement under consideration in that case, as a whole, and construed according to its terms, was an agreement for the whole of the building.
CONCLUSION
12. This decision will provide yet further encouragement to the State to commence or continue with subrogated recovery actions to recoup the more than $300 million in grant payments which the VBA and Cladding Safety Victoria (CSV) have made to owners corporations for the removal and replacement of non-compliant cladding. Section 137F of the Building Act already empowers the State to recover the costs of cladding works from companies and, critically, their directors or other officers responsible for the installation or use of non-compliant cladding. Following the first instance decision of Judge MacNamara in Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor (Revision 1) [2023] VCC 1473 (24 August 2023), the State now has a roadmap which sketches out what a claim against a builder and its officers would look like. Further, the Court of Appeal, on the only other occasion section 137F has been considered at an appellate level, confirmed that the provision has a retrospective operation, and made a number of other findings likely to facilitate recovery actions by the State.
13. Whilst the Courts have recently given the State a fair wind in these types of claims, that doesn’t mean that the State can expect a free ride. One issue which the author perceives with this sort of litigation concerns claims for both cladding and non-cladding defects. Research published by CSV indicates that, of the 359 buildings funded by CSV which have combustible cladding, nearly 50 per cent have non-cladding defects (i.e., structural, fixing and sealing and water ingress). Complex questions will arise where litigation concerns claims by an owners corporation and lot owners, some of which are subrogated, and some of which are not.
14. It seems inevitable that more cladding-related claims and litigation are on the horizon.
[1] In this way it mirrored the allegations successfully made by the State in the Shangri-La case. See Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor (Revision 1) [2023] VCC 1473 (24 August 2023) and Naqebullah v State of Victoria [2024] VSCA 307 (11 December 2024).