Insolvent builder and project issues

Discussion in 'Legal Issues' started by Picket Fence, 24th Jun, 2017.

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  1. Picket Fence

    Picket Fence Active Member

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    Hi guys,

    New to the forum, and currently completing my first development in Melbourne Victoria. I'm feeling quite financially exposed at the moment due to a small property development going off the rails. This thread will likely touch on both legal and general aspects of the industry. I have an appointment with a property lawyer next week to further explore options.

    My personal finance status: Fully employed with above average income / cashflows. Servicing of my commitments is a non-issue, with a good buffer. I have savings as well.

    Current project details: Renovation of existing PPR + new build of townhouse next door (2 properties currently under construction). Project is currently circa 8 weeks away from completion and both houses are fully locked up (mostly electricity/gas/water connections and finishing touches left). I have met all payments under the build contract to the builder and have held up my end of the contract, and gone above and beyond for the builder. Build is about 6 months beyond scheduled completion.

    Current project issues: Builder is currently trading while insolvent (can't meet bills as and when they fall due). Subcontractors on the project are owed an estimated $80k and have my contact details. I am sure you can imagine the type of phone calls I am having with subcontractors who have not been paid for 2-3 months, but at the moment they are all okay. My builder is now mentally unwell due to financial and personal issues.

    Contract specifics: I have right to cancel the build contract with cause due to excessive delays in project completion.

    My questions are as follows:
    • What happens if a subcontractor causes damage to the properties as an act of revenge for not being paid by the builder? I have insurance for each property given the properties are both locked up but this has limitations, including not covering vandalism. Builder has insurance but I ultimately don't know what this covers or if he decides to not pay his monthly premiums. I do have his certificate of currency which expires soon and builder has told me he is extending on a month by month basis.
    • If I cancel the contract with cause how do I ensure the properties while I find a new insurer and claim under Builders Warranty Insurance? Owner builder insurance?
    • Any advice on how to manage subcontractors?
    • Any lawyers or other resources you suggest I read or contact? Victorian Builders Association and VCAT have shown no interest in assisting.
    I feel like as both a home owner and as a consumer I am very very exposed to significant financial loss if a subcontractor decides to wreak havoc and I am not covered by either builder or my insurance.

    Any advice or otherwise would be hugely appreciated.

    Regards,
    Picket Fence
     
    Perthguy likes this.
  2. Hamish Blair

    Hamish Blair Well-Known Member

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    Not sure if you can pay his subbies directly.
     
  3. Joynz

    Joynz Well-Known Member

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    Follow this link for advice on who to contact when a builder is insolvent:
    Domestic building insurance and insolvency

    You may need to lodge a claim within a certain time frame.
     
    Last edited: 24th Jun, 2017
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    The subcontracts contract with the builder will often have clauses that they own items fitted until full payment is received. This may mean plumbing and electrics stuff. They might be in their rights to take out these items - hotwater systems etc if they are not paid.
     
  5. Brian84

    Brian84 Well-Known Member

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    I would have thought if you cancel the contract then no one has the right to be on your property unless employed or authorised by yourself and they could be charged with trespassing. If they start to damage your property then they can be charged as well. Look at those young chippies who went to a frame they built and didn't get paid for so they cut it all with chainsaws so it all had to be pulled down.

    I have felt like doing that before to some builders but it is only punishing the homeowner as well.
     
  6. Joynz

    Joynz Well-Known Member

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    Don't do anything without qualified legal advice - and following the instructions from the organisation that administrates the warranty insurance.
    (as I'm sure you know, being in mergers and acquisitions)
     
    Last edited: 24th Jun, 2017
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  7. snoopy

    snoopy Well-Known Member

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    See a lawyer as you have planned asap. As Joynz has mentioned above don't do anything without legal advice. Paying a subbie may not help the situation as once you start they may press harder on their threat.

    Not sure why subbies have your contact details but if they pressure you, play nicely, let them know you have paid the builder and causing damage will only make the situation worse but you are trying to sort something out. At the end of the day if the builder doesn't pay them you maybe only look at value of materials that they can legally remove from site. Lawyer should clarify this and this would be a challenging negotiation.

    The legal process will be slower than you like esp. if the builder is unwell.

    Can you coax the builder to finish up and even consider paying something extra to get there?

    Unfortunately the last 8 weeks of a build is the costly part - I assume kitchen, bathroom and fittings and appliances are incomplete. Cancelling the contract could leave you significantly out of pocket.

    The lawyer should confirm but getting the builder to bankruptcy and relying on the homebuilding insurance maybe the best option but this will take some time.

    I have been in similar situations before with larger developments and come out ok but the stress was too much. Luckily I found a great building consultant who advices me on the process to follow. PM me if you would like details. The best solution for me has always been a series of commercial negotiations after getting all legal facts. The legal process is so slow, time consuming and expensive.
     
  8. Picket Fence

    Picket Fence Active Member

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    Thanks! Really beneficial.

    I am not too upset about the subbies having my contact details, at least I can cool their jets while I try solve the problem. Everybody loses if damage happens.

    Kitchens and bathrooms are in (the most expensive appliances held offsite with supplier and paid by me directly). In the ordinary course, I'd say 4 weeks could have the project done.

    I will PM you for details and very much appreciated.

    I agree on the stress. Makes my day job seem like a walk in the park.

    Cheers,
    Picket Fence
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    NSW Security of Payments Act is something the lawyer would advise on. The head contractor may be in breach and as you say insolvent.

    I dont get why more subbies dont use the Act.
     
  10. Picket Fence

    Picket Fence Active Member

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    I thought I would provide an update on this project.

    Under legal advise the contract with the builder was terminated on the following grounds: 1) lapsed builder license; 2) lapsed site insurance; 3) excessive time delays. VCAT and insurance claim is in the works.

    A new builder has been appointed with handover in the coming weeks. Overall project delays will be 15 months.

    Lessons learnt:
    1. Builder going bust is the biggest risk to a developer/development.

    2. Keep significant cash reserves. I have had $100k+ in costs I have had to foot. Lawyer $5k, property inspectors and reports $5k, new builder costs $40k, lost rent $50k.

    3. Victorian Builder Warranty Insurance is a joke. I have had no ability to claim because the builder is not technically insolvent. My VCAT claim for all costs is in the works which will then trigger insurance. If I didn’t have the cash to put upfront to a new builder I would be sitting around waiting another 12 months for VCAT and insurance to finish the house with a new builder.

    Happy to answer Q’s.
     
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  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Not technically insolvent ??

    Why has a winding up proceeding (bankruptcy if its a person who is building) not been initiated ? Or is that what you refer to as in progress. Often legal costs make it a likelyhood of $0 recovery for the investment BUT it does trigger warranty claims. The subbies would be your best friends for commencing a creditors winding up. If he is already back to the wall he may be have difficulty opposing winding orders although depends on situation. If he has a company he may argue he is also a creditor and outvote others.

    Does your warranty insurance pay you for losses or just pay for the rework ?? I had a client do this once (WA ??) and the insurer refused to pay - Said they would have organised and approved completion and despite him paying another tradie same value to fix things they refused to pay that as a result he effectively paid twice for completion.
     
  12. Picket Fence

    Picket Fence Active Member

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    I used the word technically because the builder, whilst having no money, has not been determined by an independent liquidator/court or other proceedings to be formally insolvent. Therefore this has not triggered the Builder Warranty Insurance. My VCAT proceedings are for significant damages which the builder will not be able to meet. Once the builder fails to meet the VCAT order this is a straight pass through to an insurance claim.

    A wind up order has not been initiated because no subcontractor (creditor) is willing to spend the $$$ ($10k?) required to wind up the builder and cover liquidator costs. The subbies believe there is nothing to gain as they believe the builder has no assets.

    Builder Warranty insurance covers the following in Victoria: 1) up to 20% of the contract value for costs to complete the build (eg. my cost over runs); 2) structural and non-structural defects for 7 and 2 years respectively (I have $100k in defects); and 3)other costs eg lawyers/consultants/rent etc (limits in the policy). My construction lawyer has advised that I can claim on insurance for my cost over runs once I get through VCAT. VCAT should be an easy process given the gross negligence of the builder in managing his licensing/insurance and time delays on the project.
     
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  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Ahhh the old chestnut that nobody wants to pay a liquidator to do the work. Yep...So things stall until as you say VCAT make that determination. Its like swimming up a waterfall.

    As long as warranty in Vic still pays your choice to get it done thats good news. You have to finance it and hope to get some (not all! !) of the costs.

    I always find the laws are useless - Your incur a loss of $200K. They order a fraction of it or the whole lot knowing nobody can pay. I wish I could walk into Woolworths and tell the checkout person - Sorry I only want to give you $20, not $100. She shugs and says - OK thats fine.
     
  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A court would apply a liquidator. All that would be needed is to apply for the winding up order. This could potentially be done pretty cheaply.
     
  15. Ted Varrick

    Ted Varrick Well-Known Member

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    Might be worth considering hiring some security guards, just in case.
     
  16. Picket Fence

    Picket Fence Active Member

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    What I have learnt during this process is that there is next to no consumer protection when doing a development, albeit a very small development. You get significantly more consumer protection on your $50 per month mobile bill via the telecommunications ombudsman in comparison to building a couple of properties.

    The average joe would have been financially crippled by the experience I have had. I'm fortunate to have had the right advice and access to $100k+ cash funds and a good paying job to see the project through without access to insurance.

    My lawyer, through his past experience, has indicated my claim on insurance will likely cover the vast majority of cost over runs, defects etc. But this has required a thorough process of inspectors/reports, record keeping etc.
     
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  17. Picket Fence

    Picket Fence Active Member

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    I slept at the properties for a period when I discovered that the old builder did not have insurance over the properties (despite him showing me a Certificate of Cover).

    I now have an alarm with alerts to my mobile phone. Plus the new builder has insurance.
     
  18. Scott No Mates

    Scott No Mates Well-Known Member

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    Very true unfortunately however the theory is: if you can afford an ip/development etc, then you can afford to go to court.

    It fails the homeowners who have to go to extraordinary lengths to get a judgement for half of very little (& then there's caps).
     
  19. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    There may soon be a huge spike in failed developers and builders in some areas. Its like musical chairs with half the players getting to a chair in time. When construction demand slows their work spreads thin. Competitors drop prices. They suddenly find themselves with one job ahead of them and $0 in the bank and costs keep arriving. Suppliers stop supply, subbies are unpaid and they cant complete work on site. They take on new work hoping for a miracle and then make it worse.

    I'm hearing some shockers on land developments in NW Sydney. Developers who thought prices would keep rising. Land that is being sold at lender insistence by people out of depth.
     
  20. Picket Fence

    Picket Fence Active Member

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    Small builders can struggle to understand working capital and the need for it.

    My project was profitable for the builder, yet because he didn't understand working capital he ran out of money.

    With the level of defects, delays, and not having sufficient funds for his insurance/builders license I was not willing to make further progress payments to the builder.
     
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