EXCLUSIVE

Hundreds of apartment owners in an inner-city development have been told they may have to cough up $45,000 each in special levies to cover the estimated $12.5 million cost of removing and replacing 10,000 square metres of potentially deadly flammable cladding.

Residents of The Quay in Sydney’s Haymarket are mulling over whether to proceed with legal action in the Supreme Court of NSW against builder Parkview Constructions and Chinese developer Ausbao for a major defect claim.

The owners corporation held an extraordinary general meeting this week to go through the options. One owner, who asked not to use his name, said he didn’t bother going to the EGM because he had “lost faith in the system”.

“Everyone blames everyone else,” he said. “The lawyers get rich as we wait years to go to court.”

The Quay, a 282-unit, mixed-use development built on the site of the old poultry section of Paddy’s Market in Chinatown, is one of 435 identified as “potentially high-risk” by the NSW government’s Cladding Taskforce earlier this year.

Authorities around the world have been scrambling to assess the scale of dangerous aluminium cladding often used on the exterior of apartment buildings in the wake of the Grenfell Tower fire in London last year that killed 72 people.

The NSW government in August this year declared combustible cladding a banned product, meaning it must be removed from any building on which it has been installed, often to the tune of millions of dollars.

At the same time, it included combustible cladding within the definition of a “major defect” under the Home Building Act, giving owners corporations a six-year window to take legal action to recover their costs.

The problem is, no court has yet ruled on whether developers can be held liable retrospectively. “The retrospectivity of the legislation is where the challenge is,” said Strata Community Australia NSW president Chris Duggan.

“I expect we’ll need to see some precedents around litigation before we can determine where liability sits. Until we get some precedent around this question, it’s difficult to determine who funds it.”

Mr Duggan said until that question was answered by a court, “the only people who have the statutory responsibility to repair it are the lot owners”.

“We find that unacceptable as a long-term solution based on them having zero involvement in the supply chain,” he said. “The least responsible party is ultimately the one most responsible for the rectification.”

People living in buildings outside the six-year statutory warranty period — that is, built before August 2012 — lack even the option of taking the developer to court.

The question of who foots the bill for the cladding epidemic is going to cause major headaches over the coming decades. In Victoria, the government has offered a low-interest loan scheme to affected owners, but NSW has not followed suit.

There are currently a number of class actions in the process of being prepared across the country relating to the issue of aluminium cladding.

“I’m not entirely sure which parties they intend to ultimately make claim against but there are several parties that may be the defendants in those proceedings,” said Mr Duggan.

“That ranges all the way from suppliers and manufacturers to developers, builders or even government agencies. They could all end up being held to account through that process at some point.”

In a report to The Quay’s owners’ corporation in August, Parkview Constructions argued the cladding was not “defective” at the time it was installed and so neither it nor Ausbao could be held liable for the cost of removal and replacement.

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The Quay owners corporation had already commenced legal proceedings regarding general defects against Parkview and Ausbao in 2016 to remain within the two-year time limit.

It must now decide whether to proceed with a major defect claim for the cladding when the case returns for a directions hearing next week.

“In my view, the OC should try to resolve this dispute without the need for litigation. The court proceedings should be the last resort if the parties cannot negotiate a settlement,” a lawyer for the owners corporation wrote in a letter last month.

“The cost and risk of litigation associated with the cladding claim will be high because it is a complex, new and novel area of the law. I am not aware of any decided case relating to the liability of a builder and/or developer for combustible cladding.”

But he added that if the dispute could not be resolved by negotiation, “the substantial cost associated with the removal and replacement of the cladding means that it may be commercially viable to take the cladding claim to court”.

An Ausbao spokeswoman said the “matter you refer to is currently the subject of proceedings in the Supreme Court of NSW”.

“In these circumstances it would be inappropriate for Ausbao to comment upon this matter,” she said. “Ausbao devotes ourselves to deliver the highest quality and standard development to our clients as always.”

Parkview Constructions did not respond to a request for comment.

The owners corporation first became aware of the potentially dangerous issue in March this year after an independent fire safety engineers report. Insurance premiums for the building “increased dramatically” as a result.

In July, it received a letter from the NSW Cladding Taskforce warning of the fire safety risk and advising it “take action to make any recommended changes to the building”.

Hailed as a revitalisation of a site that had lain dormant for 25 years, the $300 million, two-tower development was awarded with an extra 10 per cent floor space by the City of Sydney in recognition of its contribution to the precinct.

Former Ausbao managing director Gavin Zhang told Domain in 2015 the development was at the forefront of sustainable city living and had been awarded a four-star Green Energy rating.

“The Quay gave us an exciting opportunity to showcase best practices in architecture, interior design, construction and sensitive planning,” he said.

“We’ve had a lot of inquiry for stock in the building because the apartments have turned out even better than anyone had imagined.”

A spokeswoman for the NSW Cladding Taskforce said it was recommended all owners of buildings with cladding ensure the cladding is assessed as soon as possible by a fire safety professional.

“The Taskforce has carried out audits of building records and identified, inspected, and contacted the owners of buildings that require further assessment,” she said.

“However, owners should not wait to be contacted by the government. If they have any concern about the cladding on their building, they should take action and contact a fire safety professional to arrange an assessment.”

A fire safety professional would then inspect the cladding, determine its type, and assess whether it is safe to remain on the building or what steps needed to be taken to remove the danger.

That can include removing all or parts of the cladding to prevent the spread of fire.

While prices in The Quay have skyrocketed since 2012, the cladding issue may already be starting to bite. CoreLogic data shows at the end of June, a two-bedroom, two-bathroom unit changed hands for $1.56 million.

That was 65 per cent more than its off-the-plan price of $946,000, but just $110,000 more than the $1.45 million it last sold for in 2015.

Median prices in the Chinatown suburb have increased at an average of 6.8 per cent annually over the past decade, meaning the seller would likely have been expecting around three times the capital increase they ultimately booked.

frank.chung@news.com.au