Mike Mortlock: Welcome to Geared For Growth. This week we're chatting with Hamish Geddes, who is a senior associate with Nexus Law Group. Hamish is a specialist construction lawyer so we have a chat to him about how you can protect yourself if you're a property investor that's building a property or undertaking renovations. Hamish is an accomplished investor as well so we have a chat about his portfolio. But in general the ways that construction projects can go south and how to protect yourself from that happening. Here's Hamish. Hamish Geddes, welcome to Geared For Growth.
Hamish Geddes: Thanks for having me.
Mike Mortlock: Just to kick things off who are you and what do you do?
Hamish Geddes: Well I'm a senior associate at Nexus Law Group. Primarily we focus on in my area, on the built environment. So I do building construction, civil, everything from the front end. So negotiations, contracts, all the way to the back end. So a lot of dispute work generally around defects, liquidated damages. Trying to resolve those as commercially as I can.
Mike Mortlock: That would be a handful I'm guessing. We really hope that our listeners maybe never get to meet someone such as yourself. But if they do we're going to run through some of the issues that pop up. Just to get to know you a little bit what posters were given prime real estate on the bedroom wall as a younger?
Hamish Geddes: As a youngster I was pretty much in love with surfing. That hasn't really changed. I see Marty next door's got his surfboard on the wall as a member of hunter business board riders, which I am as well. Most of it was there. Really Kelly Slater and Mark Occhilupo and those sort of boys. Mark Richards obviously because he was just down the road. They really probably took prime place on the wall. But definitely on the bookshelf there's always been some investment books. My mum would probably attest that was Rich Dad, Poor Dad, Barefoot Investor. So I got all my I guess investor knowledge from books. My parents were very probably same as a lot of parents in my sort of era and they were very risk-adverse I would say. Pay down the home loan, those sort of things.
Mike Mortlock: As fast as you can.
Hamish Geddes: As fast as you can.
Mike Mortlock: And why would you borrow if you don't have to?
Hamish Geddes: Exactly. But they were always encouraging me to do those sort of things. A little entrepreneurial, little adventures and whatnot that were pretty fun. But definitely looking at things like Rich Dad, Poor Dad and Barefoot Investor and the realisation of compound interest and what they can do including in having an asset that continues to grow. Definitely spurned my interest in real estate. It's been a driving force for a fair while.
Mike Mortlock: Rich Dad, Poor Dad, that was a huge book for my parents' generations. I'm hoping we're roughly the same age. You probably carry it a bit better than myself. How did you start or get started in property investing yourself? You're obviously an accomplished investor as well as a lawyer.
Hamish Geddes: Well yeah. I mean it's really been a recent thing. Rich Dad, Poor Dad pretty much had me when I was 12 or 13 setting some pretty lofty goals. Pretty happy to say I missed all of them completely by about a decade, spent most of my 20s at university and then-
Mike Mortlock: Surfing?
Hamish Geddes: Surfing and then trekking around the world. The investment ideas always fell on the back burner. But then about six years ago I thought I better pull myself together. At that stage real estate was fairly I guess cheap, it seemed like it anyway. My current wife and I had just moved into a place in Carrington. I don't know, I think we've been together for about 12 months by that stage. But ended up looking around the corner and there was a place that we could pay off the mortgage cheaper than we could pay rent. Which was quite unbelievable.
Interest rates were six or 7% but we sort of looked at it and I think I was paying 300 bucks a week for a two bedroom place. They were just about to put it up to 320. I looked at another place around the corner, I could buy it for 265 and I worked out the rates and I thought, "I pretty much break even here renting my own place." It was pretty ramshackle but I thought, "Let's do it." Luckily my current wife said, "Yeah, why not?"
After 12 months of being together. We legitimately 100% honest, I cracked open my own money tin to put down the deposit. I had a money tin, you know, one of those big money tins that you buy from Hot Dollar. I still do them, I have a little rule with myself that I put all my $5 notes and one and $2 coins in them when I come back from being at the pub or being at work or whatever. It just chips up and ended up being a couple of thousand bucks in there.
Mike Mortlock: We won't mention your residential address then just in case.
Hamish Geddes: Unfortunately it just got cracked open again, this time to buy a couple of surfboards though so it wasn't too bad. So, we cracked that open, my wife had a bit of savings and pulled those things together, plonked down for a place in Carrington for the massive sum of 260-odd thousand dollars.
Mike Mortlock: And the median's got to be close to six or seven hundred down there.
Hamish Geddes: Yeah, it's gone crazy with ... We bought that five years ago and did a full renovation. I didn't get a quantity surveyor before I started that renovation so I thought it was going to cost me $30,000 in my infinite wisdom of knowing everything. Blew through that by a long margin so luckily had a builder that was very accommodating and taught me the whole way through it. Who I still use now and had a great relationship with him, we created a great property. Just about finished it and my wife fell in love with our current place over in Tighes Hill so we packed up and pushed over there.
Mike Mortlock: You've gone on to do a few fixer-upper-type projects. Is that a bit of a strategy for you?
Hamish Geddes: Look, it's sort of where I've fallen into. I don't think it's intentional but I realised the other day that every single property I bought has been a deceased estate. My wife and I are definitely not against getting our hands dirty, I think that's definitely a way that you can add a huge amount of value to these places. But it's definitely changed. The first place we bought, we bought a place in Mayfield that is 600 or so square metres and it's an old ramshackle place that we bought that's just rented itself out from day dot. It's one of those things that you just forget about and leave it there. Didn't really have a plan but just knew that we wanted some land, because the place in Carrington was on 99 square metres.
Mike Mortlock: Right, that's tight.
Hamish Geddes: Very tight. The place in Mayfield is over 600 so ...
Mike Mortlock: So it's an acreage in comparison.
Hamish Geddes: Yeah, absolutely. We thought this would be a good little place to go in there and maybe my strategy always has been from now, is to buy an old place like this with the ability to renovate it and then the option, probably in the next boom, to knock down, rebuild and develop on that side. This one is, I'd be able to get three on it currently. Although I do hear that Newcastle DCP is going to be changing. It might not be happening anymore because I think around that area there's a bit of aggravation by the owners that are there now.
Mike Mortlock: Bit of nimbyism.
Hamish Geddes: Yeah, it's just been carved up. Anywhere on 800 square metres and they're jamming tiny little blocks on there now. I've heard that they're trying to widen the frontage from 12 which is what I've got to 20. But who knows. My plan was to buy a place, the ability to renovate, rent it, try and get it up as close to neutral as possible. Not there yet, not far away. As you know each year the rent ticks up a little bit which is nice, hopefully. That's basically been the plan.
Looked at potentially before the next boom get on there and get a DA and knock it down, build two of them and really just renovate, finance and hold. That's probably my Rich Dad, Poor Dad mantra coming out, is just hold. If you don't have to sell, hold, never, ever sell. That's what's happened so far and yeah. Here we are. Also got the ability there to help and work with my mum so my mum looked to get into the investment world. She's retired though so we looked at the ways that we can do it and have got a couple of places with her where she's able to throw up the investment funds and I'm able to-
Mike Mortlock: You've got an equity backer.
Hamish Geddes: Yeah. I've got the equity backer and the banks throw in the rest. Which is pretty nice. And that's tied up in some family trusts that get to spit out the dividends on the back end when they get there once they stop losing money. It's been a good little adventure, it's worked out well so far but I think it's a rising market in the last five years. If you missed the last five years you've probably had to try pretty hard to do that. That's where it's going to go for here. But I'm pretty buoyant on Newcastle.
Mike Mortlock: I think in general Newcastle's been one of the better-performing markets over the last decade. It might be the case that we're looking at maybe single-digit growth for a little while but eventually it's going to take another run and you'll be there ready to capitalise. I want to get onto the legal side of things, obviously that's your specialty as well. I want to look at the legal traps, especially for property investors. What got you in the first place into construction and building disputes?
Hamish Geddes: I’d like to say that I was guided there by something, but it really wasn't a big choice. I came out, I finished law school, I had a place in Carrington doing some work on my place and the wife said, "All right, I'm going back to university now. Time for you to get out there and put your law degree to use." Just contacted a couple of friends and said, "If you hear anything that we're already working, if you know anything let me know." We were lucky enough that Mike Morris here at Nexus had just picked up a bunch of work and he was there with Marcus as well back when we were ... Back when there were two and on we went. He rang me up and said, "I've got a role one day a week, if you’re keen."
I had no idea what ... I didn't even know there was such a thing really as construction law. It's not something you learn at university. You obviously learn contracts, you know there's construction disputes. But in terms of a specific niche area I wasn't aware of that. He gave me a call and said, "I've got a day a week if you're interested." And I said, "Okay, well, may as well. Absolutely." I think I've pretty much worked full-time from that first day. It's been a-
Mike Mortlock: Awesome. Here you are.
Hamish Geddes: It's been a great run. I didn't really choose it but it's something that I absolutely love and I'm pretty hands-on with. A lot of the renovations and developments and stuff that I do, I love getting in there and love's a strong word now. But I still get in there with the paintbrush, the sledgehammer's probably more of my forte these days. I don't mind that, knocking some things down and-
Mike Mortlock: Shock and awe.
Hamish Geddes: Pulling walls out and whatnot. Able to use that and then go and talk to my clients, the builders and the owners and the homeowners and developers and actually have a bit of that practical background as well, of even basic things like skirts and upper trays and these sort of things and actually knowing what things mean seems pretty beneficial to them but it makes me actually understand what their problems are in real terms.
Mike Mortlock: If you're on a conclave and someone says architrave and you're looking in the wrong direction you look a little bit silly don't you?
Hamish Geddes: Absolutely.
Mike Mortlock: I guess with any building works and where lawyers get involved is the building contract. Is there a certain point where a job will have a contract or doesn't need to have a contract?
Hamish Geddes: Anything above $5,000 needs to have a contract. Between five and 20 you need to have a small contract. Some of the home building at and above 20 you just should have a standard contract. I would generally recommend that anyone that is going into it just has a look on some of the options that are out there from the Master Builder's Association, Housing Industry Australia and Fair Trade. They all have contracts for any different sorts of jobs, including I think the Fair Trading has specific contracts for plumbing and electrical work and so on, so forth. Really if you're going into go and talk to a home builder and someone that's going to project manage the whole job, they should just have a standing contract from the NBA or the HIA or Fair Trading. They might have special conditions around it.
One of the other things that I guess a lot of homeowners need to also realise is, it's a lot of the issues that are around owner builder work. So owner builders used to be able to get things like home warranty insurance. So home warranty insurance is a scheme that basically protects consumers from builders who go bankrupt, die or disappear in the event that there are defects in the property or that they fail to complete the works and need to get someone else in to do it because any builder will tell you if they come into a job that's half-completed. Their costs are going to be far more than what there's going to be under the contract.
Mike Mortlock: Because they're assuming the risk of the work that was done by the previous party right?
Hamish Geddes: Absolutely. Builders always work differently so some of them might front end load their contract. And so in a $200,000 contract for example you might have paid a builder $100,000 and all he's built is the slab for example because he's gone out and he's getting ready to buy the frames and he's ordered the frames, he's ordered the kitchen and he's ordered those sort of things. Now if he disappears and goes bankrupt at that stage you're probably not getting your frames or your kitchen delivered. So that's all gone. So then another builder might come on and say to you, "Well actually there's still $150,000's worth of work here." So that $50,000 is there, going to be able to ... Hopefully you're going to be able to get that back from the Home Building Compensation Fund, which is home loan insurance.
Mike Mortlock: Has that changed with owner builders now?
Hamish Geddes: Yes, owner builders used to be able to get a home warranty insurance up until 2014. As a homeowner you used to be able to go and build your own house and get home warranty insurance, which then allowed you to sell it with the condition that the consumer that was purchasing your property was able to get home warrant insurance and some sort of guarantee over it. Home Building Compensation Fund, they're actually run by New South Wales government but that's now actually going to go back into the private sector.
But the Home Building Compensation Fund, generally on average, don't quote me but it pays out between two and $3 per $1 of revenue. So that's a massive loser for the New South Wales government. One of the big areas that they were losing a lot of money was owner builders because they were just doing work that was fairly dodgy. You get an owner builder and they don't have a lot of experience and one of the subbies does something and they're not sure and they're cutting corners and they do it in little bits and pieces and they're doing the electrical themselves. They're running their own pipes and-
Mike Mortlock: What could go wrong?
Hamish Geddes: What could go wrong? Which is all good if you're going to live in there for six or seven years, or forever. You take your own risks, that's fine. But a lot of what they were finding is people were going in, being owner builders and then just turning around and flipping them and taking the money off the builders. But now you can't have home warranty insurance as an owner builder, which basically means if you go to sell the property you don't have an insurance policy over it. So that's probably someone that's going to look at a property, if it's been done by an owner builder just to be aware that they don't have an insurance policy as they would from normal builders. And that's a real risk. You then have to sue the owner builder who may or may not turn up if there's something that goes wrong. And there's no back stop there, which is probably the great thing that the Home Warranty Insurance Fund does.
Mike Mortlock: For investors that do find that they're looking at a property that is built by an owner builder what's the best advice for them to make sure that they're covering themselves?
Hamish Geddes: Don't do it would be my ... It's that hardline I think in my opinion. You've got to realise, obviously it doesn't matter if you're going in to buy a property that's ... And you're buying it for land value and you're getting your house for free on top of it. Obviously that's something that they're going to have to consider. If they go into it and the housing component's a significant part of the value of the property that they're purchasing and it is done by an owner builder, you should know that you're not going to have home owners' warranty insurance over it. Even though you should, the owner builder should have got home owner's warranty insurance from any contractor that did more than $20,000's worth of work. In my experience it just doesn't happen. Very rare that a plumber who does $20,000's worth of work gets home warranty insurance.
Because the owner builder doesn't know they need to enforce that. That would be pretty much my rule, is either don't do it or if you are going to do it make sure you've got a very thorough home building inspection report. I'm not talking about one that you go and spend 250 bucks from Joe Blog's ABC Building Inspections which is probably fine and they're probably fine to do it in most circumstances. But when you're going to go into an owner builder property definitely get a detailed report from a detailed home building expert. They might run you for a thousand dollars and you might turn around and not build it, but you really need to be making sure that a lot of the things that you were doing there, particularly if you're going to invest in it and then rent it out, are up to code. Because the last thing you want to do is you get in there and then your tenants turn around and say, "ABCD," and then you've got to go fix it.
Mike Mortlock: If you do have the property built by a builder how long do they maintain a liability for their works?
Hamish Geddes: They've got a liability for either two or six years under the Home Building Act. They've got two years for what they call non-major defects. I'd call those the cracks in the architrave, the paint's coming off. Those little things that are non-major. Then you've got six years for major defects. The definition of major has not been fully fleshed out in the law at this stage and more and more will come out. Once they do you start being able to categorise them as you have disputes as to whether something's minor or major. But those disputes will now only just be resolved because the act that created this minor or major differential only came in in 2014. So you're only really going to get those disputes starting in the end of 2016. And so they're only going to be just starting to be decided towards the end of this year. And so towards the end of this year and flowing into next year we'll start being able to get more of a definitive list of what's major and minor.
Mike Mortlock: Because we'll get some precedence from what makes it to the courts.
Hamish Geddes: Yeah, exactly. Most of the major things that will be covered will be things like waterproofing, most structural damage to internal major elements. I don't think you're going to get over for a structural defect for a deck for example. It's probably not going to be classified as a major defect but obviously if your concrete pillar's got concrete cancer and they're going to fall over at any second the story of your house is at serious risk.
Mike Mortlock: It sounds pretty major, yeah.
Hamish Geddes: Sounds pretty major. You're also covering some things like major elements of the building. So if you've got for example defective tiling but you've tiled the whole first floor of your house then that could be classified as a major defect because it is a major element of the house. That's just been using that legal terminology there and applying it to those, the situations you find yourself in.
Mike Mortlock: Let's talk about disputes which is I guess your bread and butter. Where do the disputes happen? Does it normally start with a conciliatory process? How does it start and how can it escalate to the point where there's an order?
Hamish Geddes: I would say that a dispute always starts where the parties don't fully articulate their agreement at the start of a front-end contract. That's probably why you generally want to have a standard contract. A lot of consumers don't read those, a lot of builders don't even understand how they work. It's a very large issue. For example things like under the master builder's contract how extensions of time work, whether rain delays are something that are an issue, how variations are claimed, all those sort of things. They're all articulated very clearly in a building contract. But most of the time two parties sign it and the only time they'll look at the building contract is-
Mike Mortlock: If something goes wrong.
Hamish Geddes: Yeah exactly, if the lawyers are getting involved which is quite crazy because these building contracts are not there to ski. They're actually there to tell you how to run the job.
Mike Mortlock: And to protect both parties really aren't they?
Hamish Geddes: Absolutely, protect both parties. If you're an investor and you're going in there and you're doing these things you need to be aware of what those building contracts say. You don't need a lawyer to read them, they try to be as pain English as possible. There are obviously issues that come up whether something falls into being an extension of time or a variation or whatnot. But if the builder and the owner are both on the same page and can get together and discuss, "Okay, well ..." The builder might say, "This is a variation, well no, I don't think it's a variation because look at the plan that's here." That would resolve most of them.
In terms of the actual disputes, where we see most of the disputes is at the end of a job. Generally, it comes down to time, it's taken too long to build, I'm paying too much money out of here to rent my other property. Or there's a lot of defects, so they're the two issues. Often when there's a lot of defects the builder turns around and says, "Well there are all these variations that I didn't claim and I'm going to claim them now." That's a common type of issue that we have with building disputes.
Mike Mortlock: Can we run that as a bit of a case study? The building has gone overtime, there's some defects, the builder was sitting on some variations that maybe wasn't interested in charging for. But now it's getting a little bit adversarial, he's on the front foot there. What's the first step with that dispute and in what sort of direction does it go from there normally?
Hamish Geddes: The first step is that they go to, generally the Office of Fair Trading. The Office of Fair Trading has a great free regime to try and resolve these before lawyers or anyone else gets involved. That's definitely the recommendation. They would come in there as an impartial party and try and determine the dispute between them to come to some sort of resolution. Most of the home building-type disputes, you're probably fighting about amounts that really the lawyer shouldn't be involved in. Legal fees become costly, experts become costly. But often the issue is that the relationship has just completely broken down between the two parties at that stage. And that's what every dispute comes down to, is just the conversation between the parties has either stopped or it's just become so adversarial that neither party can deal with each other.
They don't want to see each other. Which I would say happens a lot more often when you have either homeowners that are going to go and live in their property because they're stressed about what it looks like or investors that are too emotionally tied into the property that are going on. I mean they're generally the two that they kick it off. Obviously if you've got a builder that's probably not acting with as much integrity as you would like there's obviously an issue there. But often it's the emotions that get involved.
That occurs, Fair Trading get involved, they'll come in and have a conciliation and they'll go to site most of the time, walk around, do an inspection with both parties. What are your concerns? Okay, write down those issues. And then they'll tell the builder, "Okay, you've got to complete these works by date X." And they'll tell the homeowner, "You've got to pay the contract sum, or I agree that these variations ..." They'll try and come to an agreement, homeowner or investor pays X dollars, builder does Y works, let's resolve it and hopefully that's it.
Mike Mortlock: Is that a binding agreement or is it-
Hamish Geddes: It's not a binding agreement, no. It shows bad faith if you don't act in accordance with it. It's not a binding agreement but it's definitely something you probably want to comply with, particularly as an investor when the commercial realities of it just kick in. You just really want to be either getting the property built, finalised and then you're selling it. In which case you really don't have a huge concern unless the defects are going to decrease the value in your property. Because the warranties go with the house, they don't go with you. So the insurance policy is not with the investor, with the builder. The insurance policy is by the builder against the property. So if there is a defect there that you're really concerned about but ... Or you're not aware of and you think you need to know about all of them and you've got to sell the property, well you can sell the property and if the new homeowner's got the problem then they still got all those rights against the builder.
Mike Mortlock: Let's say we have an order from Fair Trading that's not complied with. What's the next step from there?
Hamish Geddes: If the order's not complied with by either party then you go to the Tribunal. That's the New South Wales Civil and Administrative Tribunal. Again, it's a forum where lawyers are not encouraged to be to keep the costs down and experts aren't encouraged to be either. At that stage they will go forward. Either party commences in the tribunal. If we use this scenario there's some defects, the homeowner isn't happy because the builder hasn't come back and done the defects and fixed the works, then you turn around and they'll be making a claim for, "I need to build at a ... Put the roof on, sheet the walls, do the plastering and install the kitchen. I'll want him to do it by 30 days from the date of today." And then the builder says, "Okay, I'm happy to do that once they pay me for the extra three rooms that I put in at the front," or something along those lines.
Then that will generally be held by ... A mediator will then get involved. Similar sort of thing to the tribunal but this will actually be a conciliation. If they can resolve that there will be actual orders that are made, and those orders actually need to be complied with. They might have things for example, exactly the same as the Fair Trading builder to do this work by date X and owner to pay this by date Y. It might be contingent on different things.
For example it could be ... Whatever agreement it could be it can end up in orders. It might be that the owner's got to pay half of it up front and then half of it once the frame's up for example. And then that's how it goes. It just tries to get that relationship. And if that's not complied with at that stage the homeowner within a year of the orders expiring, or the builder, either party. If the other party hasn't complied with it they're able to then go back to the tribunal and do what they call renewal proceedings which are generally shorter proceedings to determine a quantitative dollar of what the damages should be for the orders that weren't complied with.
Mike Mortlock: I guess there's a time imperative at that point, there's a project that could potentially have been dragging out for months or even years before you even get to that point. Is that right?
Hamish Geddes: Absolutely. I've had some cases where the property hasn't been finished for four years. It's just dragged out and the owner's saying to the builder, "Can you come back and fix it? Can you complete it?" "Yes, I'm coming back. I've just ..." The excuses go on and on and on. Particularly when you're an investor you might not be ... You should be on the ball but let's say the property market's going up or you've got other things on your mind, you're not pushing it as hard as you can and things just drag on, drag on, and then the builder's giving excuses, so on, so forth. It can be absolutely a lot of years and then it does become more and more imperative.
Mike Mortlock: That's basically where most of the disputes will end, after that tribunal?
Hamish Geddes: Once the tribunal starts depending on how the dispute is and what stages the works are at, that's often when we'll get involved. If the parties are unable to resolve it at the ... Often at the mediation stage, but sometimes we get involved prior to those things occurring. If there's some significant defects or if the parties have gone through fair trading and the builder hasn't complied with the fair trading and the owner's asked him to come back or her back a bunch of times and they haven't come back, often they just go, "Okay, I can't deal with this anymore, it's too stressful for me. I need someone to push this forward and make sure it's working as quickly as possible." That's often when we'll get involved and run through that sort of process.
Mike Mortlock: Say for example a standard sort of three bedroom residential house that there's a dispute that perhaps should have been sorted out through conciliation but gets to the point where you're involved, what's a bit of a range of the legal fees that they can incur to finalise this dispute, including expert witnesses and that sort of thing? I'm guessing that it's ... You mentioned before the huge incentive to sort it out in the beginning. What sort of dollars are we talking?
Hamish Geddes: It's almost impossible to say. I will say that generally in my experience the minimum amount of time and effort for experts that you're looking for for fairly small disputes, you'd be running into between 30 and $50,000. That would really be the minimum. These things can drag on for years. When the parties have a lot of ill will between each other they can drag on for many, many years. Three, four years, I've had experience in some cases.
Mike Mortlock: In excess of the value of the whole project?
Hamish Geddes: Yep.
Mike Mortlock: By many multiples I imagine as well.
Hamish Geddes: I have. I've had one dispute where the value of the legal fees, the expert fees were seven times the value of the dispute.
Mike Mortlock: Wow, right. What went wrong in that situation? Maybe not specifically the defect but how does it get to that sort of ... That just cartoonish level?
Hamish Geddes: Honestly it's something that you sit there and you don't actually realise how it gets there. It's generally between the two parties, there's just so much animosity there. And then basically what occurs is little bits and pieces pop up that spot fires that mean that you're dealing with these spot fires around the outsides before you're actually getting to the nuts and bolts of a dispute. Which is one of the key reasons why when you have a building dispute you really need to go to someone that actually understands how these things work.
Unfortunately I've got a lot of experience of dealing with experts and lawyers who are not familiar with the building world and don't quite understand where the commercial realities start, stop. It just becomes a huge issue. They're running very technical legal arguments that try and get out of what really is quite basic, simple outcomes. That's really where the costs start escalating, when you don't have a choice but to deal with these spot fires before you get to the major bushfire. That's where the cost really escalates. They can come in all sorts of spheres. I generally say that when there's a ...
Home building disputes are no different to major commercial building disputes. There is really no difference between us arguing about a $10 million defects claim over a major apartment block and a $50,000 defects claim over a home building with a mum and dad. It's really the same amount of work. Obviously the $10 million block is bigger because you've got ... You might have 50 apartments in it so you've got 50 times that work. But a lot of the defects are replicated throughout. But it's really the same issues. There's a lot of core things of who's liable, what the costs are, what's reasonable and so on, so forth.
If you're arguing about something in the 50 to $100,000 range, it often just becomes non-commercial for the lawyers to be involved because the outcome, which is really pushed now by the tribunal. Finally we've got some ... At Nexus we generally act for builders so they've amended the act to include Section 48MA which is under the Home Building Act, which basically means there's a preference for the builder who did the work if they're still able to go back and rectify. Which is a huge-
Mike Mortlock: It makes sense right?
Hamish Geddes: It does make sense. But it's a huge disincentive to people that are commencing proceedings against a builder who refused to allow that builder to come back and rectify. Because if you know that the end result is going to be that the builder's going to come back and do the works you really should be aiming to try and resolve that as quickly as possible. If you've got two lawyers and an expert that's involved right from the start that aim to get to that point as soon as possible you can really be resolving this for a couple of thousand dollars for basically getting into a boardroom somewhere and saying, "Okay, well the brickwork's defective.
What are you going to do about it?" "Yes, I agree it's defective. We can do these options and we can fix it." Or, "I've got my subbie bricklayer who's said he's going to come back and fix these six parts that he's issued about." The expert can say, "Well yeah, I'm happy about that because it's not a structural issue. It's just what it looks like." Okay great, well we'll come down and we'll rip down the front half of the house but who cares about the little side access that you've got? No, I don't care about that either. Once you start taking those things out you start reducing the costs and you can resolve these things in a matter of weeks is obviously the goal. If they don't get to that point they can drag on for months and years.
Mike Mortlock: Because there will be people that are building a home or an investment property that get to a point where they don't want to see that builder or any of their associates on that site again. So there's a bit of a disincentive to take that view that, "I just don't want to look at the guy." Because now we're sort of saying that I guess the tribunal is favouring the easy solution, which is getting the builder back on-site. But in that situation where the owner can't stand to look at them it's inevitable that that goes further right?
Hamish Geddes: It is inevitable. The tribunal can still order that that builder goes back and does work. You basically as an owner, you then have orders against you to allow access for them to do the work. Which can be very, very stressful and it can ... I haven't come across the exact circumstance where an owner would refuse a builder the ability to come back and do the rectification works after having that order. But I can guarantee that that will definitely float up in the next ... Because Section 48MA only came in 2016 I believe, or 15. So that was another amendment, a recent amendment. Although they were making work orders for a lot of period, a long period before that. It's definitely something that's going to come up where the builder says, "I've tried to access on numerous amount of time."
Mike Mortlock: There's a rottweiler in the way and ...
Hamish Geddes: Yeah exactly. Well, come to think of it I have got a matter at the moment which is quite similar to this sort of issue where our client has been saying ... As a builder has been saying, "I've been trying to go back there and they're claiming a couple of hundred thousand dollars to complete the works." And the builder's saying, "You're not letting me on-site. How are you going to do it?"
Mike Mortlock: And I'm nervous bricklaying when there's a shotgun pointed at me.
Hamish Geddes: Exactly. There could be some precedent that comes out of that in the near future. We've got a builder that basically says, "I want to come and do it. I appreciate that there's a lot of animosity between the parties but I can finish this work for ... $30,000 it might cost, and they still owe me this money." But you're claiming a couple of thousand dollars, well, there's a difficult way to get around that. And that really comes down to the evidence of showing who's acting in good faith at that time.
Mike Mortlock: Now when it comes to the disputes, I guess it's around things like extensions of time, variation and defects. Are they probably the three main disputes that you see?
Hamish Geddes: Yeah, mainly. They're the main areas, particularly in home building that are in dispute. Obviously time, it's taking too long, and defects are the two big ones that are an issue. In the smaller matters obviously you don't have quite the small nuances that you have in a major dispute. Being a QS you would know, there's no change of work methods or there's no ... Things like that don't really concern if you're building a three bedroom house. A home owner's probably not going to tell you to build it some way or the other.
Obviously that dispute in major things, if you've got a principal and you're building a hospital and they tell you you've got to build it this way and you costed it at the other way, it might seem that you get the same result but it can cost twice as much because you're doing something differently. So those nuances and those types of disputes which are major areas that we have disputes in in larger transactions. They obviously don't come into the home building world which is great.
Mike Mortlock: Of course. Let's say we're looking at a dispute over extension of time. Your standard master builders or HIA contract, that's going to have a provision that says that the building will be built roughly by a certain time allowing for reasonable rain delays or slab curing time, that sort of thing. What typically goes wrong in those extension of time cases?
Hamish Geddes: Again, it's just the price points between the parties. That's what goes wrong. And it's generally a builder's issue. It's not generally lack of access for example. If you're building a new home the builder might say, "Okay, well I can catch up on these days because something occurs." For example the slab guy was meant to come on a Monday but then it rains and then you go to book him in to come back next Monday but he's booked out and he's gone to Bali for four weeks and he's the only slab guy you can get. All of a sudden because you weren't aware of that and you just assumed that they were there if you're that type of builder then you're out by five weeks. Now we've got a real big concern because that's not a reasonable reason for an extension of time. But I think most people would be understanding of those sort of things.
If you're building a three bedroom home, as long as you can say to the builder, "Okay, well that's an issue but you're going to have to accelerate it at the back end." Obviously that acceleration doesn't come into home building contracts but as a QS you'd understand how those sort of things happen on major projects where you get told to work faster and longer and long nights, so on, so forth. But generally it's just a matter of the conversation between two parties and saying, "Look, this has occurred, here's my delay, this is the reason for delay."
As long as both parties are up to date, and the homeowner really has ... Not an obligation but really should try and be just having a good conversation with their builder or whoever it is that's undertaking these works. Say, "What's happening? What's the issue of the delay? Can we try and work around this?" For example the homeowner might say, "Well I know I've done another job with this other builder and they use this slab guy. Can you have a call to him and see if he's available?" "Okay, I could call him." Those things can be worked out reasonably if both parties have a good relationship. If neither party talks to each other that's-
Mike Mortlock: The builder should have a critical path analysis at the beginning and a programme to say, "This is what's going to happen. If they have a bit of communication they can kind of see if something doesn't happen it pushes things out." But is there compensation where a builder has obviously done something that slowed the progress of the property with liquidated damages at the end? How does that work if it's clear that the builder's at fault and they can't accelerate that programme?
Hamish Geddes: It really doesn't even make any difference if the builder's at fault or not in terms of liquidated damages. If you're an investor or a homeowner or anything where you are going to be incurring costs because something is not completed at a certain date and time. Then you should be really considering what your liquidated damages are going to be. So liquidated damages obviously occur when the date for completion is 30th July and they finish it on the 14th of August and you've got liquidated damages of 100 bucks a day, not business days. Well then your builder's got to pay you 14 hundred bucks. Liquidated damages generally need to be a reasonable pre-estimate of what your actual losses are.
Mike Mortlock: So if you're renting a property say and you're wanting to move into this space you have to continue renting so something reasonable might be what you would have to pay in rent. Is that fair?
Hamish Geddes: Yeah, absolutely. Plus your interest costs. A liquidated damages clause can be completely cut out of the contract if it's unreasonable. If you're building a $300,000 house and you're renting a house for 200 bucks a week down the road or you're not renting at all, but your interest costs are 400 bucks a week and you put $5,000 a week in there as the liquidated damages. It's not going to fly in the court because it's just not a reasonable pre-estimate of your loss. So you need to be reasonable and put it in there for what actually would be what you think your costs are. It could be on the higher end, it doesn't need to be exactly what your costs are. You don't have to sit down and work it out.
But you should have a reasonable idea of what those costs are. For example if you're going to move in or you're going to lease it out then you've got the loss of rent that you're going to have over those properties. That might be more than the interest costs that you're building for the place. Just have a think about those. And generally what occurs is builders don't want liquidated damages, obviously. That's something hanging over their head. But at the same time if you enforce and want liquidated damages, which is an entirely reasonable position. The NBA, the HIA make provision for it.
Mike Mortlock: Is that basically just a blank line to say, "This is what the liquidated damages are priced at?"
Hamish Geddes: Yeah, exactly. The NBA contract and the HIA contract have the standing contract terms and conditions. On the back of it they have a schedule. The schedule's really the only thing you need to talk about with your builder and that'll have your liquidated damages, that'll have your contract price, who the owner is, so on, so forth. Those sort of the things, who the owner is is critical. They need to be, mum and dad investors need to make sure that they're actually from a tax perspective putting down who the correct donor is in those sort of circumstances. You've got your liquidated damages, you should just put that in there as what your actual liquidated damages are.
But what you absolutely should expect is that you get a corresponding similar delay damages claim. Now delay damages are the reverse of liquidated damages and they fall into the characterization where the builder suffers delay because of something that you did for ... Also rain delays and things like that, things that they can't control. They're generally excluded. But builders can try to get them in there.
Mike Mortlock: Say for example I'm building a place and I'm supplying the tiling and all the PC items, but I couldn't make up my mind whether I want Miele or Ariston that doesn't arrive to site in time, that's delayed the builder so that's what you're talking about there?
Hamish Geddes: Absolutely. Both parties need to put on notice the other party that they're making these delay and liquidated damages claims. But that's absolutely a critical thing. Delayed damages for installation of PC items for a dishwasher, et cetera, things that won't ... Shouldn't really hold up the completion of the works probably aren't going to fly for delay damages. But if you're the supplier of the tiles for example then everything that needs to be put on the showers and all those things, finished, and you delay them by two weeks ... Like you say the critical path if you're talking about delay and liquidated damages, to bring you back to that critical path, if the builder and you and the owner sit down and actually work out what the critical path is, very unlikely and I very rarely see it in the home building issue.
But it's a quite simple process and builders really should be taking the time to sit down and figure out what a critical path is and how it works. Because they've got it in their head. They know that build a slab, put the brickwork up, build the framing, electrical, plumbing, so on and so forth. All the plumbing’s normally before the slab, but ... So you sit down and work those things out and you can figure out what the changes are. If you're two weeks late on supplying the tiles and that's the only thing that's holding up OC because everything else has been done, well the builder can say, "I've still been here. My delay damages are X dollars." Even that is a small case of occurring because the builders should be able to limit their losses by going and getting the tiler to do the other work. But if the tiler's turning up to site every day because you've been promising him that the tiles are going to be there, well, he's losing a day of work so tradies are expensive. That's 500 bucks a day.
Mike Mortlock: It's reasonable, that there's a loss isn't there?
Hamish Geddes: That could be a loss, 500 bucks a day if that's what the delay damages are there. If you don't have liquidated and delayed damages and there's a bit of case law around the fact that it's nil or zero or not applicable. I won't go into too much detail here, but if delay damages are not applicable then just general damages apply. That's far more scary than the liquidated or delayed damages in my experience. Liquidated and delayed damages are great because you're not fighting about the quantum. You're just fighting about the time and what occurred.
General damages, you're fighting about what the actual quantum is. Let's use the tiling for example. The tiler has been rocking out, if you've got delay damages of 100 bucks a day you pay them 100 bucks a day. But if they got delayed, if delayed damages are not applicable under the contract for example that means general damages apply. If the tiler's going there every day and then you've got to put a project manager on site each day to go and project manage that guy and you're trying to order the fit outs, items, your general damages can be far more than 100 bucks a day.
Mike Mortlock: We've been roaring through time and I just wanted to ask specifically, just before we forget, with contracts for construction works there's different ways that a builder will be paid. Whether it's progress claims, which is typical of maybe larger developments, or perhaps milestone payments which may be a little bit typical of the smaller projects. You mention before about front loading, so builders will want to get as much money as they can at the start of the construction because that'll help them finance purchasing the windows or whatever they need to and not carrying that cost themselves. What is the norm in say an NBA or a HIA contract and how can people get into trouble with the way that those payments are written into the contract?
Hamish Geddes: I guess using your terminology they are generally milestone payments. But I think the NBA actually calls them progress payments within their contract. So they are a little bit different. But yeah, generally milestone payments is the way that they do it. Some builders just go very simple and just say 10, 20, 20, 20, 10 and that's it. It's 10 for deposit, 20 for slab, 20 for framing, 20 for roof, 20 for fit out, 10 for finish.
Mike Mortlock: So a milestone is basically we stand back and we can say, "All right, we've done the timber frame. So we've reached that milestone. So then the owner is required to finance whatever the value in the contract was for that milestone." Is that right?
Hamish Geddes: That's it, that's correct. You can have it that way or you can have progress payments on a monthly basis. For example on the bigger developments it then gets obviously valued by a QS that comes in and says, "Oh well, you've done $100,000's worth of work and here's your certificate. Take that to the bank," and off they go. If you're using that mum and dad terminology and you're doing a five townhouse development you'll probably be looking at progress payments and you'll definitely be wanting to get a QS out there. And your bank would be requiring-
Mike Mortlock: They would require that, yeah. Because they're not experts themselves.
Hamish Geddes: No, they're not. The builder would be saying, "You owe me 120." And the QS might say, "You've only done $90,000's worth of work and you're not claiming for these because they're not on site," and on they go. Same for milestone payments. If you're an investor obviously interstate or something like that, it'd be difficult to get on side of having to look and see what's going on. But if you are that sort of investor and you're doing those sort of works then try and figure out a guy or a girl that can jump up there and have a look. That could be a QS, a building inspector, anyone. Pay them a couple hundred bucks to walk out there when you get the claim and say, "I've had a dispute where half of the contract sum have been paid and they went on site and it hadn't even started to be built." It's like, "Whoa." Pay someone a thousand bucks for the whole thing to literally walk out and say, "Frames are done, frames are up." And see them. You don't have to get up-
Mike Mortlock: Yeah, or if you're going to sell it ask the real estate agent to do it to get the listing or the property manager that's going to rent it. I'm sure they'd be happy to drive by, take a photo and flick it through if they know they're going to get the management right. Sounds a bit silly.
Hamish Geddes: Absolutely. Just using that practical standpoint is so valuable. It just makes complete sense if you're going to go down that milestone payment path to actually go out there on site and have a look and see what they're doing. Most builders these days on bigger projects probably won't just have five. They generally try and step them out a little bit more. As an owner or an investor you can definitely sit down and jump on Google and figure out some good milestone payments for houses and step them out for 10 stages and actually sit down with your builder and say, "Okay, let's have a chat about breaking these stages up a little bit so you're not ahead and you're not behind and the value of the work is corresponding with what's occurring."
Mike Mortlock: So milestone payments and where they land and what the percentages are, they're not normally a problem for a construction project as long as you know that that's what they've done? Or does it really just pop up as an issue if that builder disappears or dies and they have front loaded it? Is that the only real concern with the milestone payments?
Hamish Geddes: That's really the only concern with the milestone payments. I mean at the end of the day if you pay your bill, the $500,000 to put the slab down and that's the contract price for them they deliver you the fully completed home for $500,000. No issue, you pay for what you've got for and that's the contract price. Bit different though if you've paid $500,000 and the builder just flies away to Bali for the rest of his life and you're sitting there going, "Um, okay." Then you're having a fight with the insurance company, hopefully, with them there to try and recoup your money and get the rest of the funds paid. I don't think the insurance company's going to be too keen to say, "Well, that contract's just ridiculous and we're not going to uphold it. You shouldn't have paid that much money and you really could be in trouble there."
Mike Mortlock: What about say an investor that's just doing a bathroom kitchen renovation or an extension? I'm guessing that there's not enough value to justify coming and seeing yourself unless it goes into the toilet for some reason. What's your advice for people to protect themselves with that?
Hamish Geddes: Same things. Go into the NBA, the HIA, make sure you've got a contract, a minor works contracts will be fine. But make sure it's all articulated properly and there's an agreement there. I mean they don't have to be the standard agreements but keep it ... Have an idea of what the builder or the subbie or the tiler or the chippie's going to actually charge you when and why and how, and what rates he's going to do it on.
Mike Mortlock: And perhaps don't do it over a handshake.
Hamish Geddes: I would definitely not do it over a handshake. I mean an email correspondence is fine. It's not great, it's not always service but it's evidence, stuff that you can rely upon if things do go badly. So just articulate that. One thing I would recommend is generally try to not engage with people on hourly rates, as silly as that sounds because I charge on an hourly rate. But hourly rates are very difficult to govern. How do you do it if you're not there on-site all the day? How do you know that the tile's been there for eight hours? Whereas, tiles are a very specific example where they generally just work on a square metre rate and charge you whatever they charge you. If you want you can go in there and measure up your square metre rates pretty easy, get a tape measure out, wall, floor, floor, done.
Definitely try and talk to those sort of things. Try and articulate it, just be upfront. If you've got people that aren't willing to be upfront then I generally would say don't involve yourself with them. There's plenty of other good, reputable, great builders. I mean I've got builder clients that I've been with that have been working for 40 years, never had an issue because they solve them. They talk about all these things upfront. "Here's an issue." They might be more expensive but they're not claiming a bunch of variations on the back end for you. They actually know how to do the work. So the guys that have been around for 20 years and have got a good name, they've got a good name for a reason. It's not because they're just ripping everyone off and everyone hasn't been keeping up to date with them.
It's because they're doing their job properly and what they say is what you get. If you don't have a minor works contract or a small contract, just make sure you've got it in an email. Talk to the tiler. "Cool mate, you're 60 bucks a square metre. I measure it as 20 bucks, 20 square metres bathroom. Do you agree?" "Yeah, I've gone and measured it. I think it's 22." "Cool, no problem. That means that it's whatever that is."
Mike Mortlock: That sounds simple but it's a common sense way to protect yourself isn't it?
Hamish Geddes: Yeah, absolutely it's a common sense way to protect yourself. Just take a bit of time to sit down and send an email and confirm these things and people won't get themselves out of joint if the position in the playing field is well-articulated between the parties.
Mike Mortlock: My last question was going to be what's your best advice for property investors when they're dealing with construction projects or renovations, but it sounds like that might be it is get the documentation.
Hamish Geddes: Yeah, absolutely get the documentation. It's critical to have full and frank discussions upfront with the builders and whoever it is that you're engaging. Make sure you're all on the same playing field and keep the channels of communication there as open as possible. Try and make sure ... I guess one of the things that I think for consumers is to realise that if you walk in halfway you've got to realise, walking into open heart surgery halfway through is murder. Often you've got to, unless you've got ... If you're not a building expert or someone that actually knows what they're looking at a lot of the times when you're going in there and telling someone that there's all these issues they're not. They're things that are going to be resolved because someone's undertaking works in a different manner. While those things might be issues in future if you're not a building expert you don't know what you're looking at. Really either go away and get a building expert or just realise that you're walking into something that's half-finished and once it's finished it might be okay. Particularly if you come in and go and sell it.
Mike Mortlock: Awesome. How do people get in touch with you Hamish, heaven forbid they need to?
Hamish Geddes: Well I'm on Nexus, at nexuslawyers.com.au. My email address is firstname.lastname@example.org and yeah. Happy if they would give me a call and run through it and have a chat.
Mike Mortlock: Awesome. Well thanks very much for your time, really appreciate it.
Hamish Geddes: Thanks for having me.
Mike Mortlock: Cheers.
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