Court case shows cladding is an apartment owner’s nightmare

They want $24 million. On Monday, owners of the 328 apartments in Melbourne’s Lacrosse residential tower will start their long-awaited case for damages against builder LU Simon, over the combustible cladding placed on their building.

While the fire sparked by a tenant’s cigarette on the balcony of unit 805 of that troubled building mercifully killed no one, it’s been a test of endurance for the apartment owners ever since that night in November 2014.

As they seek redress including an estimated $10.7 million in recladding costs, $1 million in lost rent and emergency accommodation costs and over $500,000 in insurance premium hikes, the Lacrosse owners are not the only apartment owners in Australia trying to resolve a cladding problem not of their own making. But they are the highest-profile group so far. And there will be more.

“We are putting buildings through a process of risk assessment,” says Adam Dalrymple, the acting deputy chief officer, community resilience of Melbourne’s Metropolitan Fire Brigade

Grenfell Tower in London suffered particular circumstances that make such a catastrophic fire in this country less likely.
Grenfell Tower in London suffered particular circumstances that make such a catastrophic fire in this country less likely.

Matt Dunham

“And where the risk is being identified as extreme or high, there is a rectification process that needs to be undertaken with the owners to achieve compliance.”

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Of course, even lower-risk buildings with non-compliant combustible cladding will be required to replace it, especially given that Victoria, NSW and Queensland have banned the use of high-content PE-core cladding. It’s just that the rectification costs of higher-risk buildings are greater.

The Lacrosse owners are now finalising a loan of $11 million to replace the polyethylene-core panels that still wrap around their building on Melbourne’s La Trobe Street. Nearly four years after the original fire, the original cladding remains on the building – which has been declared safe for occupation – partly because the owners sought a cheaper way to make their building comply with regulations than by replacing the cladding.

Exposing secrets

In 2015, the City of Melbourne originally gave owners of the 328 Lacrosse apartments a year to fix the cladding. The apartment owners and LU Simon fought an earlier order to replace the panels – they wanted to keep the panels and add fire sprinklers instead – but the state’s Building Appeals Board dismissed the bid and upheld the requirement of the City of Melbourne’s building surveyor.

It's been a test of endurance for Lacrosse  apartment owners ever since that night in November 2014.
It’s been a test of endurance for Lacrosse apartment owners ever since that night in November 2014.

Gregory Badrock

The Lacrosse and Grenfell fires – and a host of others around the world – are exposing the secrets of apartment buildings that have huge liability issues for their owners.

On one level, it is exposing owners’ corporations to a web of technical and legal issues that they are ill-equipped to confront. Combustible cladding forces insurance premiums higher, devalues apartments and even makes apartments unsaleable, as the owners of one apartment tower in Manchester in northern England have found.

And when it catches fire, it is dangerous.

The string of cladding-related fires globally shows mercifully few fatalities. But there are grim exceptions. Many of the 72 victims of London’s tragic Grenfell Tower fire last year died because of toxic smoke given off by the burning aluminium composite panels and as a result of the burning contents of apartments, said Gary Strong, a member of the UK’s Independent Expert Advisory Panel consulting to the Secretary of State for Housing, during a visit to Melbourne earlier in August.

“It only takes three breaths of toxic smoke and you’re unconscious,” says Strong, global building standards director of the Royal Institution of Chartered Surveyors industry body.

“You imagine trying to get down the stairs, 24 storeys high – you’re not going to get very far. Can you hold your breath for that long? I don’t think so. So the firefighters who were going in, who were dispatched to try and get to the upper levels – to level 18, 19, 20 – never got that far, because they were finding dead bodies on the staircase as they were trying to go up.”

Non-compliant fire doors

Grenfell suffered particular circumstances that make such a catastrophic fire in this country less likely. The building had no fire sprinklers, which are required in Australian buildings – and which worked as intended when Melbourne’s Lacrosse building caught fire.

There were more than 100 non-compliant fire doors, a firefighting lift that didn’t work and a stay-put policy that kept residents in place, rather than evacuating them. Risers intended to channel water to the higher floors of the building – where most people died – failed to work properly and a system for extracting smoke from lobby areas did not work or meet building regulations, a report published in June found.

But combustible cladding is everywhere and so are the risks it poses to apartments and their owners.

“This is not unique to the UK,” Strong says. “It is a very international problem.”

It’s a financial and safety problem and in the UK, at least – where as many as 600 residential buildings are thought to be clad with the material – it is a highly political problem.

“There are only two things I talk about in the UK which are of most importance to anybody right now at a government level,” Strong says. “One is Brexit and the other one is the Grenfell Tower, both of which have the ability to bring down the government.”

The extent of the problem is less clear in Australia, where disparate state and territory audit processes – and a general lack of transparency – cloud the overall picture.

Victoria is working through a list it drew up last year of 1400 buildings with combustible and potentially dangerous cladding. In June, the state government said Fire & Rescue NSW had assessed 2280 buildings and found 417 in need of closer scrutiny.

Closer scrutiny

This month, Queensland authorities started sending letters to the owners of 12,000 private buildings it identified for closer scrutiny after a state audit.

The wheels of state turn slowly and in many cases the insurers of apartment buildings are quicker at forcing owners corporations to act. Underwriter CHU last year told AFR Weekend it had already priced insurance policies of some buildings so high that it was cheaper for owners to fix the cladding than pay for insurance.

“There have been a couple [of cases] where we’ve said ‘This is potentially a high-risk building – you’re doing what you can but given where you are now, the price would probably be more than prohibitive. It would be better to spend on the cladding removal than pay in annual insurance’,” CHU head of marketing Jason Starr-Thomas says.

In Sydney’s Pyrmont, 200 apartment owners, pressured first by their insurer and now the changing state regulations, face the prospect of a special levy to cover the estimated $7 million to replace the combustible cladding on their tower at 45 Bowman Street.

In Melbourne, the Lacrosse owners have seen their annual insurance premiums inflated by 80 per cent due to the ongoing presence of the cladding on their building. Since 2016, as much as $534,270 out of the total $1,023,209 paid in insurance was attributable to cladding-related premium rises, Owners Corporations chairman Jeffrey Dawson said in a witness statement.

Legal process  under way

For all their problems, the Lacrosse owners are still ahead of some other owners’ groups. They at least have a legal process under way. Elsewhere in Melbourne, 133 apartment owners in inner eastern Richmond this month found their legal action over combustible cladding against builder Hickory stymied when Hickory put the subsidiary responsible for the Stawell Street complex into voluntary administration.

In the UK, apartment owners saddled with combustible cladding face other costs while their buildings await rectification.

“At the moment we’ve got fire engines parked in bases on towers, with firemen there 24/7 in case a fire breaks out,” Strong says. “There’s a cost attached to doing that as well, which runs to – as you might imagine, a few thousand pounds per week per block. So we’ve already run up, in some instances, quite heavy bills … just to have the fire engine parked in the car park, just in case the building catches fire.”

Melbourne’s Lacrosse owners are just beginning their legal process. But with the Victorian Civil and Administration Tribunal case scheduled to take 30 days and weigh up a complicated mix of claim and cross-claim between the builder and consultants it says are also responsible, the 328 owners cannot hope for a speedy end to their nightmare.

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