Solid as steel: the insolvency implications of rigorous reforms to Victoria's building laws

Consumers are being left without adequate recourse and stakeholders, including financiers, are dealing with costly delays and uncertainties regarding the completion of projects. In light of these issues, the Victorian Government has recently passed the Building Legislation Amendment (Buyer Protections) Act 2025 to provide better safeguards for consumers against defective or incomplete building work.

The proposed Victorian reforms

Victoria is set for a major overhaul of its building legislation with the newly passed Act to come into force incrementally over 2025 and 2026. Key changes include:

• the creation of a new regulator, the Building and Plumbing Commission to replace the Victorian Building Authority;

• a shift to first-resort domestic building insurance;

• mandatory developer bonds for multi-storey projects;

• new financial viability requirements for builders; and

• restrictions on land registration where defects remain outstanding.

The purpose of these reforms is to increase protection for purchasers of new residential developments and lift standards across the Victorian building industry to align more closely with the New South Wales framework.

Implications for insolvencies

The introduction of the reforms is likely to put further pressure on the sector as builders and developers struggle to meet the more onerous requirements, in an industry already struggling with the increased cost of inputs, workforce shortages, fixed-price contract models and other systemic issues. The proposed reforms will only add to the increased expenses for developers and builders, this time in the form of compliance costs. An example of this is the requirement for developers to engage an independent building assessor at their own cost to inspect the building and provide reports 18 months and 24 months following occupancy.

In the medium to long term, we may see the number of construction industry insolvencies either steady or improve as the industry is filled with skilled developers and builders who remain accountable for their builds and actions during the projects (and beyond) that will improve the standard of property developments in Victoria going forward. Of course, the insolvency trends in the industry will also be largely dependent on other factors, such as the cost of inputs and the supply of labour.

Implications for financiers

Once the proposed reforms are enacted, financiers may need to engage in more comprehensive diligence in relation to building projects to ensure that builders and developers are equipped to deal with the proposed reforms. In particular, financiers should:

• be confident in the relevant builder's qualifications, skills and professional skill development. Underqualified builders may lead to additional defects and delays, resulting in increased costs which may be required from the financier in order to keep the project afloat;

• investigate the relevant builder's financial viability, noting that the proposed reforms require builders to meet prescribed minimum financial standards that could lead to suspension or cancellation of their registration (or otherwise, fines that may impact on the builder's solvency);

• build strict monitoring requirements and quantity surveyor involvements into finance documents to ensure that builders and developers are accountable and transparent throughout the project. By staying across this detail, defects can be identified as and when they arise. Delays in identifying defects may lead to further damage and be costly;

• ensure that any bank guarantee that it needs to provide (for the developer bond) is properly secured. The provision of a developer bond should be a condition to funding to avoid undue delays;

• have adequate security to cover any additional costs and expenses that the financier may need to inject into the project to deal with defect rectifications and delays; and

• consider the risk associated with settlements (at the end of the project) being delayed and the implications of this, noting that the developer's application for registration of a plan of subdivision will be delayed if the new regulator has issued defect rectification orders that remain outstanding.