77 homeowners facing financial ruin as they discover major government oversight after builder goes bust

The innocuous ping of a new email landing in their inboxes was the start of a disaster that has been unravelling for years at a Melbourne property.

EXCLUSIVE

Seventy-seven Melbourne apartment owners couldn’t have imagined that the innocuous ping of a new email landing in their inboxes would herald the disaster that would leave many of them on the brink of financial ruin.

“IMPORTANT”, said the email – sent by their strata firm in March 2020 – which in hindsight was not an exaggeration.

Lot owners located in the inner suburb of West Footscray learned that combustible cladding had been installed in their four-storey building complex, which meant a barbecue or cigarette on the balcony could turn the block into a deadly inferno. When the block was built, this type of cladding was not illegal.

This turned out to be the first of many serious defects which came to light in the years after residents moved into the block from 2014.

Several independent building reports found the builder, Shangri-La Construction, had carried out inadequate waterproofing, causing some residents to experience waterfalls in their lounge rooms, resulting in rampant black mould and rendering some properties too dangerous to live in.

Residents had begun a lawsuit against Shangri-La Construction when the building company went into liquidation at the end of March.

This has left apartment owners with no way to recover the money needed to carry out the rectification works, leaving them to foot the $4.5 million bill themselves.

The terrifying email residents received in their inboxes in 2020, which started a chain reaction of disasters. Picture: Copyright/news.com.au

These apartment owners have been left high and dry, footing the $4.5 million bill for shoddy workmanship themselves because of a government oversight. Picture: Nicki Connolly/news.com.au

Buildings above three storeys are not required to be covered by Builders Warranty Insurance under Victorian law.

That means if a builder goes bust – as in the case of the West Footscray apartment – residents have no insurance to automatically cover building defects.

It matters because 2.5 million Aussies live in an apartment, and half of those people reside in a block of units that is more than three storeys high.

Although this blindspot in the law is nationwide, the Victorian Government is currently looking to reform laws in its building sector. You can sign the petition here.

‘It’s a life sentence’

Residents at the West Footscray block dread receiving their quarterly strata fees, which has spiralled to be about $10,000 a year, more than people’s mortgages in some cases, and is expected to take 15 years to pay off due to the many defects.

A strata levy dated 2015 for a two-bed, two-bath apartment required $1134 to be paid per quarter. But by 2018 in the same period, this had climbed to $1729. The most recent levy, sent out on August 1, amounts to $2926.50, to pay down the substantial debt residents have taken on to fix the defects that have been identified by independent building reports.

News.com.au has spoken to 11 apartment owners who are facing financial ruin as a result of the sudden increase in strata levy. Some have had to move back in with their parents and still aren’t breaking even. Others are more than $10,000 behind in payments. One person says they are suicidal.

News.com.au understands one person has defaulted on their home loan.

For many, this was their first home, while some are retired or divorcees, leaving them with little hope of scraping their way out of this financial hole without government help.

As of the end of July, 18 out of the 77 owners are in arrears on their strata payments. In total, the block is $86,000 behind in strata payments.

“You can’t come back from this, it’s a life sentence,” 32-year-old Andrew John, one of the residents, told news.com.au.

“There’s people who are retiring, people with disabilities, we’re all stuck. You walk past people here, no one smiles, no one talks to you. We’re at our wit’s end.”

Have a similar story? Get in touch | [e-mail]

Andrew John has started his own Facebook group, called Protection for apartments – Victoria, advocating for the three-storey apartment threshold on mandatory insurance to be abolished. Picture: Nicki Connolly/news.com.au

Apartment owner Maria De Leon, who lives in the defective building, is an out-of-work animator struggling to survive financially. Picture: Nicki Connolly/news.com.au

Residents feel ‘trapped’

Mr John managed to pull together enough savings to buy his first home, a two-bedroom, one bathroom apartment for $415,000.

But just a few years later his strata fees have skyrocketed and now he is $10,000 in arrears.

“This was supposed to be a stepping stone but instead it’s a trapdoor,” he said.

Zoe Muller, 47, has been forced to move back in with her mother as she drowns in debt. She is $6000 behind in payments.

“Half my wage goes to strata fees, the other 25 per cent goes to mortgage, I have hardly any left over,” she told news.com.au.

“That’s the reason I decided to move (into my mum’s), I couldn’t afford to live anymore really.”

Another resident, Jessi*, only managed to save $200 last year amid the rising costs in the apartment.

“Essentially I’m working to live,” the teacher told news.com.au.

Others are struggling to accumulate savings, including Maria de Leon, 29, telling news.com.au: “I didn’t save at all last year. I was eating into my savings.”

A spot of mould under a balcony. Picture: Copyright/news.com.au

A mould spot on a resident’s ceiling. Picture: Nicki Connolly/news.com.au

$10 million in damages at one location

Shangri-La Construction went bust on March 31 this year, with David Coyne of insolvency firm BRI Ferrier appointed as liquidator.

“There is a significant amount of litigation going on (against the company),” Mr Coyne told news.com.au. “I’m aware of approximately 10 separate legal claims.”

One of those claims was for the West Footscray property and there are nine other apartment blocks in similar situations, but some were further along with their court cases, having reached trial or judgement stage.

One single claim for a block of units was for $10 million worth of damages, at a different location.

“The proceeding concerns a complex construction dispute between the applicants (an owners corporation and a number of individual lot owners) who seek damages from Shangri-La and nine other respondents in relation to alleged defects in a major residential development,” the court document read.

Although court cases usually end once a company enters liquidation – as in the court’s eyes the company has ceased to exist – many are seeking leave to continue the proceedings.

Among those continuing to pursue Shangri-La Construction in court is the Victorian government because of substantial bills racked up during the process of replacing the dangerous cladding installed within buildings.

Cladding Safety Victoria, a government body established to fix cladding issues, told news.com.au that of the 365 buildings approved for funding so far, 16 are buildings where the original builder was Shangri-La Construction, of which the total funding committed was just over $24.5 million (excluding GST).

Water ingress issues in the parking lot. Picture: Nicki Connolly/news.com.au

Another defective underside of a balcony. Picture: Copyright/news.com.au

According to the liquidator’s statutory report into Shangri-La Construction, there was only $18,000 left in its bank account while the company’s assets have been sold for $146,00.

So far, the company’s known liabilities are $13.256 million, but that’s not including a lot of claims, including those for the West Footscray residents.

Unsecured creditors – like all the apartment owners in the West Footscray building – are not expected to recover a cent.

But according to a media report in 2015 on Shangri-La Construction, the business turned over $120 million worth of building work every two years.

When defects emerged at the West Footscray block, the building was still within its warranty period.

The director of Shangri-La Construction declined to provide a comment to news.com.au, as relayed through their solicitor.

The Victorian Building Authority confirmed to news.com.au that investigations into Shangri-La are ongoing.

Rachel’s apartment was so severely damaged by water that it became uninhabitable. Picture: Copyright/news.com.au

The total cost of fixing the defects is $4.5 million, a loan residents must pay off. Picture: Copyright/news.com.au

‘It was raining inside my loungeroom’

Issues at the building block include waterproofing, defective lifts and unsafe fire safety exits which have cost millions to fix.

Rachel* knew something was seriously wrong with her apartment when a waterfall flowed from her ceiling whenever it rained.

“It was raining inside my lounge room,” the 47-year-old healthcare worker told news.com.au.

As her living room is directly below her upstairs neighbour’s balcony, which was not properly waterproofed, rain would regularly seep through.

The water damage led to a mould build-up in Rachel’s home and in 2020 it became uninhabitable. She now lives in rural Victoria, isolated from friends and family, as it is the only place she can afford, while her apartment sits vacant waiting for repairs.

Mould on the floor in one of the apartments in the building, where carpets had to be ripped up. Picture: Nicki Connolly/news.com.au

Local MP says situation ‘heartbreaking’

All these problems are now in the process of being fixed, at a cost to residents.

“I don’t see why I should have to pay for a problem made by Shangri-La,” Garry Potter, another resident who is retired, told news.com.au. “I don’t want to end up on the government pension.

“I wanted to retire, sell and move to Queensland, I’ve been stuck here three years. It’s just horrible.”

Mr John has been struggling to get any attention from the government.

“We’ve been on their case for months,” he said. “I’ve been notifying the premier, the Opposition, the planning and finance ministers weekly and for the most part they are blatantly ignoring us.”

The local member for Footscray, Katie Hall, told news.com.au she was aware of the plight these 77 residents found themselves in and described the situation as “heartbreaking”.

“I have raised their situation with the Minister for Planning and will continue to support residents and advocate on their behalf,” she said.

“The Government has recently introduced reforms to the construction sector to provide better protections for Victorians building or renovating their homes and I know that the Minister for Planning is working on further reforms in this space.”

News.com.au contacted the Minister for Planning, Sonya Kilkenny, and Victorian Premier Daniel Andrews for comment but they provided a joint statement.

A government spokesperson would not comment specifically on the West Footscray block despite multiple requests, nor would they indicate whether they were considering changing the three-storey rule.

“Victorians rightly expect their homes to be built to approved building standards and built to last,” the spokesperson said.

“We are delivering a suite of building reforms to provide stronger protections to Victorians building or renovating their homes, including reviewing the Domestic Building Contracts Act and domestic building insurance requirements.”

Now residents just have to hope that the government will listen.

The petition

Samantha Reece, CEO of The Australian Apartment Advocacy, has started a petition calling for the government to expand the last resort insurance scheme to include apartments of any height.

“We want insurance protection to be equitable whether you buy a single storey house or on the 33rd floor in an apartment building,” Ms Reece told news.com.au.

Currently, 2.5 million people live in an apartment, and half of those people reside in a block of units that is more than three storeys high. An academic report from 2019 found that a whopping 85 per cent of all Australian apartment buildings analysed had at least one defect across multiple locations.

Earlier this year, the Victorian government pledged to reform its building industry laws to tighten consumer protections in light of the collapse of major construction firm Porter Davis Homes, making Ms Reece hopeful that the three-storey law might be abolished.

* Names withheld

[e-mail]

Originally published as 77 homeowners facing financial ruin as they discover major government oversight after builder goes bust