STATE OF VICTORIA (DEPARTMENT OF TRANSPORT AND PLANNING) v L.U. SIMON BUILDERS PTY LTD & ORS [2025] VSCA 52

The Victorian Court of Appeal has provided clarity on the extent to which the State is entitled to be subrogated to the rights and remedies of individual lot owners in relation to cladding rectification work under section 137F of the Building Act 1993 (Vic) (Building Act).

The decision confirms that the State may be subrogated to the rights of both the owners’ corporation and individual lot owners, enabling the State to pursue claims against builders and other responsible parties on behalf of both categories of owners.

 

Background

LU Simon Builders Pty Ltd (LU Simon) was the builder of the Atlantis Towers (Building), a 36-storey tower located at 284-300 Spencer Street. The Building comprised of a residential apartment and hotel. There are 205 residential apartments which are lots in a plan of subdivision owned by individual lot owners. The common property is owned by an owners corporation created by plan of subdivision No.1 PS600940E (Owners Corporation).

Aluminium composite panels (ACPs) were installed on the external walls of and as attachments on both common property and on privately owned lots. The ACPs were combustible and non-compliant with the Building Code of Australia and had to be removed.

The Victorian Building Authority then entered into a funding agreement with the Owners Corporation, providing assistance for the removal and replacement of the ACPs. Notably, the cladding rectification work was carried out on the external walls of the Building, including both the common property and the lots of individual lot owners.

After the rectification works were successfully completed, the State commenced proceedings in the County Court of Victoria alleging that:

1. It was subrogated to the rights of the individual lot owners and the Owners Corporation against LU Simon and two of its directors; and
2. LU Simon in using the ACPs in the construction of the Building breached the warranties under the Domestic Building Contracts Act.

Due to uncertainty surrounding the operation of section 137F, the County Court referred key questions to the Court of Appeal for determination.

Issues

The Court of Appeal considered the following questions:

1. Does section 137F(1) of the Building Act require the Victorian Building Authority or Cladding Safety Victoria (as the case may be) to make a direct payment to an individual lot owner in order for the State to be validly subrogated to the rights and remedies of that lot owner against any person in relation to the installation or use of any non-compliant or non-conforming external wall cladding product, or other building work, that required the cladding rectification work to be undertaken?
2. If the answer to question 1 is "yes":
   1. Was the first payment recorded in Schedule A to the State’s amended statement of claim dated 15 September 2023 made to the owners’ corporation:
      • for and on its own behalf; or
      • for and on behalf of the individual lot owners; or
      • for and on behalf of both owners’ corporation and the individual lot owners.
   2. On the proper construction of s 137F, is the State subrogated to all the rights and remedies of the individual lot owners against LU Simon in relation to the installation or use of any non-compliant or non-conforming external wall cladding product, or other building work, that required the cladding rectification work to be undertaken to part of the Building comprising lots owned by individual lot owners in circumstances where the grant of financial assistance by the authority was paid to the owners’ corporation?

Court Findings

The Court of Appeal determined that the State is entitled to exercise the rights of both the Owners Corporation and the individual lot owners.

In doing so, it clarified the operation of section 137F of the Building Act and confirmed the following:

1. The State may be subrogated to the rights and remedies of individual lot owners, provided a payment is made in connection with the rectification of non-compliant cladding. However, that payment need not be made directly to each individual owner and instead it can be made to the Owners Corporation on their behalf.
2. The funding agreement in this case clearly indicated that the payment was made both for the benefit of the Owners Corporation and on behalf of the individual lot owners, satisfying the requirement for valid subrogation under section 137F.

Implications

This decision may encourage the State to more actively pursue rectification costs from builders and other responsible parties involved in defective cladding installations.

It may also result in greater financial assistance being provided to affected buildings, as the State has more assurance that they can claim costs against builders when assisting owners’ corporations and individual lot owners rectify defective and non-compliant cladding.