The Court of Appeal provides clarity on subrogated cladding claims

The Court of Appeal has confirmed that s 137F of the Building Act 1993 (Vic) (Building Act) confers power on the Victorian Building Authority (Authority) to make payments to the Owners Corporation (OC) both on its own behalf and on behalf of individual lot owners, thereby entitling the State of Victoria (State) to be subrogated to the rights of both the OC and the individual lot owners.

In issue

• The Court of Appeal in State of Victoria v L.U. Simon Builders Pty Ltd [2025] VSCA 52 has handed down its decision which provides clarification on the proper construction of the State right to subrogation under s 137F of the Building Act.
• The issue which required determination from the Court of Appeal was whether the Authority's payment to an OC under a funding agreement between the Authority and the OC for cladding rectification works was made solely on behalf of the OC or also on behalf of individual lot owners — affecting whether the State’s subrogated rights against LU Simons extended beyond common property to include individual lots.

The background

In late 2024, the County Court of Victoria in State of Victoria v L.U. Simon Builders Pty Ltd and Ors [2024] VCC 1075 referred a special case to the Court of Appeal for its opinion on the proper construction of s 137F of the Building Act and the extent to which the State is entitled to the subrogation of rights and remedies of the individual lot owners, as distinct from the OC, in relation to cladding rectification work.

Specifically, the questions were formulated to the Court of Appeal as follows:

1. Question 1: On its proper construction, does s 137F(1) of the Building Act require the Victorian Building Authority or Cladding Safety Victoria (as the case may be) to make a payment to the owner of a lot of a building 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. Question 2: If the answer to Question 1 is ‘yes’:
   1. was the first payment recorded in Schedule A to the State of Victoria's amended statement of claim dated 15 September 2023 made to the owners' corporation:
      1. 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 parts 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 established under the Owners Corporation Act 2006 (Vic) in the capacity found in the answer to Question 2(a)?
      2. for and on its own behalf,
      3. for and on behalf of the lot owners, or
      4. for and on behalf of both the owners' corporation and the 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 parts 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 established under the Owners Corporation Act 2006 (Vic) in the capacity found in the answer to Question 2(a)?

Court of Appeal Decision

The Court of Appeal has confirmed that s 137F of the Building Act confers power on the Authority to make payments to the OC both on its own behalf and on behalf of individual lot owners, thereby entitling the State to be subrogated to the rights of both the OC and the individual lot owners.

In its decision, the Court of Appeal made findings that:

1. the answer to Question 1 is ‘yes’, that the State can be subrogated to the rights of lot owners when it provides financial assistance for cladding rectification—even if the payment isn’t made directly to individual owners. The exact nature of that payment (e.g. to an owners' corporation) was further addressed in Question 2,
2. the terms of the funding agreement made it clear that the agreement with the OC for provision of financial assistance was for the OC and on behalf of the individual lot owners. The first payment made to the Owners Corporation pursuant to that funding agreement was therefore correctly described under paragraph 2(a)(iii) of Question 2(a), and
3. s 137F(1), in referring to payment of an amount ‘to an owner of a building (the payee)’, encompasses payment to an owner of an individual lot in the building as well as to an owners' corporation - both the individual lot owner and the OC can be the payee for the purposes of that subsection. Subsequently, because the answer to Question 2(a) is that the payment was made to the OC for and on behalf of both the OC and the individual lot owners, that payment resulted in the State being subrogated to the relevant rights and remedies of both the OC and the individual lot owners – thereby answering ‘yes’ to Question 2(b).

Implications for you

The Court of Appeal’s clarification on the application of s 137 of Building Act may operate to unlock the State’s apparent reluctance to pursue recovery claims notwithstanding Cladding Safety Victoria having addressed in excess of 1200 buildings with combustible cladding, including more than 400 high-risk buildings where cladding removal and replacement have been performed¹.

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