Executive Summary

In State of Victoria v L.U. Simon Builders Pty Ltd [2025] VSCA 52, the Victorian Court of Appeal clarified the extent of the State’s subrogation rights under s137F of the Building Act 1993 (Vic) (Building Act).

The decision confirms that when the State funds cladding rectification works on privately owned buildings, it may be subrogated to the rights of both the owners corporation and the individual lot owners irrespective of whether the latter received direct financial payments.

Factual background

1. The proceedings concerned Atlantis Tower, a 36-storey development at 284–300 Spencer Street, Melbourne, constructed by L.U. Simon Builders Pty Ltd (LU Simon). The building included common property and 205 individually owned apartments.
2. The façade of Atlantis Tower was found to contain non-compliant cladding. The cladding posed a fire safety risk and contravened the Building Code of Australia at the time the building was constructed.
3. The Victorian Government (the State), through the Cladding Rectification Program, entered into a funding agreement with the owners corporation to cover the cost of replacing the non-compliant cladding. The remediation works extended to the facades of both common property and individual lots. The State then sought to recover its expenditure by relying on subrogation rights under s137F of the Building Act.
4. In short, the issue of subrogation was pertinent because if allowed, it would entitle the State to recover the full amount spent in rectifying the non-compliant cladding, rather than just the costs associated with rectifying the cladding located in the common property areas.
5. LU Simon contended that the State’s subrogated rights could only extend to those of the owners corporation and not the individual apartment owners.

Legal issue

The key issue was whether s137F of the Building Act entitled the State to be subrogated to the legal rights of individual lot owners, even though rectification funds were only paid to the owners corporation, not to the individual owners.

County Court decision

The County Court narrowly interpreted s137F of the Building Act, concluding that the State’s subrogation rights were confined to the rights of the party to whom funds were directly paid which in this instance was the owners corporation.

Court of Appeal decision

The Victorian Court of Appeal unanimously allowed an appeal, adopting a purposive interpretation of s137F of the Building Act. The Court held that the State’s funding of rectification works benefited both the common property and the individual lot owners, and that this benefit was sufficient to support the State having subrogation rights in respect of all affected owners.

Key findings

Statutory purpose: The Court found that the purpose of s137F of the Building Act is to facilitate recovery actions for State funds spent on building rectification. A narrow application would undermine this purpose.

Payment vs benefit: In regard to payment, it does not matter if funds are paid to the owners corporation alone. The determining factor is whether the use of the funds discharged the obligations of all lot owners to carry out rectification works.

Commercial practicality: The Court emphasised that in multi-unit developments, it would be commercially impractical to require the State to disburse funds to each lot owner individually.

This article was written by Paul Graham, Partner, Oliver Keats, Associate, and Campbell Dawes, Law Graduate.