At Pallas Capital, safeguarding investor interests remains at the core of what we do. Equally, we recognise that strong risk oversight is vital for our borrowers, ensuring projects are delivered within a framework that supports compliance, transparency, and long-term success. Through rigorous risk management processes and proactive engagement with regulatory developments, Pallas Capital help investors and borrowers navigate an evolving market with confidence.
As part of our new series, Risk Insights with Pallas Capital, our Head of Construction Risk, Royston Toh, shares key lessons from recent regulatory changes that are shaping the way financiers, investors, borrowers and builders operate across the construction and property sectors.
Navigating Victoria’s Building & Construction Reforms with Confidence
The State of Victoria is undertaking the most significant overhaul of its building and construction regulatory framework in decades. These sweeping reforms are designed to boost consumer confidence, raise professional accountability, and stabilise the industry’s payment structures. For borrowers, builders, and investors operating in the Australian Commercial Real Estate (CRE) debt space, these changes – encompassing the Building Legislation Amendment (Buyer Protections) Act 2025 and the Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Bill 2025 – mandate an immediate strategic review of risk, contract structuring, and cash flow management.
Unified Regulatory Oversight: The Building and Plumbing Commission (BPC)
Effective 1 July 2025, Victoria will streamline enforcement under a new body, the Building and Plumbing Commission (BPC). This new authority will consolidate the functions of the Victorian Building Authority (VBA), Domestic Building Dispute Resolution Victoria (DBDRV), and the domestic building insurance arm of the Victorian Managed Insurance Authority (VMIA). The shift to a streamlined regulator is intended to centralise accountability, enhance compliance, and foster improved consumer confidence. This consolidation signals a more focused, powerful, and proactive enforcement regime, meaning the risk of regulatory intervention in projects is higher than ever before.
Stronger Consumer Protections
The Building Legislation Amendment (Buyer Protections) Act 2025 introduces several mechanisms that drastically increase financial exposure and liability for borrowers and builders. Firstly, the regulator will gain the power to issue Rectification Orders, compelling builders to fix defects for up to 10 years post-occupancy. This significantly extends the liability window for all parties. Secondly, the introduction of Developer Bonds from 1 July 2026 mandates that borrowers of apartment projects over three storeys must lodge a 2% bond of the total build cost with the regulator before receiving occupancy permits. This bond acts as a financial safeguard for defects, imposing a direct, two-year holding cost and collateral requirement on the developer. Finally, Domestic Building Insurance (DBI) is transitioning to a first-resort scheme. Claims can now be lodged if builders simply fail to comply with rectification orders, moving beyond the historical “last resort” requirement of builder insolvency or death. These changes redefine contractual risk and elevate the need for precise project monitoring and adequate collateralisation.
Modernising Compliance and System Transparency
To future-proof the industry, the reforms introduce mechanisms aimed at systemic improvement and transparency. A Building Manual will become mandatory for all new buildings, providing comprehensive guides for owners on design, construction, and ongoing maintenance. Furthermore, the reforms explicitly offer Support for Modern Methods of Construction (MMC), encouraging efficient, off-site, and prefabricated construction techniques. Building surveyors must also adhere to new Transparency rules, requiring them to issue information statements within 10 days of permit approval. Together, these requirements lay the groundwork for a more data-driven and accountable industry, supporting higher quality standards and reducing future latent defect risk.
Raising Practitioner and Professional Standards
The new framework places a strong emphasis on professionalising the sector through stricter controls and mandatory training. This includes Reformed Registration requirements for surveyors and inspectors, and an Enforceable Code of Conduct for plumbers. Critically, Mandatory Continuing Professional Development (CPD) will be enforced for all building and plumbing professionals. There is also potential for Expanded Registration to include consultants and site supervisors. This increased professional scrutiny is designed to lift the quality bar across the industry but also introduces new compliance burdens and potential for disciplinary action, which must be factored into the overall operational risk profile of every project.
Fairer Payments & Industry Stability
The Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Bill 2025 brings major amendments to the Security of Payment Act 2002 (VIC). While commencement is expected around 1 September 2026, the legislation’s retrospective application to most contracts demands immediate attention from all industry participants. The key financial implications are increased liquidity pressure and heightened counterparty risk. Crucially, the removal of “Excluded Amounts” means variations, latent conditions, and delay costs are now claimable under the fast-track adjudication process. This, combined with a tightening of Payment Terms to a maximum of 20 business days (with longer terms being void), fundamentally reshapes the speed of cash flow. Furthermore, the definition of a ‘business day’ is specifically altered to exclude the Christmas Shutdown period (22 December to 10 January), ensuring payment cycles are not artificially shortened over the holidays. Further strengthening the builder’s position, the reforms allow Builders to demand the release of performance security with just 5 days’ notice. Additionally, Unfair Time Bars can now be invalidated by courts, respondents cannot introduce new reasons for withholding payment during adjudication, and the “Pay When Paid” Ban is expanded to include clauses linked to other contracts.
Conclusion
Pallas Capital acknowledges these changes as an important step toward improved industry standards, fairer payment practices, and greater stability across the construction lifecycle.
For our investors and borrowers, these reforms may present both challenges and opportunities. Factors such as increased exposure, tighter payment timelines, and evolving compliance requirements highlight the importance of proactive risk management and careful structuring.
Pallas Capital has experience in managing construction risk and navigating regulatory complexity. We aim to support stakeholders who are seeking greater certainty in a changing environment. Our team can work with you to consider strategies, review covenants, and explore alternative security structures that may assist in safeguarding investments.
In a market undergoing transformation, engaging with experienced lenders can be a valuable step. Pallas Capital seeks to provide insights and tailored solutions designed to help borrowers and investors respond to regulatory change while managing their financial interests.
About Risk Insights with Pallas Capital
This series summarises key themes from our risk training sessions into general insights for our investor and borrower community. By sharing these perspectives, Pallas Capital aims to promote transparency, diligence, and confidence throughout the investment process.
Disclaimer: General information only and not financial product advice. Past performance is not a reliable indicator of future performance. All forward-looking statements are provided as a general guide only. For wholesale investors only.