NSW Strata Reforms – Introduction of the new Building Defect Bond Scheme

Raymond Frangi

Developers and builders of residential and mixed use high rise strata buildings are being urged to familiarise themselves with the introduction of the Building Defect Bond Scheme introduced under the new Strata Schemes Management Act 2015 (NSW) (the Act). The Building Defect Bond Scheme will commence on 1 July 2017, and will require developers to lodge a bond with NSW Fair Trading equal to two percent of the contract price for residential and mixed use high rise strata buildings. 

The purpose of the Building Defect Bond Scheme is to increase consumer protections available to owners of strata buildings by securing funding for the payment (up to the amount of the bond) of the costs of rectifying defective building work not rectified within the two year statutory warranty period. 

How will the Building Defect Bond Scheme apply?  

The Building Defect Bond Scheme will only apply to the building works carried out on new residential and mixed use high rise strata buildings from 1 July 2017, and where such building works are exempt from requiring Home Owners Warranty Insurance.  

How will the Building Defect Bond Scheme work?

The Act requires developers to comply with a number of conditions concerning the payment of a bond and the rectification of defective building works. The following are some key items concerning how the Scheme works:   

  1. Payment of Bond - Before an occupation certificate is issued, the developer must ensure that a bond (representing two percent of the contract price for the building work) is paid to the Secretary of the Department of Finance, Services and Innovation (Secretary) to be held in a trust account. The bond may also take the form of a bank guarantee.
     
  2. Appointment of Building Inspector - At its own cost, the developer must appoint an independent building inspector 12 months after the completion of the building works for an inspection. The appointment of the building inspector must be approved by the owners corporation and the developer must provide a notice of the appointment to the Secretary. In circumstances where the developer fails to appoint a building inspector, the Secretary will appoint one on the developer’s behalf.
     
  3. Building Defect Reports - The building inspector will prepare an interim report identifying any defective in the building works  and the cause of such defects (if any) that have arisen within the 15 - 18 months after completion of the building work. Within 21 - 24 months from the completion of the building works, the building inspector is required to prepare a final report following inspection, identifying any defects in the interim report that haven’t been rectified or other defects that have arisen due to rectification efforts.
     
  4. Rectification of Building Works - The developer and builder will have an opportunity to rectify defects identified in the interim report. Owners corporations are under an express obligation to provide access to the builder to carry out any rectification works. 
     
  5. Release of the Bond - Where defects in the building works haven’t been rectified by the final report, the owners corporation may submit a claim to the Secretary to have the whole or part of the bond released to meet the costs of rectifying defective building work identified in the final report. The owners corporation may only submit a claim for the release of the bond where the rectification works have been identified within two years from completion or within 60 days of submitting the final report to the Secretary -whichever occurs later. Once the bond is released (in whole or in part), the owners corporation must use the bond to rectify the defects.  After the defects are rectified, the owners corporation must repay the developer the balance of the bond (if any).

Implications of the Building Defect Bond Scheme

The introduction of the Building Defect Bond Scheme has significant administrative and financial implications for developers of residential and mixed use high rise strata buildings. At the very least, developers should ensure that the terms of their construction contract with the builder are consistent with its obligations under the Building Defect Bond Scheme, including ensuring there are adequate terms dealing with the provision of security, rectification obligations and rights during the defects liability period.

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