New NSW Strata Building Bond and Inspections Scheme

The new strata building bond and inspections scheme in NSW (the scheme) will now commence on 1 January 2018. It was originally scheduled to commence on 1 July 2017.

This means that the scheme will only apply to construction contracts signed (or where there is no contract and building work commences) from 1 January 2018.

The commencement date has been delayed so that all procedural and professional requirements supporting the scheme are in place before commencement. This includes finalisation of:

• the standards and procedures relating to strata-specific building inspections; and
• new digital business processes to support bond lodgement and processing of the scheme.

The Strata building bond and inspections scheme

The scheme applies to building work to construct residential or partially-residential strata properties that are four storeys in height or over. Buildings that are three storeys in height or under are covered under the Home Building Compensation Fund.

This scheme introduces a building bond and mandatory defect inspection reports.

Payment of Bond

Before an occupation certificate is issued, developers must pay a building bond equivalent to 2 per cent of the contract price for the building work to the Secretary of the Department of Finance, Services and Innovation (Secretary), in order to secure funding for the rectification of any building defects identified in a final inspection report if the builder fails to do so. The bond is held by the Secretary for a period of two years.

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 building inspector must be independent of the developer.

Penalties may apply for undisclosed connections with the building inspector. The inspector is to be approved by the owners corporation in general meeting.

In circumstances where:

• the developer fails to organise for one to be appointed; or
• the owners corporation rejects the building inspector that the developer seeks to appoint;

the Secretary will appoint one on the developer’s behalf.

Building Defect Reports

The building inspector must provide an interim building inspection report within 13-18 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 errors.

Release of bond

If there are no defects, the bond is released in full to the developer.

If there are defects:

• 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; or
• the developer can agree to release part or all of the bond money to the owners

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. After the defects are rectified, the owners corporation must repay the developer the balance of the bond (if any).

There is an alternative review process if the owners corporation or developer disagrees with how much bond money, if any, is returned to the developer or paid to the owners corporation.

Implications for Developers

Developers should ensure that the terms of their construction contract are consistent with its obligations under the Building Defect Bond Scheme.

In particular, developers should:

• ensure that the defects liability period extends to the expiry of the period within which the building bond under this new regime can be accessed by the future owners corporation;
• consider requiring builders to provide back-to-back security to mirror the 2 per cent building bond.

Main Contractors should equally consider passing risk down the chain.