April 2018

Defects in Strata Buildings – the strata building bond explained

Authors: Irene Horan, Sharon Levy & Melissa Potter

Defects in newly constructed high-rise developments are becoming more and more prevalent, especially in Sydney.

With the aim of addressing this, there are now new obligations on property developers in New South Wales pursuant to Part 11 of the Strata Schemes Management Act 2015.

Under the new scheme, buildings must be checked by an independent building inspector and the original property developer (not the builder) must pay a bond to cover the cost of rectifying any defects.

When does it apply?

This scheme only applies to developments where:

  1. the building has four or more storeys; and

  2. the building will be used for residential purposes (or a mix of residential and commercial purposes); and

  3. the building contract between the developer and the builder was entered into on or after 1 January 2018.

Buildings which are less than four storeys remain covered by the Home Building Compensation Fund.

How much is the bond?

The amount of the bond must be equal to 2% of the contract value of the work. The bond is to be paid to the Department of Fair Trading.  Where there is no written contract for the building work, or the parties to the building contract are associated (if for example, the developer and builder are the one entity), the contract price is determined by a quantity surveyor. The bond must be lodged before an occupation certificate is issued by Council or another authorised consent authority.  An occupation certificate will be required before the sale of the units in the building can be completed.

The bond can be paid by cash, bank guarantee or another form of security pursuant to the Strata Schemes Management Regulation 2016.

When does the building inspector come in?

The building inspector must be independent from the developer and there are penalties for both the developer and the inspector for failing to disclose any connection with each other.

The building inspector must carry out his/her inspection between 15 to 18 months after the building work has been completed.

If there are no defects identified, then the bond is refunded to the original property developer two years after the building work was completed.

If there are defects identified, the original builder must rectify them and then the building inspector must re-inspect the building.

The cost of rectifying the defects will come out of the building bond but the amount must be agreed by the developer and the Owners Corporation of the building.

There are various dispute resolution avenues if no agreement is reached.

What the bond means for developers, builders and contractors

The legislative amendments mean increased risk and liability for developers of residential building works that form part of a strata scheme.  Developers may seek to pass on this risk and make significant changes to contracts with builders and/or contractors.  Examples could include:

  • passing on the bond to contractors or otherwise requiring that any security held by the developer covers the 2% bond until after the expiration of the two year liability period.

  • an increase in the obligations of builders and contractors to include the rectification of any defects identified in the building inspector’s interim and final reports.

  • extending the customary 12 month defect liability period to two years (to marry up with the period the developer’s bond is held). In this way, builders and contractors are liable to rectify any defects identified in the building inspector’s report.

On the flip side, contractors will need to consider the cost of the increased and extended risk, and likely factor this into the contract price.

What’s the benefit for owners?

It is intended that the bond will mean the early identification of defective building work in strata schemes which will in turn result in quicker rectification of defects.  In this way, it is hoped that owners will avoid the usual rectification process which is known for being lengthy, costly and generally unsatisfactory for all involved.

Given the likely increase in building contract prices however, it could result in an increase in the cost of purchasing off the plan.

Owners also need to be aware of their obligation to grant access to their unit to enable the rectification works to be undertaken.

Want some help?

Whether you are purchasing off the plan, need advice on a contract or have defect issues generally, Bartier Perry has someone with the expertise to help you.