Developers to pay a bond for building defects before settlement — new legislation

Given that there are approximately 75,000 strata schemes in NSW alone, one can understand the recent shift to provide greater protection against defective building works in multi-storey apartment buildings.

Changes to the Strata Schemes Management Act (‘the Act’) are likely to have a huge impact on NSW developers who commence construction after 1July 2016.

Background

There are currently no requirements for developers to contribute to a fund or provide a bond for the rectification of building defects in multistorey apartment buildings.

What is the change?

The changes to the Act create new obligations for developers who carry out residential building work of more than 3 storeys and containing 2 or more separate dwellings in NSW.

The changes to the Act will become effective for construction work started (or construction contracts entered into) on or after 1 July 2016.

A new key obligation will be the requirement for developers to provide the Secretary of the Department of Finance, Services and Innovation (‘the Secretary’) a bond for 2% of the contract price for the building work. The bond must be lodged before an occupation certificate is issued. The purpose of the bond is to allow the Secretary to make payment to the owners corporation for the rectification of defective building works.

The developer must appoint a qualified independent building inspector to inspect and report on the building defects. If a building inspector is not appointed by the developer, the Secretary may appoint one at the developer’s cost.

The building inspector is required to prepare an interim report between 15 and 18 months after completion of the building work and a final report between 21 and 24 months after completion of the building work.

The developer bears all costs in relation to the building inspections and reports.

If any defects specified in the interim building report are not rectified by the developer prior to the final building report, the owners corporation can claim the bond to pay for the cost of rectifying the outstanding defects.

If the owners corporation wishes to use the bond to pay for the rectification of defects, it must make a claim against the bond within 2 years of completion of the original building works, or up to 60 days after the final report is given, whichever ends later.

Once the bond is paid to it, the owners corporation can spend the bond to rectify the defects. After the defects are rectified, the owners corporation must repay the balance of the bond (if any) to the developer.

Many aspects of the law, such as the qualifications of building inspectors, will be further explained by the regulations which will accompany the Act. The regulations have not yet been published.

How does this affect you?

For developers developing residential apartment complexes that are 3 or more storeys in NSW after 1 July 2016, you should consider the practical and financial impacts of this new legislation, such as:

  • the cost of paying the bond before sale proceeds are received
  • the risk of losing the bond if there are building defects noted in the final report
  • the inability to control the rectification of defects (and the cost) after the final report
  • the administrative and financial cost of appointing a building inspector to prepare an interim and a final report
  • the time required to obtain the approval of the owners corporation prior to the appointment of the building inspector, and
  • fines for failing to comply with the Act.

Developers who anticipate entering into a building contract for the construction of a multistorey apartment building in NSW around the middle of this year should endeavour to do so prior to 1 July 2016.

For more information contact the Property Commercial and Finance Team:

Christine Murray — Partner — Property, Commercial and Finance Team
(02) 6279 4402
christine.murray@mvlawyers.com.au