I in a major shake-up to the construction industry, building defects bonds are now required for many multi storey residential developments. Builders, developers and owners corporations need to understand the significant effect this will have on projects and any contracts entered into after 1 January 2018.[1]

What is the Building Defects Bonds scheme?

The strata building bonds and inspection scheme applies to builders and developers entering contracts after 1 January 2018 for building works to construct residential or partially residential strata properties over four or more storeys.

If the building is less than 4 storeys, the home warranty insurance scheme continues to apply[2].

The legislation will have an impact on a range of participants in the construction industry, including:

  • Developers;
  • Owners of the Strata Scheme;
  • Building inspectors;
  • Builders; and
  • Strata Inspection Panel.

How does the scheme work?

The scheme will include a building bond and mandatory defect inspection reports. Significantly, developers must lodge a building bond with the NSW Fair Trading that is equal to 2% of the contract price. This bond must be lodged prior to an occupation certificate being issued.

Following the date of completion (being the date as defined under the Home Building Act 1989 (NSW)[3]), the developers must engage an independent building inspector. This inspector will be selected from an approved NSW Fair Trading panel.  Once the inspector has been selected:

  • The inspector (who will also be approved by the strata board) is to provide a defects report between 15 and 18 months following the occupation certificate;
  • The report is then provided to the relevant parties (developer, builder, owners corporation and NSW Fair Trading);
  • The builder is then responsible to rectify any defects identified. If the builder is unable to rectify the defects, the owners corporation is able to access the bond money to be used to rectify the defects.
  • Following the rectification works, any remaining funds are released to the developer, although this may be opposed by the owners corporation.[4]

The Fair Trading guide can be found here: http://www.fairtrading.nsw.gov.au/sites/ftw/Tenants_and_home_owners/Strata_schemes/Building_bond.page

Immediate impact

The cost of the building bond should be considered in any negotiations between developers and builders on any project to which the regime applies.  The requirement for bonds may significantly impact the risk profile and approach to security, defects liability, control of variations and approvals, and the design of the building.

The building bond may also have an impact on how developers structure the project, including the feasibly of projects, project costs and timelines, and financing.

Builders and subcontractors will also need to consider the impact of the bond on securities by head contractors and developers.  For example, security (bank guarantees and retention monies) traditionally held for 12 months, may now be held for up to 2 years to account for the risks associated with the bonds.

Long term implications

This scheme has been designed to overcome the increasing defects claims being made for multi storey residential buildings, however, the operation of this scheme will result in a marked increase in awareness of defects and a potential increase in control costs. While this can resolve issues quickly, it will also highlight issues that would have been undiscovered.

The Scheme will not replace an owners corporations, developers or builders existing rights under the Home Building Act. It is important to properly consider the impact building defect bonds may have on any project or contract entered into from 1 January.  If you any questions, or wish to discuss the impact of the legislation contact Michael Morrissey or Hamish Geddes.

[1] The changes introducing the Building Bonds are under the Strata Schemes Management Act 2015 (NSW) (“the Act”), which means it will effect strata schemes such as apartment buildings.

[2] This can be found under Building Defects Bonds Scheme under Part 11 of the Act.

[3] Home Building Act 1989 (NSW) s3C.

[4] Strata Schemes Management Act 2015 (NSW) s210(3).

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.