What do you do when your contract price has been undervalued in the strata building bond and inspections scheme?

Under the building bond and inspection scheme (the Scheme) developers will need to lodge a building bond that is 2% of the contract price.

The developer will need to lodge the bond to the Department of Finance, Services and Innovation (the Secretary). Unfortunately, this has created an incentive for developers to undervalue the contract price for the building works to minimise the amount to be lodged. This may result in disputes where the amount of the defect bond is less than the 2% contract price and additional funds are required to  rectify defects.

For more information on the defect bond scheme, view our article here.

What is the contract price?

The contract price is the total price under all the applicable contracts for the building works, and would include all variation amounts.[1] If the building works for the strata properties is only part of the works under the contract, the building bond will be 2% of the works that applies under the Scheme.

What happens if there is no contract?

If there is no written contract or the parties to the building contract are connected persons[2], the costs of the building works will need to be assessed by an independent quantity surveyor and a cost report will need to be prepared. The quantity surveyor will need to be appointed by the Secretary and must not be connected to the developer or the builder. [3]

What happens when your contract price has been incorrectly valued?

If a party (likely the owner’s corporation) considers the defect bond is not reflective of 2% of the value of the contract works, the owner’s corporation, the developer or the Secretary may make an application to the NSW Civil and Administrative Tribunal (the Tribunal) to determine the contract price for the building works and determine the amount of the building bond.

However, if there are incidental proceedings being dealt by a Court (such as a claim in respect to defects on the strata properties), the application to determine the contract price will need to be made to and determined by the Supreme Court of NSW.

What does this mean for you?

With the proposed new amendments to the Act through the Strata Schemes Management Amendment (Building Defect Schemes) Bill 2018 (NSW), which is currently before the parliament for debate, it may have significant implications to developers.  If the bill is passed, the building bond will need to be lodged with the Secretary before the application for an occupational certificate is made.

Developers may be liable for penalties for non-compliance with the Scheme if the bill is passed and the contract price is not correctly determined for the building bond to be lodged prior to the application for an occupational certificate is made.

For more information on the proposed new amendments, view our article here.

Incorrect contract prices may lead to owners corporations not having sufficient funds in the building bond for the rectification of defective building works.

Key takeaway – The contract price determines the building bond. Without a proper valuation of the building works, the building bond will not be an effective measure to account for potential defective building works on the strata properties.

Developers should be aware that if they engage a related party or connected person to undertake the works, they will be required to engage and pay for a third party quantity surveyor to value the whole of the works.

If you have any questions regarding your obligations under the Act or the role of the Tribunal to determine the contract price, please do not hesitate to contact Morrissey Law + Advisory.

This article was prepared by Hamish Geddes and Mary Ann Wen.

[1] Strata Schemes Management Regulation NSW 2016 s 50(1).

[2] A connected person is any of the following: a relative of a principal person, is employed or engaged by the principal person, holds an executive position in a corporation (if the principal person is a corporation), is the employer of the principal person, is employed or engaged or holds an executive position in a corporation that also has engaged the principal person or the principal person holds an executive position.

[3] Strata Schemes Management Act NSW 2015 s7.

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.