Strata Reforms and the Building Defects Bond Scheme: New requirements for developers

In November, 2016 the Strata Schemes Management Act 2015 (NSW) (the ‘Act’) and Strata Schemes Development Act 2015 (NSW) introduced reforms affecting owners, managers, developers and builders of strata titled properties. The reforms include new processes for the collective sale and refurbishment of strata schemes and streamlined provisions for cosmetic renovations and for resolving disputes.

The reforms also introduced a building defects bond scheme which will have significant impact on developers. The scheme is aimed at consumer protection and commences on 1 January 2018 (it was originally scheduled to commence on 1 July 2017). Developers should be aware of their obligations under these reforms and implement systems now to ensure compliance when they take effect.

Payment of building bond

Following commencement developers of new high rise residential and mixed use strata buildings (for which Home Owners Warranty Insurance does not apply) must lodge a bond with New South Wales Fair Trading. Developers must also arrange for inspection of the building works and rectification of any defects within a prescribed timeframe.

Payment of the bond, by cash or bank guarantee, will be a pre-requisite to the issue of an occupation certificate. The bond is calculated as 2% of the total price paid under all relevant contracts for the works.

Where there is no written contract or the developer and builder are related entities, the contract price is determined by a quantity surveyor who must consider construction and fitout costs, demolition and site preparation, excavation, car parking, common property and associated work, professional fees and taxes.

The bond and prescribed documents are lodged with the Secretary, Department of Finance, Services and Innovation. Bonds must have a maturity date of no less than two years and no more than three years.

Developers must appoint a building inspector to report on works

Twelve months after completion of the building works, the developer must, at its own cost, appoint an independent building inspector. The appointment must be approved by the owners’ corporation by resolution at a general meeting.

An appointed building inspector must be impartial and not represent the interests of the developer. If the proposed building inspector has been employed by the developer or by a contractor of the developer within the past two years, then the inspector and developer must disclose this to the owners’ corporation.

A building inspector who is, or has within the past two years been ‘connected’ with the developer cannot be appointed. A connected person includes a relative / business partner of a key person within the developer entity, an executive of the developer if it is a corporation, a person that was involved in the design, construction or certification of the building works, or who has a financial interest in the project.

The owners’ corporation may refuse the appointment on any grounds in which case an inspector will be appointed by the Commissioner of Fair Trading.

Process for inspection of works

The independent building inspector will inspect the building works and prepare:

  • within 15 – 18 months after completion, an interim defect report identifying any defects in the building works and, if practical, the cause of each defect;
  • within 21 – 24 months after completion, a final report identifying any works that have not been rectified since the interim report, or any additional defective works arising because of any rectification works undertaken.

Within fourteen days of preparing an interim or final report the building inspector must give copies to the developer, the owners’ corporation, the Secretary and the builder responsible for any defective works identified in the report.

The final report cannot include additional defects (not identified in the interim report) unless they arise from the rectification efforts of defective works already noted in the interim report.

Developers and builders should arrange cooperatively to rectify any defects identified in the interim report. The owners’ corporation must cooperate in providing access to the relevant parties to inspect and fix defects.

If any defective work identified in the report is not fixed within two years of completion of the building works or within 60 days of submission of the final report (whichever is the later) the owners’ corporation may claim all or part of the bond which must be used to rectify the defects.

The Secretary must give fourteen days’ notice to the developer, builder and owners’ corporation of a decision to pay a claim.

If no defects are identified, or all defects are fixed by the developer, then the developer is entitled to reclaim the bond.

If no defective work is tabled in the interim report then the Secretary may determine that a final report is not required in which case the interim report will constitute the final report.

Applications for review

An interested party (the developer, owners’ corporation or a lot owner) may apply for review of a decision.

An application by a developer for review of a decision to release the bond to the owners’ corporation will stop payment until the matter is determined. The reviewer appointed must be a suitably qualified employee of the Department who was not substantially involved in the initial decision.

A developer will need to set out in writing the grounds upon which the claim is opposed and provide any additional supporting information.

The reviewer may affirm, set aside or vary the Secretary’s decision. Once determined, there are no further grounds for review within the Department however the parties may pursue proceedings in a Court or Tribunal. Although not binding, a report prepared under the bond regime must be considered if brought to the attention of a Court or Tribunal in subsequent proceedings.

Additional administrative requirements for developers

When lodging a bond, developers must complete the relevant form with details of the developer, principal certifying authority for the work and the owners’ corporation. Several other documents must accompany the bond, including copies of:

  • the building contract and any other documentation relevant to the calculation of the building price;
  • specifications and variations;
  • written warranties relating to the building works;
  • development approvals, consents and certificates issued under the Environmental Planning and Assessment Act 1979 (NSW);
  • any inspection reports and design certificates with respect to the works;
  • fire engineering reports;
  • Building Code of Australia complying certificates.

Conclusion

Developers and builders should review the new processes and consider the financial, contractual and administrative implications.

Contracts should be reviewed to ensure they contain provisions between the developer and builder that are consistent with the obligations under the reforms.

The respective timeframes for fixing defects and reviewing the Secretary’s decision to pay a claim must be carefully monitored.

Internal processes will assist in overseeing the administrative requirements and to ensure timely compliance under the reforms. Developers and builders might consider appointing a key person to manage these new processes.

Talk to a specialist

For a confidential, free case assessment, please call us on 02 6621 2481 at Lismore, Ballina on 02 6686 2522 or Byron Bay on 02 6680 8525, email advice@sll.com.au or contact us online.