Vincent Young - Contracts, Law, Security of Payments

According to an announcement made by NSW Fair Trading:

  • the new strata laws (Strata Schemes Development Act 2015 and the Strata Schemes Management Act 2015) will commence on 30 November 2016; and
  • the building bond scheme will commence on 1 July 2017.

We set out below a brief refresher on the building bond scheme contained in the new strata laws.

What is the Building Bond Scheme?

The building bond scheme applies to strata developments over 3 storeys and requires the developer to provide the Office of Finance with a bond equal to 2% of the price for the building work. The bond must be provided prior to the issue of the occupation certificate for the strata scheme. The purpose of the bond is to guarantee the rectification of defective building work by the developer.

Under the building bond scheme the developer must appoint a building inspector (which cannot be the contractor) to conduct an interim report and final report on the defective building work in the strata scheme.

The interim report must be prepared between 15-18 months after completion of the building work.

The final report must be prepared between 21-24 months after completion of the building work. The purpose of the final report is to identify defects in the interim report which were not rectified and further defects caused by the rectification works. The final report cannot set out new defects.

Any defective building works identified in the final report will entitle the owners corporation to apply to the Office of Finance to call on the building bond. Any surplus of the building bond not used by the owners corporation to meet the cost of defect rectification will be returned to the developer.

The building bond scheme has significant implications for both developers and contractors involved in strata developments over 3 storeys. Developers must ensure that their constructions contracts have adequate provisions in relation to the defects liability period and the contractor's security. Contractors are likely to see contracts containing longer defects liability periods and also the retention of security for a longer period of time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.