Australia: NSW Fair Trading: new strata development bond regime

IN BRIEF - A NEW REGIME HAS COME INTO EFFECT FOR NEW STRATA DEVELOPMENTS FROM 1 JANUARY 2018.

Where a developer enters into a building contract from 1 January 2018, the scheme will apply to require the lodgement of a building bond.

The bond has to be lodged in relation to any residential or partial residential development projects where the requirement to have Home Building Act insurance does not apply (for example, where the residential building work relates to the construction of a building that has a rise in storeys of more than 3 and contains 2 or more separate dwellings).

The developer must lodge a building bond equal to 2% of the contract price with NSW Fair Trading which is to be used as security for the rectification of building defects.
A very strict regime is set out whereby inspections are effected, defects are identified and, if the defects are not fixed within two years of completion, then the monies can be partially or totally utilised to rectify the defects.

MECHANICS OF REGIME

The developer has to apply for a building bond from an approved Authorised Deposit-Taking Institution regulated by APRA.

Obviously the costs of the bond need to be factored into the building contract terms and conditions and the price negotiated with the builder.

The bond is lodged via an online portal and has to be lodged with a fee of $1,500 (payable by the developer) together with the information and documentation with respect to the project (which includes a copy of the building contract, if one exists or evidence of the value of the works).

Where there is no written contract, the value of the works are determined by a quantity surveyor (for example, in cases where the developer is also the builder).

Under the scheme, the time for assessing when building works have been completed is when an occupation certificate has issued, but the occupation certificate cannot be issued until a bond that complies with the new regime has been lodged.

The developer must appoint an inspector which cannot be someone associated with the developer.

The owners' corporation has a right to approve of the appointment of the inspector or to reject this. The owners' corporation has to hold a general meeting to resolve this to determine (by a simple majority) whether or not to agree to the proposed appointments suggested by the developer of the inspector.

The developer cannot (in body corporate meetings) vote or exercise any proxy on any matter concerning building defects.

If an inspector that the developer wishes to appoint has been rejected by the owners' corporation, the process has to be gone through repeatedly over a period of 12 months and if an inspector has not been approved within 12 months, then the Building Bond Secretary will appoint an inspector.

An individual lot owner has a right to object (within 14 days) to the appointment of an inspector.

The developer has to pay all of the inspector's fees.

The scheme proposes a two stage inspection process. The first happens between 15 and 18 months from the building works being completed and the inspection identifies the defects in the building (if any) which need to be rectified.

If no defects are identified, the bond will be released to the developer within two years of completion subject to the rights of review contained in the Act.

If defects have been identified, there is further inspection between 21 and 24 months after the building works have been completed to ascertain whether the defects have been rectified. If they have the bond is released. If they have not, the costs of rectifying the defects must be agreed between the parties or the Building Bond Secretary will appoint a quantity surveyor to determine the costs.

The amount determined is then deducted from the bond and the balance is released after the defects have been rectified.

There are strict obligations on owners to give access to the inspector and if access has been denied, then the Building Bond Secretary can authorise the release of the bond.

A number of decisions that may be made in the above processes are subject to a right of review exercisable by, amongst others, lot owners within the strata scheme - however most time-frames for the exercise of such rights are very short.

WHAT DEVELOPERS HAVE TO DO

Firstly, developers have to ensure that they take into account the costs associated with the new regime when negotiating their building contracts and organising finance. They also need to consider how building contracts should be redrafted to work consistently with the requirements of the new regime (particularly in relation to documents to be provided by the builder before the bond can be lodged and in relation to the rectification of defects identified during the mandatory inspections).

Secondly, developers should begin getting together a panel of reputable building inspectors and liaise with the strata managers they propose appointing to exercise managing rights in relation to the strata schemes they are developing, as obviously the strata managers will have some influence in the decision of the proprietors as to whether or not the building inspector nominated by the developer is a suitable and acceptable building inspector. It is also important to build up a rapport with building inspectors to ensure a good working relationship and their availability to attend to matters in an expeditious way.

We do not believe that anything needs to be put into off-the-plan sale contracts dealing with this new regime as it is really a mechanical issue (similar, for example, to the process the developer has to go through in obtaining a section 73 certificate from Sydney Water Corporation or an occupation certificate from Council).

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.