Australia: Strata Building Bond and Inspections Scheme: Will it work? The experts are skeptical!

The Strata Building Bond and Inspections Scheme (Scheme) commenced on 1 January 2018 and applies where a developer and builder enter into a contract from 1 January 2018.

The stated purpose of the Scheme is to provide a mechanism to resolve building issues quickly and cost effectively and to increase consumer protection for owners in strata buildings by securing funds (up to the bond amount) for the cost of rectifying defective building works. This follows years of complaints to the Department of Fair Trading about shoddy building work in new strata buildings, in circumstances where developer/builders failed to rectify seriously defective work and subsequently went into liquidation.

Owners could previously only rely upon the Home Building Compensation Fund, which only provides cover for buildings up to three storeys, and compensates owners for losses arising from defective and incomplete work where the builder becomes insolvent, disappears, dies, or has their licence suspended in certain circumstances. The Home Building Compensation Fund also only provides a maximum cover per dwelling up to $340,000, which has been inadequate in many cases.

How does the Scheme apply?

The Scheme only applies to building works carried out on new residential and partially-residential strata buildings that are four or more storeys and where such building works are exempt from the Home Building Compensation Fund. NSW Fair Trading will not require developers of new strata schemes to lodge building bonds for contracts entered into before 31 December 2017.

How does the Scheme work?

The Scheme includes a building bond and mandatory defect inspection reports. The developer must lodge a building bond with the NSW Fair Trading equal to 2% of the contract price for residential and mixed use high rise strata buildings. The building bond can be used to pay the costs of rectifying any defective building work identified in the final inspection report.

Developers, builders, owners' corporations, strata and building inspectors will need to comply with a number of conditions, such as payment of the bond and rectification of defective building works. The stages of the process are as follows:

  1. Payment of Bond

Once the developer and builder enter into a contract to which the scheme applies after 1 January 2018, and before an occupation certificate is issued for any part of the building for which building work was completed, the developer must lodge the building bond with the Secretary of the Department of Finance, Services and Innovation (Secretary), and pay an administration fee of $1,500.00. The bond may be a bond, a bank guarantee or another form prescribed by the regulations.

  1. Building Inspector

The developer must appoint an independent building inspector (inspector) through the Strata Inspector Panel. Disclosure needs to be made of any connection between the developer and the building inspector. The developer must notify the Secretary and the owner's corporation of the appointment. The owners' corporation then approves or rejects the inspector. In the event either the developer fails to appoint an inspector, or the builder or the owners corporation rejects the inspector appointed then the Secretary may appoint an inspector. The inspector will then arrange a time with the owners corporation to do the inspections. The developer pays for the inspector.

  1. Interim Inspection and reports

The building inspector conducts the first inspections and prepares an interim report between 15 and 18 months after the building work has been completed, and if no defects are identified then the bond may be released to the developer after 2 years from the date of completion. A final report is conducted 20 to 24 months after completion.

  1. Rectification and release of the bond

The cost to rectify any defects must be agreed to by both parties. Where agreement cannot be reached, the Secretary will appoint a quantity surveyor to determine the cost. Once finalised, then the Secretary facilitates the release of the bond to the owners' corporation. Once the defects are completed then any balance may be returned to the developer.

Will it work?

Experts have expressed concerns about the Scheme and many feel that it will have unwanted implications for developers, sub-contractors and purchasers alike. For example:

  • The developer is likely to pass on the costs to the builder, as well as increase the lot price;
  • Rogue developers may leave defects in the building to the value of 2% and engage only "developer friendly" defects inspectors;
  • No protection for off the plan purchasers where developers can't raise the security bond and therefore can't register the strata plan. The project may be complete but the developer, builder, sub-contractors, purchasers may all become insolvent if the strata plan can't be registered and settlement of the lots can't proceed. The defects liability period would never come to an end and the developer would never be entitled to the return of their security and any final payment;
  • Some builders have argued their total profit is 2% to 3%, so the bond would have the effect of withholding their entire profit for greater than 12 months;
  • Subcontractors may not be aware of the commercial impact of extended defects liability periods which may increase insolvency rates;
  • The Scheme will be inflationary and will add to the problem of affordable housing.

The Scheme has only been in operation for less than 3 months. We will watch developments with interest.

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.

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