The Strata Schemes Development Bill 2015 (Development Bill) and
Strata Schemes Management Bill 2015 (Management Bill) were passed
by the New South Wales Parliament on 27 October 2015. The
changes are expected to start mid-2016.
July update highlights the proposed changes to the existing
strata laws contained in the bills when they were released for
In this article we will look at what impact Part 11 of the
Management Bill, dealing with building defects, will have on
developers of residential buildings, noting that the detail of how
these reforms are to operate will be contained in the regulations,
which have not yet been released for public consultation.
Part 11 of the Management Bill when enacted will only apply to
residential building works:
if the contract for carrying out the building work was entered
into after the commencement of the Act; and
that are exempt from the home building compensation insurance
requirements under the Home Building Act 1989 (NSW), or work on a
building used for mixed use purposes that include residential
Increased obligations in relation to building defects
Developers will be required to:
lodge a bond - equal to 2% of the contracted
price with the Secretary of the Department of Finance, Services and
Innovation before an occupation certificate is issued. The purpose
of the bond is to secure funding for the payment of the costs of
rectifying defective building work identified in a final
prepare a maintenance schedule - to be tabled
at the first annual general meeting;
prepare defect reports – by engaging an
independent building inspector to prepare:
interim defect inspection reports, between 12 and 18 months
after the completion of the works and then arrange for the
rectification of defects identified in the interim report; and
a final inspection report between 21 months and 2 years after
the completion of the work.
Flow on effects for contractors
The new obligations on developers are likely to be passed down
to the head contractor under construction contracts. It is likely
that the head contract will pass the new obligations down to its
Extended defects liability period –The
defects liability period under construction contracts will need to
increase from the standard 1 year to 2 years, or more, to reflect
this extended liability. The defects rectification regime will need
to ensure that defects identified in the interim report are
rectified prior to the final report; and
Release of security - Security under the
construction contract will need to be held until the expiry of the
extended defects liability period and a mechanism included to call
on the security, if defects are identified in the final inspection
Developers entering into a contract requiring them to carry out
applicable residential building work after the Management Bill is
enacted must ensure that their obligations to rectify defects are
passed through to the head contractor in the construction
The developer will need to factor in to the cost of the project
the additional costs to be incurred in complying with these new
obligations, including the costs associated with providing the
bond, preparing the interim and final reports, managing the
rectification of defects for the prolonged defects liability
period, and generally the costs associated with engaging the
project team for this extended period.
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Warranties can be risk-shifting mechanisms when the party giving the warranty is not the party at fault for the defect.
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