Developers and builders of residential and mixed use high rise
strata buildings are being urged to familiarise themselves with the
introduction of the Building Defect Bond Scheme introduced under
the new Strata Schemes Management Act 2015 (NSW) (the Act). The
Building Defect Bond Scheme will commence on 1 July 2017, and will
require developers to lodge a bond with NSW Fair Trading equal to
two percent of the contract price for residential and mixed use
high rise strata buildings.
The purpose of the Building Defect Bond Scheme is to increase
consumer protections available to owners of strata buildings by
securing funding for the payment (up to the amount of the bond) of
the costs of rectifying defective building work not rectified
within the two year statutory warranty period.
How will the Building Defect Bond Scheme apply?
The Building Defect Bond Scheme will only apply to the building
works carried out on new residential and mixed use high rise strata
buildings from 1 July 2017, and where such building works are
exempt from requiring Home Owners Warranty Insurance.
How will the Building Defect Bond Scheme work?
The Act requires developers to comply with a number of
conditions concerning the payment of a bond and the rectification
of defective building works. The following are some key items
concerning how the Scheme works:
Payment of Bond - Before an occupation
certificate is issued, the developer must ensure that a bond
(representing two percent of the contract price for the building
work) is paid to the Secretary of the Department of Finance,
Services and Innovation (Secretary) to be held in a trust account.
The bond may also take the form of a bank guarantee.
Appointment of Building Inspector - At its own
cost, the developer must appoint an independent building inspector
12 months after the completion of the building works for an
inspection. The appointment of the building inspector must be
approved by the owners corporation and the developer must provide a
notice of the appointment to the Secretary. In circumstances where
the developer fails to appoint a building inspector, the Secretary
will appoint one on the developer's behalf.
Building Defect Reports - The building
inspector will prepare an interim report identifying any defective
in the building works and the cause of such defects (if any) that
have arisen within the 15 - 18 months after completion of the
building work. Within 21 - 24 months from the completion of the
building works, the building inspector is required to prepare a
final report following inspection, identifying any defects in the
interim report that haven't been rectified or other defects
that have arisen due to rectification efforts.
Rectification of Building Works - The
developer and builder will have an opportunity to rectify defects
identified in the interim report. Owners corporations are under an
express obligation to provide access to the builder to carry out
any rectification works.
Release of the Bond - Where defects in the
building works haven't been rectified by the final report, the
owners corporation may submit a claim to the Secretary to have the
whole or part of the bond released to meet the costs of rectifying
defective building work identified in the final report. The owners
corporation may only submit a claim for the release of the bond
where the rectification works have been identified within two years
from completion or within 60 days of submitting the final report to
the Secretary -whichever occurs later. Once the bond is released
(in whole or in part), the owners corporation must use the bond to
rectify the defects. After the defects are rectified, the owners
corporation must repay the developer the balance of the bond (if
Implications of the Building Defect Bond Scheme
The introduction of the Building Defect Bond Scheme has
significant administrative and financial implications for
developers of residential and mixed use high rise strata buildings.
At the very least, developers should ensure that the terms of their
construction contract with the builder are consistent with its
obligations under the Building Defect Bond Scheme, including
ensuring there are adequate terms dealing with the provision of
security, rectification obligations and rights during the defects
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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