Developers of residential apartment buildings will soon have to lodge a bond before seeking an occupancy permit, following the passing of the Building Legislation Amendment (Buyer Protections) Act 2025 (Vic) (Act).
The Act, which takes effect on 1 July 2026, requires developers of residential apartment buildings over three stories to provide a bond to the Building and Plumbing Commission (BPC) (formerly the Victorian Building Authority) before applying for an occupancy permit. The bond acts as a security to ensure that any defective building works identified after construction can be rectified. It will be held by the BPC for two years after an occupancy permit is issued and then released back to the developer.
The consequences of non-compliance will be severe. They include significant statutory penalties and delayed settlements. Off-the-plan (OTP) purchasers will also be able to rescind their contract.
In this article, we consider the key changes affecting developers, and how they should prepare for the upcoming reforms.
What is the developer bond?
Developers of residential apartment buildings over three stories must provide a bond of 2% of the total build cost of the apartment building to the BPC before they can apply for an occupancy permit. The security can be in the form of a bank guarantee, surety bond or any other form of security as may be prescribed by further regulations.
Total build cost is broadly defined by the Act as the estimated total cost of the building work carried out for or in connection with the construction of the residential apartment building. Accordingly, it is not limited to structural and base building costs, but includes costs for all aspects of the development.
Further, developers must ensure that they notify the BPC of their intention to apply for an occupancy permit between six to twelve months before making their application.
Bond access
Access to the bond hinges on the identification of defective building works by a building assessor, who is appointed by the developer at its cost. If the developer fails to appoint a building assessor, the BPC can appoint one itself.
The building assessor is required to inspect building works post-completion to ensure that any defects are rectified within the two-year bond period.
The building assessor must first complete a preliminary inspection and report within 18 months of the occupancy date. The report must specify any reportable defective building work and its cause. ‘Reportable' defects will likely be prescribed by regulations, so stay tuned.
Where no defects are identified in the initial report, the bond will be refunded to the developer.
However, if defects are identified, the building assessor must conduct a final inspection and produce a final report confirming that the defects have been rectified. This must be finalised 24 months after the occupancy date.
If the final report reveals that the defects have not been rectified, the owners corporation or building assessor may make a claim to the BPC to access the bond so that the defects can be rectified.
The BPC can approve or refuse the claim or approve a lesser amount. The Act does not provide guiding factors for the BPC to consider in making its decision, so the likely outcome of a claim may be uncertain.
Where approved, the owners corporation must ensure that the bond is used to rectify the defective building work as soon as practicable after payment. Any amount that is unused to rectify the defects must be refunded to the developer.
Alternatively, the BPC may release the bond on the application of the developer with the consent of the owners corporation or in the prescribed circumstances (if any).
This process may result in disputes. Accordingly, the Act enables a person directly affected by a decision, which includes developers and owners corporations, to have it internally reviewed. If dissatisfied with the internal review decision, an application for review can be made to VCAT.
Consequences of non-compliance
The new regime imposes financial penalties on developers who do not comply. Financial penalties will be imposed if, amongst other things:
- a notice of intention to apply for a permit is not provided;
- a developer applies for an occupancy permit without providing a bond ; and
- a notice of the developer bond is not given to the BPC.
Developer liability
Under the Owners Corporation Act 2006 (Vic), a developer is liable to the owners corporation for enforcement of the building contract, including rectification of defects.
While the new regime does not create further statutory liability between a developer and owners corporation, it does create more exposure for the developer. For example, if a determination is made for rectification of defects and for the cost of that defect rectification work to be paid from the bond, a developer must ensure that payment or release of a bond amount in accordance with a determination is made, otherwise the developer will be subject to a financial penalty.
Provider of bond
Interestingly, the Act does not explicitly require that the bond is provided by the developer. Rather, it requires the developer to arrange for the issue or execution of a developer bond. The definition of developer bond also makes no reference to the developer. This suggests that a developer could defer responsibility for providing the bond to the builder. As mentioned above, the definition of developer bond extends to ‘a prescribed form of security (if any)', which suggests that further regulation will determine whether the BPC will accept deferred security through the Builder.
OTP sales
The Act also amends the Sale of Land Act 1962 (Vic) to prevent vendors under OTP contracts from requiring or permitting purchasers to take possession of a lot until an occupancy permit is issued.
Further, if the developer issues an occupancy permit without first lodging the bond, they trigger a right for purchasers to rescind their contracts.
Where a purchaser rescinds their contract, they can recover all monies paid, including the deposit, and penalty interest on that amount determined in accordance with the Penalty Interest Rates Act 1983 (Vic).
Accordingly, under the new regime, it is essential that developers lodge the bond on time. Otherwise, contract rescissions, refund obligations and significant fines may ensue.
Projects already under construction
Although it is unclear whether the bond regime will apply to projects already under construction as at 1 July 2026, the Act provides that for regulations containing transitory provisions. Accordingly, developers should be cognisant of any upcoming regulations.
Unless regulations are passed addressing this issue, developers will be forced to enter building contracts in the next year without knowing whether they will be subject to the bond requirement.
Rectification orders
The Act also broadens the BPC's powers to make rectification orders for incomplete, non-compliant or defective building work up to ten years after an occupancy permit is issued, this includes building work carried out before the reforms take effect on 1 July 2026. Where the work is performed for the construction of a residential apartment building exceeding three stories, rectification orders can be issued to the developer, rather than the person who carried out the work.
Where a rectification order is issued for a serious defect in a residential apartment building, a developer cannot apply for an occupancy permit, complete an off-the-plan sale or register a plan of subdivision.
What next?
The reforms represent a significant shift in the regulatory landscape for multi-storey residential construction. While the regime is designed to enhance consumer confidence, it introduces new risks and operational complexities. Developers will need to carefully consider how the bond interacts with contractual arrangements, project financing and defects liability periods.
As the 1 July 2026 commencement date approaches, now is the time to review your development pipeline to ensure your projects are structured to meet the new requirements.
More broadly, developers should monitor any further and make submissions to the Victorian Government to ensure that the regulations best protect their interests.
To learn more about the changes and what this means for your development, please contact Jane Hodder, David Sinn, Niresha Mudalige or your usual Herbert Smith Freehills Kramer real estate contact.
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.
