The Building Legislation Amendment Act 2023 (NSW)
The Strata Building Bond & Inspections Scheme (SBBIS) was introduced in 2018 to provide some protection to owners' corporations in relation to defects. On 21 November 2023, the NSW Parliament passed the Building Legislation Amendment Act 2023 (NSW) (BLA) which makes 2 significant changes to the SBBIS. However, it can be difficult to calculate the bond value arising out of the contract price for a mixed use building. This article discusses the 2 legislative changes and the calculation of bonds for mixed use buildings.
Recap on what is a strata building bond
A strata building bond is a security paid by developers of new 4-storeys and higher residential strata buildings. Before applying for an occupation certificate, the developer must lodge the building bond with the NSW Fair Trading Secretary (Secretary) for approval.
The strata building bond is normally released after 24 months when the defects identified by the building inspector are rectified. If not, the strata building bond is used to rectify those defects and the balance (if any) is released to the developer.
What are the changes to the SBBIS?
The BLA makes the following 2 significant changes to the SBBIS:
- the value of the strata building bond required to be lodged by a developer is to increase from 2% to 3% of the contract price; and
- in the alternative to lodging a strata building bond a developer may obtain and lodge a 'decennial liability insurance'.
Increase the value of the strata building bonds
From 1 February 2024 onwards the value of the strata building bond required to be lodged will increase from 2% to 3% of the contract price. The increase applies notwithstanding a construction contract may have been executed prior to that date.
Noting that it is common industry practice for a developer to only withhold 2.5% of security of a contractor after practical completion under a construction contract, there is a possibility that a developer may not be withholding sufficient security to back to back any liability arising out of the strata building bond.
Decennial liability insurance
In the alternative to lodging a strata building bond, a developer may lodge with a decennial liability insurance instead.
Decennial liability insurance covers any potential costs to fix serious defects of critical building elements, including the building's structure, fire systems and waterproofing, for up to 10 years.
How is the bond calculated for a mixed use building?
A mixed use building is generally a building of different classes. For example, a building consisting of residential apartments (class 2b) and commercial/retail stores (class 6) is a mixed use building.
Under reg 50(1) of the Strata Schemes Management Regulation 2016 (NSW) (Regulation), the value of the strata building bond is calculated based on the contract price of the total price paid or payable under all the applicable contracts for the 'building work'. 'Building work' to which the strata building bond applies is set out in section 191 of the Strata Schemes Management Act 2015 (NSW) (Act) as follows:
191 Building work to which Part applies
(1) This Part applies to building work carried out on a building, or a part of a building, that is part of the parcel of a strata scheme, being work that is—
(a) residential building work, or
(b) carried out on a building, or a part of a building, used or proposed to be used for mixed use purposes that include residential purposes.
Importantly, section 191(1)(b) of the Act provides that the strata building bond applies to the building work carried out on a mixed use building that includes residential purposes. This means the entire contract price for the entire building is included in calculating the value of the strata building bond.
In order to try and limit the value of the strata building bond to the residential parts of a project, developers have been creating separable portions in their construction contracts to separate the value of the commercial and residential parts. However, despite the attempts of the developer to create separable parts to manage the bond, if the commercial and residential parts are part of the same building (which they normally are), the value of the strata building bond is based on the entire contract price of the building.
Key takeaway
It would be prudent for a developer entering into a construction contract to ensure that the amount of security withheld under the construction contract is "back-to-back" with the value of the strata building bond it is required to lodge.
A developer should also make enquiries with its insurer on the cost of obtaining a decennial liability insurance. Noting that this is a new insurance product and due to the amount of liability an insurer may be exposed to, we are of the view that the costs of doing so will be significant (unless there are some economies of scale).
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.
