Update on the Strata Building Bond and Inspections Scheme which commenced on 1 January 2018

The New Strata Building Bond and Inspection Scheme  commenced on 1 January 2018. The Scheme applies to Construction Contracts signed or where there is no contract and building work commences from 1 January 2018. NSW Fair Trading will not require Developers of new strata schemes to lodge defect bonds prior to 31 December 2017.

The scheme applies to building work to construct residential or partially- residential strata properties that are of four storeys in height or over. Buildings that are three storeys in height or under are covered under the Home Building Compensation Fund. As a result of the Scheme, a Building Bond and mandatory Defect Inspection Report applies. The Scheme has been enacted to facilitate a more structured and resolutionary process in relation to building issues that ordinarily arise during the construction process given the number of new strata high rise buildings being built.

As a result of this Scheme, Developers are now required to lodge a bond with NSW Fair Trading equal to 2% of the contract price for residential and mixed use high rise strata buildings. The Building Bond will secure funds up to the amount of the bond and then can be used to cover the costs of rectification of any defective building work identified and determined in a final building defect inspection report.

In this article, we seek to outline how the process will work and the impact it will have on various bodies including but not limited to, until we know the full effect of the impact the Building Bond Process will have on:

  • Developers;
  • Owners Corporations;
  • Strata Inspector Panels;
  • Building Inspectors; and
  • Builders ordinarily contracted by the Developer in relation to a residential commercial contract.

Submitting the Building Bond

Given the effects of the Building Bond regime on execution of a Building Contract between a Builder and Developer to construct a strata scheme of four or more storeys, the Developer should take steps to prepare to lodge the Building Bond which is equivalent to 2% of the contract price for the building work. The Bond will need to be provided to the Secretary of the Department of Finance, Services and Innovation and include a required form with supporting documentation. NSW Fair Trading will be involved in this process and will then verify and determine whether to accept the original Building Bond which is required prior to the Occupation Certificate being issued.

Nominating a Building Inspector

The Developer will take steps thereafter to nominate a Building Inspector through consultation with the Strata Inspector Panel. The Building Inspector is to be independent of the Developer. The Developer will then notify Fair Trading and the Owners Corporation of the intended appointment of the Building Inspector with the Owners Corporation then holding a meeting to either approve or refuse to approve the Building Inspector’s nomination to prepare a report. NSW Fair Trading may be involved at this time and will appoint an independent building inspector in circumstances where the Developer fails to organise for one to be appointed or the Owners Corporation rejects the building inspector that the Developer seeks to nominate. At that point, the Building Inspector will arrange with the Owners Corporation to inspect the common property. The Developer will have to pay for this aspect of the Building Inspectors fees.

Interim Inspection and Report

Following completion of the building work approximately between 15 and 18 months, the Building Inspector will conduct the first inspection and complete a report which will determine any defective building work throughout the property. The Report will be provided to the Owners Corporation, Developer, and Builder responsible for any defective work as well as NSW Fair Trading.

In the event that no defective work is identified in that report, the bond is to be released to the Developer approximately two years after the date of completion.

In the event that there are defects identified in the interim inspection report, the Builder is ultimately responsible for the defective work and is to take steps to rectify them. At this point, the Developer may also organise the Building Inspector to carry out a final inspection of the building.

In the event the original building inspector is unavailable, the Developer is to advise the Secretary of the Department of Finance, Services and Innovation or make an application to the Secretary of the Department of Finance, Services and Innovation to nominate a building inspector and thereafter the Owners Corporation and Developer are to be notified.

Final Inspection and Report

Approximately between 21 and 24 months after the building work has been completed, steps will need to be taken by the Building Inspector to arrange with the Owners Corporation to carry out a final inspection of the property for the purposes of issuing a final report to the Developer, the Owners Corporation, the Builder responsible for any defective work that is to be identified in that report and NSW Fair Trading. The purpose of the Final Inspection Report is to ensure that any defective work previously identified in the Interim Inspection Report has now been remediated.

Release of Bond

In the event there are no defects identified in the Final Inspection Report, the bond is to be release in full to the Developer.

In the event there are defects found in the Final Inspection Report, the cost to rectify those defects are to be agreed upon by the parties and the Secretary of the Department of Finance, Services and Innovation will then make a claim for that amount from the issuer of the building bond for payment to the Owners Corporation or the Developer can reach agreement to release part or all of the Bond money to the Owners Corporation.

What happens after the release of the Bond or if there are further defects

NSW Fair Trading will assist with facilitation of the release of the bond money to the Owners Corporation however the Owners Corporation must use any money they receive to fix the defects identified in the Defect Report. After the defective work, if found, is remediated any amount left over in the Bond is to be returned to the Developer.

It is imperative that you seek legal advice at the early stage so that you are aware of your rights and the implications that the Building Bond will have with respect to any future construction work that you will be engaging in.

We are happy to assist and provide you with any legal advice you may seek with respect to the Building Bond and Inspection Scheme. In this regard please contact Pierrette Khoury, Solicitor Director of Khoury Lawyers.

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