Part 11 of the Strata Schemes Management Act 2015 which implements the Strata Defects Regime, finally commenced on 1 January 2018.
The regime aims to address the problem of defects in new high-rise strata buildings by mandating:
- an inspection scheme by an independent building inspector; and
- a compulsory 2% building bond payable by the developer to cover any defects in the building work.
Application of the regime
The strata defects regime only applies to the original construction of a strata scheme of 4 or more storeys, and only to residential building work (or work on mixed use schemes that include residential uses).
Importantly, the regime does not apply to building work if the building contract for carrying out that work was entered into before 1 January 2018.
Building inspection reports
If the building defects regime applies to the development, the developer must appoint a building inspector to carry out interim and final inspections of, and to report on, the building work.
The building inspector must inspect the building work and provide an interim report not earlier than 15 months and not later than 18 months after the completion of the building work.
The interim report is to identify any defective building work.
No later than 18 months after completion of the building work, the developer must arrange for the building inspector who carried out the interim report, to carry out a final inspection and provide a final report on the building work. The final inspection is to be carried out and the final report is to be provided not earlier than 21 months and not later than 2 years after the completion of the building work.
The final report must not contain matters that relate to defective building work not identified in the interim report, other than work arising from rectification of defective building work identified in the interim report.
A final inspection and report will not be required if:
- the interim report was prepared by a building inspector arranged by Fair Trading and the report did not identify any defective building work; or
- the interim report did not identify any defective building work and Fair Trading determines, on application by the developer, that a final inspection report is not required.
Where a final report is not required, the interim report is taken to be the final report.
If the building defects regime applies to the development, the developer must lodge a building bond of 2% of the contract price for the building work with Fair Trading.
The purpose of the building bond is to secure funding for the payment (up to the amount of the bond) of the costs of rectifying defective building work identified in the final report.
The building bond must be lodged prior to the occupation certificate being issued. If the development is only partially residential, the building bond payable is 2% of the part of the contract price applicable to the residential building work.
The building bond may be in the form of a bank guarantee, a bond or another form of security that is prescribed by the Strata Schemes Management Regulation 2016. The bond must be valid for at least 2 years but not for more than 3 years after the date of the occupation certificate for the building work to which it applies.
Regulation 50 of the Regulation clarifies how to work out the contract price for the building work for the purposes of determining the amount of the building bond.
The bond or part of the bond may be released to the owners corporation where defects are identified in the final report or where the owners corporation and the developer make an application to Fair Trading. A building bond must be claimed or realised:
- 2 years after the date of completion of the building work, or
- within 60 days after the final report on the building work is given to Fair Trading by the building inspector,
whichever is the later.
An owners corporation must use (within a reasonable time) any bond amount paid to it to rectify the defective building work identified in the final report or to pay for related costs. Any excess is to be repaid to the developer.
It should be noted that an owners corporation cannot elect to be paid the bond and keep it as a form of compensation for the defective work (this may be an attractive option where the cost of rectifying the work is in excess of the amount of the bond).
Fair Trading must not pay the whole or part of a bond unless it has given at least 14 days written notice to the owners corporation, the developer and the builder of the proposed payment. The 14 day period gives the developer, builder, owners corporation or owner of a lot, time to apply for a review of Fair Trading’s decision regarding payment of the bond.
We’ve included new commentary on the regime in our New South Wales Strata and Community Titles Service.