After years of Tribunal and Court litigation matters between the owner corporation and the builder/developer over defects in a new strata scheme. The New South Wales government has reviewed the defects system and now introduced a bond system scheme for those new strata scheme not covered by the current Home Fund Insurance Scheme. From 1st January 2018, those residential or partially-residential strata schemes up to three storeys, will continue to be covered under the Home Building Compensation Fund, under the under Home Building Act 1989, as amended.
As from 1st January 2018, those residential or partially-residential strata schemes four storeys or more, are now covered under the compulsory strata building bond and inspections scheme, under Part 11 of the Strata Schemes Management Act 2015 and the Strata Schemes Management Regulation 2016.
The strata building bond and inspections scheme applies where a developer and builder enter into a contract from 1 January 2018. The scheme applies to building work to construct residential or partially-residential strata properties that are four or more storeys. This scheme includes a building bond and mandatory defect inspection reports. It provides a structured, proactive process that resolves building issues quickly and cost effectively. Developers must lodge a building bond with NSW Fair Trading equal to 2% of the contract price for residential and mixed-use high-rise strata buildings. The building bond secures funds (up to the amount of the bond). The building bond can then be used to pay the costs of rectifying any defective building work identified in a final inspection report.
Who is affected?
Key participants involved in the new strata building bond and inspections process include:
- The Developer
- The Owners Corporation (owners in a strata scheme)
- Strata inspector panel – made up of nominated bodies in the Strata Schemes Management Regulation 2016 (the Regulation), through which a building inspector can be sourced
- Building inspector – a member of the strata inspector panel
- Builder (contracted by the developer).
- NSW Fair Trading with the Build Bond Secretary
Stages in the new strata building bond and inspections process –
1. Preparing to lodge the building bond
Once a builder and developer enter into a contract to construct a strata scheme of four or more storeys, the developer should prepare to lodge the building bond equal to 2% of the contract value of the work.
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2. Bond lodgement
The developer must upload the following to the Strata building bond and inspections scheme online portal when giving a building bond to the Building Bond Secretary with NSW Fair Trading:
the lodgement form
building bond (i.e. a bank guarantee or a ‘bond’) supporting documents and information and pay the administration fee of $1,500.
The Building Bond Secretary then receives, verifies and accepts the original building bond (i.e. a bank guarantee or a ‘bond’), which is required before an occupation certificate can be issued.
3. Appointing a building inspector
The developer sources a building inspector through the Strata inspector panel. The building inspector must be independent of the developer. The developer can be penalised for failing to disclose any connection with the building inspector. Likewise, the building inspector can be penalised for failing to disclose any connection with the developer.
The developer must notify the Building Bond Secretary and the owners corporation of the proposed appointment of the building inspector. The owners corporation then approves or rejects the building inspector appointment.
The Building Bond Secretary will appoint an independent building inspector, if:
the developer fails to organise for one to be appointed
this includes if the owners corporation rejects the building inspector that the developer seeks to appoint.
The building inspector then arranges a date with the owners corporation to inspect the strata property. At all stages where a building inspector is used in the process, the developer pays for their work.
4. Interim inspection and report
The building inspector conducts their first inspection of the strata property and completes a report identifying any defective building work. This happens between 15 and 18 months after the building work has been completed.
The owners corporation, developer, builder responsible for any defective work and the Building Bond Secretary receive access to the report.
If no defects are identified, the bond may be released to the developer – two years after the date of completion (not at 18 months when the interim report is provided by the building inspector).
If there are defects, the builder responsible for the defective work must rectify them. The developer must also organise the building inspector to conduct a final inspection.
The developer must advise the Building Bond Secretary if the original building inspector is unavailable, or make an application to the Secretary to appoint a building inspector. The Building Bond Secretary appoints the new building inspector and notifies the owners corporation and developer of the appointment.
5. Final inspection and report
The building inspector arranges with the owners corporation to conduct a final inspection of the property. This happens between 21 and 24 months after the building work has been completed.
The building inspector provides a final report to the developer, the owners corporation, builder responsible for any defective work and the Building Bond Secretary. This report will assess whether the defects identified in the interim report have been fixed.
6. Payment of bond
If there are no defects, the bond is released in full to the developer.
If there are defects:
the cost to rectify the defects must be agreed to by both parties. The Building Bond Secretary will then claim that amount from the issuer of the building bond for payment to the owners corporation, or the developer can agree to release part or all of the bond money to the owners corporation
an agreement is not reached between the developer and owners corporation, the Building Bond Secretary will appoint a quantity surveyor to determine the cost to rectify based on the identified defective building work in the final report.
7. Completing the process
The Building Bond Secretary facilitates the release of the bond money. The owners corporation must use any money they receive to fix the defects identified. After the defects are fixed, any money left over must be returned to the developer.
There is an alternative review process if the owners corporation or developer disagrees with how much bond money, if any, is returned to the developer or paid to the owners corporation.
For further information, readers can contact the NSW Fair Trading by Telephone on (02) 9895 0111.
Written by Paul McKenzie AAPI – CEO of ABS Conveyancing & Valuations, in Sydney. He is on the management committee for the Australian Institute of Conveyancers NSW and the Sydney CBD Chamber of Commerce. Paul is also a member of the Australian Property Institute and the Australian Indian Business Council / Australian Indian Chamber of Commerce NSW. He is a property writer, guest speak on conveyancing and has made guest appearances on radio.
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