Recent building bond changes to strata legislation in NSW, due to commence on 1 January 2018, will require Developers to pay a compulsory building bond to the NSW OFT prior to obtaining any occupation certificate (whether interim or final), for potential building defects. The changes in Part 11 of the Strata Schemes Management Act 2015 (NSW) (Strata Management Act) were due to commence on 1 July 2017 and were recently deferred by NSW Parliament, following feedback from the building and construction industry. The building bond changes radically reform the defect legislative framework and follow the wind down of Home Building Insurance. They are highly controversial, not only because of the potential enormity of administering such a system, but also because they place further upstream costs on developers and builders. However, the major incentive of the legislative changes is for developers and builders to build well and fix any problems early and prior to an owners corporation’s ability to call on a building bond.

How Does the System Work?

If there is no contract, it applies to building work commenced after 1 January 2018. For building work subject to contracts, it will apply if the contract was signed after 1 January 2018. It does not include work that requires insurance under Part 6 of the Home Building Act 1989 (NSW) (i.e. work under 3 stories).

Appointment of a Building Inspector

Firstly, a building inspector must be appointed, who is:

  • required to be appointed by the Developer within 12 months between the completion of the building works and the expiration of the initial period. For cases where the initial period is greater than 12 months, different rules apply. The appointment is required to be ratified by an owners corporation by resolution at general meeting;
  • required to have certain qualifications as set out in the associated Strata Regulations (for example, they are required to belong to Engineers Australia or other specified organisations);
  • not permitted to be a “connected” party to the Developer, as defined and set out in the Strata Management Act;
  • required to act impartially in carrying out their functions, to be paid by the Developer, and to provide two reports, known as the “Interim Report” and the “Final Report”.

The Interim Report and the Final Report

  • The “Interim Report” is required to carried out by the building inspector not earlier than 15 months and not later than 18 months after the completion of the building work. It needs to identify any defective building work and the cause where practicable.
  • The “Final Report” is required to be carried out by the building inspector not earlier than 21 months and not later than 2 years after the completion of the building work. It needs to identify any defective building work in the Interim Report not rectified, defective building work arising from rectification of defective building work previously identified in the Interim Report and specify how that work should be rectified. It must not contain matters that relate to defective building work not identified in the Interim Report.
    The idea is for the Builder to access the relevant property and rectify any defects identified in the Interim Report between the completion of the Interim Report and the Final Report, so that the building bond can potentially be returned to the Developer.

The Builder has the right at any time after the completion of the building work to enter any part of the strata scheme that is reasonably required for the purposes of or in connection with rectifying the building work. They are not bound by the Reports in doing so. A person must not without reasonable excuse refuse access to the Builder.

The Building Bond

We note the following in relation to the Building Bond:

  • Developers are required to provide a building bond to the OFT comprising 2% of the contract price for the building work, prior to obtaining an occupation certificate (whether interim or final) relating to the building work. There is a penalty fine of $22,000 if it is not paid. The building bond is required to be provided for not less than two and not more than three years after the date of the occupation certificate, and is security that the owners corporation may call upon in certain circumstances to pay for building defects relating to common property;
  • there are a number of documents that Developers are also required to hand to the OFT together with the building bond (including for example, a copy of any documents relevant to the determination of the contract price, specifications for the works, development consents, and any inspection report obtained by the Developer or Builder relating to the work);
  • the OFT may release the building bond for payment to the owners corporation to meet the costs of rectifying any defective building work shown in the Final Report (or in addition, to the owners corporation with the consent of the Developer on application to the OFT);
  • the owners corporation can only use the building bond for or in connection with rectifying the defective building work in the Final Report or for costs relating to the rectification;
  • the OFT can refuse to realise the building bond or reduce the amount payable, if they are satisfied that the Developer or the Builder responsible for the defective building work was unreasonably refused access for the purposes of rectification;
  • if the building bond is not used or partially used, any amounts left over will be paid back to the Developer once written notice has been provided by the owners corporation;
  • the building bond must be claimed two years after the date of completion of the building work or within 60 days after the Final Report is given to the Secretary of the OFT by the building inspector, whichever is the later.

Tips and Traps for Developers and Builders

Having regard to the above, we expect that Developers and Builders may want to consider the following issues:

  • Developers and Builders will need to think carefully about the definition of “practical completion” in their contracts, which is typically dependent on the issue of occupation certificates. Potential claims by Builders for extension of time and delay damages may arise if a contract requires the issue of an occupation certificate as a pre-condition to the achievement of practical completion and where the Builder’s hands are tied until such time that the Developer has paid the building bond.
  • Think carefully about when the contract price is calculated in the Strata Management Act (being the date of the issue of an occupation certificate). The price may change over time and Developers will need to keep an administrative eye on ongoing changes to the contract price during the construction process. If there is no written contract or if the Developer and Builder are “connected”, different rules apply in relation to the calculation of the contract price.
  • Developers will need to think about the financial costs of the building bond in terms of timing – provision will be required towards the end of the project. Make careful provision for the building bond at the start of the process and deal with financiers accordingly.
  • Developers are required to provide an extensive and onerous number of documents together with the building bond. This includes copies of all inspection reports obtained by the Developer or Builder relating to the building work. Think about the legal implications of the early production of these types of reports. Obtain legal advice where required so those reports may be protected by legal privilege.
  • Consider extending defect liability periods in contracts to two to three years from the date upon which an occupation certificate is issued in respect of the building work. Further, consider whether contracts should require the Builder to rectify any defects identified in the Interim Report.
  • Make sure you keep internal registers of who you are appointing as building inspectors to ensure that they are not “connected persons”. Update your precedents to ensure that you have an internal register specifying which documents need to be handed over together with the building bond to the OFT, prior to occupation certificates being issued.

The team at Project Lawyers have presented a number of seminars to builder and developers on this important topic. Should you have questions in relation to the subject of this article or any aspect of the new legislative changes please do not hesitate to contact us.