On 15 July 2017, Project Lawyers published an article on the proposed introduction of Part 11 of the Strata Schemes Management Act 2015. Now that Part 11 has been introduced, owners corporation and developers should familiarise themselves with the requirements of the strata defects regime.

 

Strata Defects Regime has commenced

The strata defects regime under Part 11 of the Strata Schemes Management Act 2015 for high-rise strata residential buildings in New South Wales commenced on 1 January 2018. (The regime does not apply to building work if the relevant building contract was entered into before 1 January 2018, regardless of when the building work commenced.)

The strata defect regime imposes:

  • 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 Strata Defects Regime

The strata defects regime only applies to the original construction of a strata scheme of four or more storeys. (That is, the regime does not apply where the building work is required to be insured under the Home Building Act 1989.) The regime applies to residential building work, or work on any part of a mixed-use strata building that includes a residential component.

 

Building inspector

The developer must appoint a building inspector to carry out interim and final inspections of, and to report on, the building work. The developer must not appoint a building inspector unless the appointment is approved by a resolution at a general meeting of the owners corporation. If the proposed building inspector is or was in the previous 2 years employed by, or a contractor of, the developer, the developer must disclose that fact to the owners corporation before the owners corporation determines whether or not to approve the appointment.

If a developer does not appoint a building inspector in breach of their obligation to do so, the Commissioner for Fair Trading, Department of Finance, Services and Innovation (referred to as the ‘Secretary’ in the Act) may do so instead.

 

Building inspection reports

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.

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 (unless they are unavailable), 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 the Secretary and the report did not identify any defective building work, or
  • the interim report did not identify any defective building work and the Secretary 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.

 

Building bonds – 2% of contract price

The developer must lodge a building bond (being a bank guarantee or a bond that is able to be claimed or realised for a period of not less than 2 years and not more than 3 years after the date of the occupation certificate for the building work to which it applies) of 2% of the contract price for the building work with the Secretary. The building bond must be lodged prior to the occupation certificate being issued for any part of the building.

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. (Therefore, in a mixed-use development, developers should consider entering into a separate building contract for the residential building work, or otherwise ensure that the contract price for that work is separately identified in the building contract for the whole building). If the building contract is not between arms-length parties, the contract price for building work is to be the price set out in a cost report prepared by a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors or the Royal Institute of Chartered Surveyors, and is not connected to the developer or the builder.

 

Building bonds – for the cost of rectifying defective building works

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 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 the Secretary. A building bond must be claimed or realised, two 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 Secretary 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.

The Secretary must not pay the whole or part of a bond unless the Secretary has given at least 14 days written notice to the owners corporation, the developer and the builder of the proposed payment (Regulation 55, Strata Schemes Management Regulation 2016). If an application to review a decision to pay the whole or part of an amount secured by a building bond is made in accordance with Regulation 56, the amount is not to be paid until the application for the review is determined or withdrawn.