The new Defects Bond Scheme starts 1 July 2017 – are you ready?

WHO SHOULD READ THIS

• All industry participants that are involved in residential building works in NSW.

THINGS YOU NEED TO KNOW

• The Defects Bond Scheme will come into effect in New South Wales on 1 July 2017.

WHAT YOU NEED TO DO

• Industry participants will need to become familiar with the new Defects Bond Scheme. Residential building contracts in NSW (which are caught by the scheme) will likely need to be amended to address the upcoming changes.

From 1 July 2017 provisions of the Strata Schemes Management Act 2015 (NSW) (Act) will come into effect requiring developers to provide a new 2% defects bond (Defects Bond Scheme).

Background

Although many of the changes to the Act came into effect on 30 November 2016, Part 11 which introduces the Defects Bond Scheme comes into effect on 1 July 2017. The purpose of the Defects Bond Scheme is to secure funding for the costs of rectifying defective building work in certain building projects in NSW.

What buildings are affected?

The Defects Bond Scheme will apply to building work involved in constructing residential (or partially residential) strata scheme properties which do not require coverage (and are not protected) under the current Home Building Compensation Fund (i.e. properties over three storeys in height). Importantly, the scheme only applies to contracts entered into from 1 July 2017.

How does the Defects Bond Scheme work?

Developers of affected building projects will need to lodge with NSW Fair Trading a bond of 2% of the contract price for strata buildings being constructed. This will secure funds for defective work identified in a final inspection report. The developer should prepare to lodge the bond once the building contract has been entered into with a builder to construct the strata scheme building.

Once lodged, NSW Fair Trading will advise the local council (or private certifier if applicable) of the bond lodgment. This will be a requirement before any occupation certificate can be issued.

Importantly, in order to reduce gap risk, developers will likely be seeking additional security from builders to cover the additional 2% security which developers are required to provide.

Inspections

Developers are required to appoint and pay for a building inspector that is independent to the developer. Penalties may apply for undisclosed connections with the building inspector.

An interim report must be prepared by the building inspector between 15 and 18 months after the building work has been completed. A final report must be prepared by the building inspector between 21 months to 2 years from completion of the building work. That report will address defects identified in the interim report that have not been rectified or any defects arising from the rectification works.

Importantly, developers will likely be extending the defects liability period under their residential building contracts in NSW to 2 years (as opposed to the standard 12 month period) to match the timing requirements of the final report.

Release and use of bond

If there are no defects identified in the interim inspection report or identified as outstanding in the final inspection report, the developer can then apply to NSW Fair Trading for the full release of the bond.

If there is defective work outstanding in the final inspection report:

• the owners corporation can claim the bond money in full or in part from NSW Fair Trading, or
• an agreement can be made with the developer for NSW Fair Trading to release all (or a certain amount) of the bond.

The owners corporation has 2 years from the issue of an occupational certificate or 60 days from when the final inspection report is given to NSW Fair Trading (whichever is later) to make a claim to NSW Fair Trading for recovery against the bond.

What should be done?

All industry participants that are involved in residential building works in NSW will need to become familiar with the upcoming changes. In particular, developers will need to be prepared to provide the additional 2% security (this is important to enable the occupation certificate to be issued).

Importantly, the impact of the Defects Bond Scheme is that residential building contracts (which are caught by the scheme) will need to be updated. The key changes will be on additional security to be provided (including any back-to-back security) and an extension of the defects liability period. Builders should ensure that they adequately pass on these risks to subcontractors where appropriate.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.