A series of major changes to strata laws have been introduced in NSW and most new regulations started on 30 November 2016.

However, the new building defect bond scheme did not start until 1 January 2018, the scheme applies where a developer and builder enter into a contract from 1 January 2018. The date is important for all off-the-plan buyers as it can impact some buildings where individual purchase contracts were exchanged before the start date.

The important thing to remember is that it’s the contract date between the developer and builder, and that information can be requested from the developer via your solicitor or conveyancer. It’s not individual purchase contracts that trigger the new rules, and with some new projects the builder might not be appointed until well after sales contracts have been exchanged.

According to Fair Trading NSW, the new scheme applies to new building work to construct residential or partially-residential (mixed-use) strata properties that are four or more storeys. While buildings that are three storeys or under are covered under different rules via the Home Building Compensation Fund.

In the lead-up to the new legislation, there were concerns expressed via community and buyer feedback that some projects were finding it difficult to have building defects fixed, either at all or within a reasonable time. For buyers it’s been good to see these concerns fully addressed.

A major part of the scheme is that it includes a building bond and reflecting public feedback it also includes a mandatory defect inspection report. After years of review the new rules provide a structured, proactive process that will help to resolve any building issues quickly and without major costs.

How the rules work is very simple. 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 (over four storeys). If a developer does not carry out any work to fix defects then the bond can be used to pay the costs of fixing any buildings defective.

Developers lodge their bond before the occupation certificate is issued for the building, this ensures that the bond is in place before any units are settled. The bond is then held until a mandatory inspection process is completed.

If any defective building work is identified and not rectified before the final inspection, the bond can be used to pay the costs of rectifying any defectives that are found, if there are no defectives, the bond is returned to the developer.

Mandatory Inspections

For affected projects, the developer must appoint a building inspector to produce a comprehensive building defects report, and buyers have some sensible protections in this process.

Firstly, the developer must obtain the approval of the owner’s corporation. If the owner’s corporation and the developer can’t agree, the independent Building Bond Secretary will step in and arrange the building inspector.

The rules do allow for an individual owner to also object, for any reason, to the owner’s corporation’s approval of a building inspector. Individual owners must lodge objections with the Building Bond Secretary within 14 days of the owner’s corporation approval of the appointment.

The Building Bond Secretary will decide whether or not there are grounds to appoint another building inspector, and notify everyone involved.

The developer must appoint a qualified building inspector within 12 months, or notify the Building Bond Secretary within 21 days after the 12 month period.

Further, the building inspector must be an authorised and a suitably qualified member of a Strata Inspector Panel.

The inspection is then a two-stage process. The first inspection (known as the interim inspection) will take place between 15 and 18 months after the building work has been completed, this looks to be a reasonable time for any defects not immediately obvious to surface. This results in the building inspector producing an interim report. That report is then used by the builder in rectifying any building defects that might have been identified and contained in the interim report.

The second and final inspection, takes place between 21 and 24 months after the building has been completed. This inspection checks that the necessary work identified in the interim inspection has now been rectified at the developers cost. The final report also identifies any defects that have not been fixed.

When this happens the building bond comes into play. The bond can then be used to pay the costs of rectifying any outstanding work. If there are no defects, the bond is returned to the developer.

Key Dates

The building inspector must do the final inspection between 21 and 24 months after the occupation certificate is issued. The costs to rectify identified building defects is to be agreed between the developer and the owners corporation. The parties may apply to the Building Bond Secretary with their agreed amount no later than 14 days before the last day that the bond must be claimed or realised. It’s important to note that the final date to claim or realise the bond is:

  • 2 years after the date the building work covered by the bond is completed, or
  • within 60 days after the final report on the building work is submitted by the building inspector.

If for any reason the owner’s corporation and the developer do not agree on the amount to be paid, the Building Bond Secretary will then nominate a quantity surveyor to decide the amount. The professional costs are paid equally by the owner’s corporation and the developer.

A majority of developers and their builders do a good job, however it’s reassuring for buyers that the new bond has been introduced, it’s also important that the owner’s corporation plays its role in the process.