New strata building bond scheme is set to commence 1 July 2017

 What is the Building Bond Scheme?

The building bond scheme is a regime whereby developers of residential strata schemes have to:

  1. lodge a bond with the Department of Finance, Services and Innovation (DFSI); and
  2. arrange for defects inspections within the strata scheme after completion of the building work.

Does the Building Bond Scheme Apply to You?

The building bond scheme applies to building work the subject of a contract entered into on or after 1 July 2017 or where there is no contract,  if the building work commenced on or after 1 July 2017.

The building bond scheme applies to strata developments over 3 storeys.

How Much is the Building Bond?

If the building bond scheme applies, the developer must provide DFSI with a bond equal to 2% of the price for the building work. The bond must be provided prior to the issue of the occupation certificate for the strata scheme. The purpose of the bond is to guarantee the rectification of defective building work by the developer.

The bond can be in the form of:

  1. bank guarantee; or
  2. bond,

or a combination. The bank guarantee or bond must have a maturity date of between 2-3 years from the date of the occupation certificate.

Interim Report

Within 12 months after the date of the occupation certificate, the developer must appoint a building inspector (subject to approval by the Owners Corporation) to conduct an interim inspection on the defective building work in the strata scheme. Any person who, in the last 2 years, has been connected with the developer cannot be appointed as building inspector.

The interim report must be prepared between 15-18 months after the issue of the occupation certificate for the strata scheme.

Final Report

No later than 18 months after the date of the occupation certificate, the developer must appoint the same building inspector to carry out a final inspection of the building work in the strata scheme.

The final report must be prepared between 21-24 months after the dateof the occupation certificate for the strata scheme. The purpose of the final report is to identify defects in the interim report which were not rectified and further defects caused by the rectification works. The final report cannot set out new defects.

Recourse to the Building Bond

Any defective building works identified in the final report will entitle DFSI to call on all or part of the building bond and pay the realised amount to the owners corporation to meet the costs of rectifying the defects set out in the final report.

In circumstances where the contractor has been unreasonably refused access to complete defect rectification works, DFSI, may reduce the amount which the owners corporation may otherwise be entitled to.

Any surplus of the building bond not used by the owners corporation to meet the cost of defect rectification will be returned to the developer.

Practical Implications

The building bond scheme has significant implications for both developers and contractors involved in strata developments over 3 storeys. Developers must ensure that their constructions contracts have adequate provisions in relation to the defects liability period and the contractor’s security. Contractors are likely to see contracts containing longer defects liability periods and also the retention of security for a longer period of time or until the developer’s bond is returned.

If you are a developer or contractor and would like more information, please contact Mike Ellis, Executive Director or Qin Bi, Associate on +61 2 9261 5900.