With the New South Wales state government going full steam ahead on its plans for strata law reform, McCullough Robertson’s Property team explain here in simple terms what these reforms will mean for developers.

This is the first major reform of the legislation since 1996 and the most significant change to the strata development laws since the second generation laws of 1973.  In this publication, Partner Brett HawkinsConsultant Michael Allen  and Senior Associate Simone Nokesrun you through the expected changes and the implications and opportunities for your business.

Further, we would be very happy to expand upon these changes by hosting a workshop style seminar with your team and are keen to lock in a preferred date and time.

Background

The draft Strata Schemes Development Bill 2015 and Strata Schemes Management Bill 2015, are now open for consultation.  There is a substantial role to be played by the (yet to be drafted) regulations and there are a number of important possibilities that these leave open from a developer’s perspective.

Obligations on developers to pay building bonds equalling 2% of the contract price for building work

Proposed Part 11, Division 3 of the Management Act will require every developer of a strata scheme to lodge security with the Chief Executive of the Office of Finance and Services before completion of the building work (Building Bond).

The Building Bond:

  • is to be 2% of the contract price for the building work
  • is to secure funding for the payment (up to the amount of the bond) of the costs of rectifying building work identified in a final report (see comments under “Establish a new process of identifying and rectifying building defects” below)
  • is payable as follows:
    • to the owners corporation to meet the estimated costs of rectifying defective building work identified in the final report
    • to the developer, if there is no defective building work, or no further costs for rectification works identified in the final report
    • to the owners corporation or the developer, with the consent of the other party, on application to the Chief Executive by both parties, or
    • to the owners corporation or developer in accordance with an order of the Civil and Administrative Tribunal or the Supreme Court,
  • must be paid out or refunded not later than 2 years after the completion of the building work or within 60 days of the final inspection report, whichever occurs later.

It is important to note that:

  • an occupation certificate must not be issued for the use and occupation of the building or a part of a building unless the Building Bond is provided
  • failure to provide the Building Bond attracts a maximum penalty of 200 penalty units, and
  • the proposed divisions are to apply to residential building work that is exempt from the home building compensation insurance and requirements under the Home Building Act 1989 (NSW) or works on a residential building or a building used or proposed to be used for mixed use purposes that include residential purposes.

Establish a new process of identifying and rectifying building defects

Proposed Part 11, Division 2 of the Management Act will:

  • require a developer of a strata scheme, to have the building work inspected by a building inspector not later than 12 months after that work is completed
  • require that the appointment of the inspector must be approved by the owners corporation and the owners corporation may refuse to approve the appointment onany grounds. The inspector must not be connected with the developer
  • require that in circumstances where an inspector has not been appointed within 12 months of the completion of the building work the Chief Executive is to arrange the appointment
  • require that the inspector must no earlier than 12 months and no later than 18 months after completion of the building work give an interim report, identifying any defective work. New regulations will prescribe the kind of defective work that is to be reported on
  • require that the developer must arrange a final inspection by the inspector not later than 18 months after the building work is completed
  • require that the final report must be provided by the inspector within 2 years of completion of the building works
  • permit a person who carried out defective building work to rectify the work at any time before the inspector completes the final inspection
  • provide that the developer is responsible for all costs of obtaining an inspection and report, and
  • prescribe that penalties may apply for non-compliance, with a maximum penalty of 200 penalty units.

New measures for addressing maintenance items and building defects

In relation to maintenance obligations affecting a developer, proposed section 115 of theManagement Act, requires the developer to prepare an initial maintenance schedule for the maintenance of common property in the strata scheme setting out the matters prescribed by regulation. An owners corporation is not required to comply with this schedule, however, the schedule may be considered in any defect dispute to determine whether the defect or damage could have been avoided by taking specified action.

Building defect provisions are largely summarised in the points above.

The ability for owners corporations to seek compensation against the developer if unrealistic levies were set

Proposed section 89 of the Management Act provides that the Civil and Administrative Tribunal may, on application by an owners corporation or the owner of a lot in a strata scheme (such application to be made no later than 3 years after the end of the initial period), order that the developer pay compensation to the owners corporation if the Tribunal determines that the estimates and levies determined during the initial period were inadequate to meet the actual or expected expenditures of the owners corporation.

The Tribunal must not make an order if the developer satisfies the Tribunal that it used due care and diligence in determining the estimates.

The Regulations

Many of the important mechanics of the new legislation will be found in the regulations (which have not yet been prepared).  These range from how the contract price is calculated (and subsequently the amount of the bond), the qualifications of the persons who will be approved building inspectors to what defective building works must be covered in the inspectors’ reports. 

The Government has indicated it wishes to consult widely on these regulations.  We would be pleased to assist you identify all the matters to be covered in the regulations and in any submission you wish to make.