Long gone are the days when developers and builders can simply disappear or become bankrupt when building defects are identified. A quarter of Sydney’s Metropolitan residents live in Strata title properties, including 75% of residents within the City of Sydney, and the reluctance by builders to rectify failures in the early life of a building is about to be changed.

This article deals with the introduction of the new bond scheme inserted in the Strata Scheme Management Act 2015 (NSW) (‘Strata Act’) that requires all developers to contribute a building bond of 2% to the total contract price. The purpose of the bond is to secure funding for the Owners Corporation in respect of rectifying defects.

The Process

The new bond scheme can be broken down into three simple steps:

1. Developers are to appoint a building inspector within 12 months of completion of the works to the Secretary of the Department of Finance, Services and Innovation;

2. Building inspectors are to prepare an interim report within 15-18 months after completion of the works identifying any defective works; and

3. A final report is to be prepared between 21-24 months after completion of the works detailing any defective works.

Calculation of the Building Bond Amount

The calculation of the building bond amount is important for developers in order to ensure that no sudden increase in cost occurs. The Strata Act leaves the definition of ‘contract price’ to the Regulations, which states that the total contract price that the building bond of 2% is based on is the price at the time when the occupation certificate is issued. In effect, this means it is the price on the face of the building contract plus any adjustment to that price.

Penalties

The Owners’ Corporation is also given the power to engage another builder using the building bond to rectify works if the appointed builder refuses. A further win for the Strata Committee is that a developer is subject to a fine up to $22,000 if they fail to provide the bond, and an occupation certificate will not be issued prior to a bond being provided.

The Impact the New Bond Scheme has on Developers

Under the new bond scheme developers are greatly impacted. Smaller scale developers are likely to be impacted by the scheme as they are more likely to be in the position of being unable to secure a bank guarantee, and may be required to use most of their own equity to fulfil the bond requirements.

In addition, the process of the new bond scheme requires developers to engage an independent building inspector at their own cost, and even more developers will not be issued an occupation certificate until the building bond is provided, which may impact the Developer completing its contracts for sale.

On the other hand, Fair Trading NSW has indicated that the new bond scheme is likely going to reduce incentives for owners to undertake legal proceedings thereby reducing cost of litigation to all parties. Furthermore, the new bond scheme provides developers with greater security that a threat of litigation is unlikely thereby reducing the likelihood of insolvency or the deep financial burden of protracted litigation processes.