With a quarter of Sydney’s Metropolitan residents now living in Strata titled properties[1], the increase in high rise residential developments shows few signs of abating. New legislation, coming into effect at the end of this year, will give these owners greater protection and developers may need to consider changes in the way they do business.

The Strata Schemes Management Act 2015 (the Act) will come into operation across New South Wales in November 2016 and draft regulations are currently being circulated by NSW Fair Trading for comments[2]. This should offer better protection for owners of residential building apartments[3]. In particular, it addresses a constant bugbear - the defects in these developments.

There has been particular concern recently for the rights of owners’ corporations and purchasers in pursuing defect rectification following the High Court’s decision in the case of Brookfield Multiplex v Owners Corporation Strata Plan 61288 [2014] HCA 36 (the Brookfield Multiplex Case). The Brookfield Multiplex Case provides that the law will not step in to assist purchasers in respect of latent defects where parties had an agreement articulating the builder’s obligations to remedy defects. Owners’ corporations (and purchasers of apartments) will either be limited to relying on their contractual protections, or the introduction of legislative reform[4].

The Actmay have a significant impact upon developers[5] with the introduction of a new defect bond and inspection regime, designed to reduce the incidence of drawn-out disputes for defect rectification. This new regime, however, will only apply to construction contracts entered into after the commencement of the legislation and won’t apply retrospectively.

Significant changes from a development point of view

  • Developers must now appoint a qualified building inspector to inspect and provide an interim and final report on the building work[6].

  • Prior to completion of the building work, developers must provide a building bond (paid into a fund established by the Department of Fair Trading) equal to 2% of the contract price for the purpose of securing payment for rectifying any defective building work identified in the final report[7].

  • On the later of two years after the completion of the building work, or within 60 days after the final report is given to the developer, the bond will be either drawn down in favour of the owners’ corporation if the final report identifies and estimates the costs of the defective work, or returned to the developer (or the balance of the bond) if there is no defective work identified.

  • The maturity date for a building bond must not be more than three years[8].

  • Importantly, an occupation certificate (as issued under the Environmental Planning and Assessment Act 1979) for any part of the building for which the building work was done will not be issued until the building bond is provided by the Developer, which may impact on the Developer completing its contracts for sale[9].

Clearly, the NSW Government is attempting to address the need for additional statutory protection for purchasers or unit holders by increasing accountability for developers. The new legislation supplements the statutory warranties provided by the Home Building Act 1989 (NSW) (Home Building Act) and in particular, “multi-storey”[10] developments[11]. Under the Home Building Act, owners have a period of six years to claim for any ‘major defects’. Claims for defects causing physical damage, which fall short of this definition, need to be brought within two years[12].

Implications for Developers

So how will the draft legislation impact upon developers? It really depends on the way their organisation is structured. Those developers with in-house construction capabilities will have different considerations and may seek to allocate risk differently compared to those who contract with third party builders.

Those contracting with third party builders will seek to extend the defects liability periods until the issue of the final report (which will occur after the two year period), and require builders to provide additional security to cover the 2% defects bond.

Developers with in-house construction subsidiaries may not wish to change their current approaches and risk allocation with their related builder entity. These organisations could seek to pass this added cost on to the individual purchasers of the strata units.

How effective the reforms will be at addressing the issue of post-completion defect rectification remains to be seen. There are obvious practical considerations for all parties to negotiate; will bonds for 2% of the value of the contract sum really be adequate to cover the costs of rectifying all defects? Debateable.

In light of the Brookfield Multiplex Case, or any legislative reform, there is a prudent path. Developers and builders, as well as owners corporations and purchasers should ensure that the terms of the agreement between the parties are clearly set out in the contracts they enter into.