Defect Bond Scheme for Developers in New South Wales to start in July 2017

On 1 July 2017, the Defect Bond Scheme (the Scheme) comes into force in New South Wales. The Scheme seeks to provide purchasers of units (over 3 storeys) a greater degree of protection against defective building work.

The Scheme is introduced by the recent Strata Schemes Management Act 2015 (NSW) and places additional obligations on developers of high rise residential buildings. These obligations include the lodgment of a 2 percent defect bond with NSW Fair Trading and mandatory defect inspection reports.

Who will be affected?

The Scheme applies to the construction of buildings with three or more storeys and with two or more dwellings. These buildings do not have the protection under the Home Compensation Fund, therefore the Scheme aims to provide a structured, proactive process that resolves building issues quickly and cost effectively.

This means that the Scheme applies to the construction of high rise residential buildings and also mixed use developments which contain both residential and commercial components.

Defects Bond

Developers will be required to lodge a bond with NSW Fair Trading equal to 2 percent of the contract sum, this is required before an occupation certificate can be issued. Building Inspector Developers are also required to appoint an independent building inspector and notify NSW Fair Trading and the relevant owners corporation of the proposed appointment. The owners corporation can then accept or reject the proposed building inspector.

At all stages the developer is responsible for the payment of the building inspector.

Interim Inspection

The inspector shall conduct an inspection and prepare an interim report between 15 and 18 months after practical completion. If defects are identified, the developer is responsible for organising the rectification of the defects in addition to organising for a final inspection to be conducted.

If no defects are identified, the developer may apply for the release of the bond.

Final Inspection

The inspector will conduct a final inspection between 21 and 24 months after practical completion. A final report will be prepared which will assess whether the defects identified in the interim report have been rectified and if any further defects have arisen.

Release of the Bond

If there are no defects identified in the final inspection, the developer can apply to Fair Trading for the release of the bond in full. If there are defects, the owners corporation may make a claim to Fair Trading for the release of all or part of the bond to pay for the rectification works at any time, up to 2 years after the occupational certificate is issued, or 60 days after the final report is given, whichever is the later.

What does this mean for you?

The Scheme will impact developers of high rise buildings in New South Wales, whether they are purely residential or mixed use developments. Developers of high rise developments should review their current building contracts to ensure they are adequately protected. Developers should consider amending their contracts to ensure they are adequately protected to meet the requirements of the Scheme.

Possible amendments to head contracts would include:

  1.  an extension of the defects liability period until the issue of the final inspection report; and
  2. additional security to be provided by the builder to meet the requirements of the defect bond. Contact the team at CDI to further discuss how the introduction of the Scheme affects your contracts and for advice on how your current contracts should be amended.


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