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On 1 January 2018 a new Part 11 was inserted into the Strata Schemes Management Act 2015 to implement a new Strata Defects Regime.

The regime requires developers of residential or partially-residential strata buildings comprising four or more storeys, where construction commences on or after 1 January 2018 to:

  1. appoint an independent building inspector to undertake interim and final inspections of the building work and submit a report identifying any defective building work; and
  2. prior to the issue of an occupation certificate, lodge with NSW Fair Trading a bond to the value of 2% of the building contract price to cover defects identified by the independent building inspector.

Buildings comprising three or less storeys are already covered by the existing Home Building Compensation Fund scheme.

Independent Building Inspection

Once appointed, the independent building inspector must inspect the building work and provide a report identifying defective work no earlier than 15 months and no later than 18 months, after the building work is completed.

The developer must then rectify the defects identified in the interim report.

Then, no earlier than 21 months after the building work is completed, and no later than 2 years after its completion, the building inspector must carry out a final inspection of the work and submit a final report. This requirement does not apply if no defective building work was identified in the interim report.

Defective work bonds

The 2% building bond is designed to ensure that payment is secured from the developer for the rectification of defective building work identified in the independent building inspector’s final report.

The building bond must be valid for at least 2 years (but not more than 3) after the date the occupation certificate is issued.

The bond (or such part of it as is necessary to rectify the defects identified in the final report) may be released to the owners corporation of the new strata scheme for the purposes of:

  1. rectifying the defective building work; or
  2. paying costs associated with the rectification of defective building work.

The bond (or such part of it as is necessary) must be claimed by the owners corporation by the date which is the later of:

  1. 2 years after the date the building work was completed; and
  2. 60 days after the final report is provided to NSW Fair Trading.

NSW Fair Trading will pay the bond (or such part of it as is claimed), once 14 days notice of its intention to do so has been provided to the owners corporation, the developer and the builder.

Any excess funds remaining on the bond must then be returned to the developer.

This scheme aims to decrease costs, litigation and time delays in having building defects rectified and encourages developers and builders to minimise defects and to establish processes for rectifying those defects when they occur.