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On 1 January 2018, Part 11 of the Strata Schemes Management Act 2015 (NSW) and Part 8 of the Strata Schemes Management Regulation 2016 (NSW) will take effect.

The new provisions require a "building bond" (in the form of a bank guarantee or bond) to be provided by the developer of a residential building (or a building for mixed purposes, including residential), for which home warranty insurance is not required, carried out for the purposes of the registration of a strata plan. The building bond must be equal to 2% of the contract price for the building work. Provision of the building bond will be a precondition to obtaining an occupation certificate and must be provided with a copy of the building contract and related documents.

The building bond is to be in favour of and provided to the Secretary of the Department of Finance, Services and Innovation (Secretary). It will be used by the owners corporation to meet the cost of rectifying "defective building work"—any building work that constitutes a breach of the statutory warranties contained in Part 2C of the Home Building Act 1989 (NSW)—as identified by an inspector's final report.

The new provisions also require that a developer appoint an inspector at their own cost, who will undertake two separate inspections and prepare two reports. If the initial period of the strata scheme has expired, the inspector must be appointed within 12 months of completing the building work and must be approved by the owners corporation. If the initial period of the strata scheme has not expired within that 12 month period, the Secretary will appoint the inspector. The appointed inspector must provide an interim report identifying any defective building work—and, if reasonably practical, its cause—within 15-18 months of the work being completed.

Within 18 months of completing the building work, the developer must arrange for the same inspector to prepare a final building report (or if the original inspector is not available, an inspector appointed by the Secretary). The final report must be provided within 21-24 months of completion of the building work, identify any defective building work noted in the interim building report that has not been rectified, identify any defective building work arising from rectification of previously identified building work and specify how any remaining defective building work should be rectified.

The new provisions provide a right of access to the builder to complete the rectification works identified by the inspector. If the builder refuses to rectify the defects, the owners corporation may engage another builder, using the building bond to meet rectification costs.

If the final report identifies defective building work, the Secretary may have recourse to the building bond up to two years after completion of the building work, or 60 days after the Secretary is given the final report—whichever is later. Before paying an amount to an owners corporation for the cost of rectifying defective building work, the Secretary must give the owners corporation, the developer and the builder 14 days' notice of the proposed payment. The owners corporation, the developer, the owner of a lot and the builder can apply to have the Secretary's decision to pay the amount proposed reviewed, in which case no payment will be made until the review is complete.

The new provisions will only apply to contracts entered into from 1 January 2018 (or if there is no contract, to building work commenced from 1 January 2018).

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