Building bond to increase from 1 July 2024

Building bonds

The Strata Schemes Management Act 2015 (NSW) (SSMA) requires developers of a strata scheme to pay security, known as a building bond, before an occupation certificate under the Environmental Planning and Assessment Act 1979 is issued for any part of a residential building where building work, as defined in the SSMA, was done. The building bond is paid to Fair Trading and is to secure funding for the payment of costs of rectifying defective building work identified in reports prepared under the SSMA.

Currently, the prescribed percentage of the building bond is 2% of the contract price for the building work.  Developers must be aware that, due to the introduction of the Strata Schemes Management Amendment Regulation 2024 (NSW), the prescribed percentage is increasing to 3% as and from 1 July 2024.

As a reminder, a building bond will be held until the later of two years after the completion of the relevant building works, or 90 days after the final report on the building work is issued.

Decennial liability insurance

The increase to the prescribed building bond supports the NSW Government’s aim to encourage the use of a decennial liability insurance (DLI) policy in preference to a building bond. It is expected that the NSW Government will continue to increase the prescribed percentage of the building bond, so that DLI is the preferred protection measure.

DLI is taken out by the developer in favour of the owner’s corporation for the strata scheme and insures against serious defects of common property for 10 years, on a strict liability basis. If the developer satisfies the Commissioner for Fair Trading that the developer has obtained DLI for the relevant building work, they will be exempt from the building bond and inspection report requirements under the SSMA.

Key Takeaways

Developers undertaking building works, particularly those with buildings nearing completion, should consider how the increase to the building bond percentage on 1 July 2024 will impact them.  

DLI is still a relatively new product in New South Wales, and there are limited insurance providers offering this type of policy. As the prescribed building bond percentage increases, developers should investigate and consider whether obtaining DLI, rather than payment of the building bond, is preferred on completion of their building works.