Changes to residential strata defect bond requirements from 1 July

The Strata Schemes Management Amendment (Building Defects Scheme) Act 2018 (NSW) (Amending Act) and the Strata Schemes Management Amendment (Building Defects Scheme) Regulation 2020 (NSW) (Amending Regulation) commenced on 1 July 2020. The Amending Act and Amending Regulation make changes to the scheme that commenced on 1 January 2018, which requires developers to provide a "building bond" (in the form of a bank guarantee or bond) in relation to building works for a residential building (or a building for mixed purposes, including residential) carried out for the purposes of the registration of a strata plan. The scheme only applies where home warranty insurance is not required for the building work.

The key changes are:  

• the bond must now be provided before the developer applies for the occupation certificate, rather than the previous position of provision before the occupation certificate is issued
• the “contract price” for the building work, used to determine the amount of the bond (being 2% of the contract price), is now the “total price paid or payable under all the applicable contracts for the building work regardless of when the amounts become payable” rather than total price paid under all the applicable contracts as at the date of issue of the occupation certificate
• the bond must be in place for at least 30 months after the date of the occupation certificate, being six months longer than the previous requirement of two years
• the Commissioner for Fair Trading may make a claim on the bond within the later of two years after the completion of the building work and 90 days (rather than 60 days) after the building inspector's final report is given to the Secretary, and
• the maximum penalty for a developer failing to lodge the bond has significantly increased from 200 penalty units (currently $22,000) to 10,000 penalty units (currently $1.1 million), with a further 200 penalty units (currently $22,000) for each day the offence continues.

The changes will extend to apply to building work underway on 1 July.

Effect of changes

The changes bring greater clarity to the previously challenging provisions regarding the timing and amount of the bond, while also extending the length the bond is to be in place. Consideration will need to be given to the impact of the changes on developer’s costs and contractual risk allocation between developers and builders. Developers should also be cognisant of the significantly increased penalties and the way in which these changes will operate with the commencement of the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) on 1 September 2020.