Strata Schemes Management Bill 2015 - New obligation to rectify building defects

Impact on Developers and flow on impacts on Contractors

Publication November 2015


Introduction

The Strata Schemes Development Bill 2015 (Development Bill) and Strata Schemes Management Bill 2015 (Management Bill) were passed by the New South Wales Parliament on 27 October 2015.  The changes are expected to start mid-2016.

Our July update highlights the proposed changes to the existing strata laws contained in the bills when they were released for public consultation.

In this article we will look at what impact Part 11 of the Management Bill, dealing with building defects, will have on developers of residential buildings, noting that the detail of how these reforms are to operate will be contained in the regulations, which have not yet been released for public consultation.

Which developments will be affected

Part 11 of the Management Bill when enacted will only apply to residential building works:

  • if the contract for carrying out the building work was entered into after the commencement of the Act; and
  • that are exempt from the home building compensation insurance requirements under the Home Building Act 1989 (NSW), or work on a building used for mixed use purposes that include residential purposes.

Increased obligations in relation to building defects

Developers will be required to:

  • lodge a bond - equal to 2% of the contracted price with the Secretary of the Department of Finance, Services and Innovation before an occupation certificate is issued. The purpose of the bond is to secure funding for the payment of the costs of rectifying defective building work identified in a final inspection;
  • prepare a maintenance schedule - to be tabled at the first annual general meeting;
  • prepare defect reports – by engaging an independent building inspector to prepare:
    • interim defect inspection reports, between 12 and 18 months after the completion of the works and then arrange for the rectification of defects identified in the interim report; and
    • a final inspection report between 21 months and 2 years after the completion of the work.

Flow on effects for contractors

The new obligations on developers are likely to be passed down to the head contractor under construction contracts. It is likely that the head contract will pass the new obligations down to its subcontractors:

  • Extended defects liability period –The defects liability period under construction contracts will need to increase from the standard 1 year to 2 years, or more, to reflect this extended liability. The defects rectification regime will need to ensure that defects identified in the interim report are rectified prior to the final report; and
  • Release of security - Security under the construction contract will need to be held until the expiry of the extended defects liability period and a mechanism included to call on the security, if defects are identified in the final inspection report.

Take home

Developers entering into a contract requiring them to carry out applicable residential building work after the Management Bill is enacted must ensure that their obligations to rectify defects are passed through to the head contractor in the construction contract.

The developer will need to factor in to the cost of the project the additional costs to be incurred in complying with these new obligations, including the costs associated with providing the bond, preparing the interim and final reports, managing the rectification of defects for the prolonged defects liability period, and generally the costs associated with engaging the project team for this extended period.

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