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Building bond 

The new strata building bond and inspection scheme (the scheme) will now commence on 1 January 2018. It was originally scheduled to commence on 1 July 2017.

This means that the scheme will only apply to construction contracts signed (or where there is no contract and building work commences) from 1 January 2018. NSW Fair Trading will not require developers of new strata schemes to lodge defect bonds before 31 December 2017.

The commencement date has been delayed so that all procedural and professional requirements supporting the scheme are in place before commencement. This includes finalisation of:

  • the standards and procedures relating to strata-specific building inspections
  • new digital business processes to support bond lodgement and processing of the scheme.

NSW Fair Trading has been working with stakeholders in the strata, legal, building and development sectors in developing the scheme.  

Most reforms to strata laws in New South Wales commenced on 30 November 2016. The Strata building bonds and inspection scheme is the second part of these reforms and will commence on 1 January 2018.

The scheme applies to building work to construct residential or partially-residential strata properties that do not require coverage under the Home Building Compensation Fund (those over three storeys in height).

This reform introduces a building bond and mandatory defect inspection reports. It will provide a structured, proactive process that resolves building issues quickly and cost effectively. This will raise confidence in the quality of new strata high-rise buildings. 

Developers will be required to lodge a bond with NSW Fair Trading equal to 2 per cent of the contract price for residential and mixed use high rise strata buildings. The building bond will secure funds (up to the amount of the bond). This money can then be used to pay the costs of rectifying any defective building work identified in a final inspection report.

The following information explains how the scheme works. You can also refer directly to the legislation in Part 11 of the Strata Schemes Management Act 2015 (the Act) and the supporting Strata Schemes Management Regulation 2016 (the Regulation).

Who is affected? 

Key participants involved in the building bond process include:

  • Developer
  • Owners corporation – (owners in a strata scheme)
  • Strata panel – made up of nominated organisations in the Regulation, through which a building inspector can be sourced
  • Building inspector
  • Builder (contracted by the developer).

The following organisations enable and authorise key stages in the process:

  • Occupation certificate authorising body. This may be the local council or a private certifying authority
  • NSW Fair Trading, on behalf of the Secretary of Department of Finance, Services and Innovation (the Secretary).

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Stages in the process 

The Strata building bond and inspection scheme can be broken down into key stages. The stages include:

  1. Preparing to lodge the building bond
  2. Bond lodgement
  3. Appointing a building inspector
  4. Interim inspection and report
  5. Final inspection and report
  6. Release of bond
  7. Completing the process.

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1. Preparing to lodge the building bond 

Once a building contract is entered into between developer and builder to construct a strata scheme of four or more storeys, the developer should prepare to lodge their bond equal to 2% of the value of the building work. Fair Trading will provide more information to support developers to complete this process before the requirements apply from 1 July 2017. 

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2. Bond lodgement  

The developer lodges the bond, pays the lodgement fee and sends Fair Trading confirmation of the bond’s lodgement together with supporting documents.

Once Fair Trading accepts the bond, Fair Trading advises the local council or private certifier of the bond lodgement, which is required before an occupation certificate can be issued.

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3. Appointing a building inspector 

The developer sources a building inspector through the Strata panels. The building inspector must be independent of the developer. The developer can be penalised for failing to disclose any connection with the building inspector. Likewise, the building inspector can be penalised for failing to disclose any connection with the developer.  

The developer must notify Fair Trading and the owners corporation of the proposed appointment of the building inspector. The owners corporation then accepts or rejects the building inspector being appointed.

Fair Trading can intervene to appoint an independent building inspector if:

  • the developer fails to organise for one to be appointed
  • the owners corporation rejects the building inspector that the developer seeks to appoint.

The building inspector then arranges a date with the owners corporation to inspect the strata property.

At all stages where a building inspector is used in the process, the developer pays for their work.

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4. Interim inspection and report  

The building inspector conducts their first inspection of the strata property and completes a report of their findings. This happens between 15 and 18 months after the building work has been completed.

The owners corporation, developer, builder responsible for any defective work and Fair Trading receive copies of the report.

If no defects are identified, the bond may be released to the developer.

If there are defects, the developer/builder responsible for the defective work must organise for them to be fixed. They must also organise the building inspector to conduct a final inspection.

If the original building inspector is unavailable, the developer must advise the Secretary of that fact, or make an application to the Secretary to appoint a building inspector. The Secretary then notifies the owners corporation and developer of the appointment.

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5. Final inspection and report 

The building inspector arranges with the owners corporation to conduct a final inspection of the property. This happens between 21 and 24 months after the building work has been completed.

The building inspector provides a final report to the developer, the owners corporation, builder responsible for any defective work and Fair Trading. This report will assess whether the defects identified in the interim report have been fixed.

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6. Release of bond 

If there are no defects, the bond is released in full to the developer.

If there are defects:

  • the owners corporation can claim the bond money in full or in part, or
  • the developer can agree to release part or all of the bond money to the owners corporation.

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7. Completing the process 

Fair Trading facilitates the release of the bond money. The owners corporation must use any money they receive to fix the defects identified. After the defects are fixed, any money left over must be returned to the developer.

There is an alternative review process if the owners corporation or developer disagrees with how much bond money, if any, is returned to the developer or paid to the owners corporation.

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Further information 

More details about how the building bond reforms will work in practice will be available before the new requirements commence.

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