Strata building bond and inspections scheme

The strata building bond and inspections scheme

The NSW Government introduced the Strata Building Bond and Inspections Scheme (the Scheme) as a way to rectify defective building work early in the life of new high-rise strata buildings.

The Scheme commenced on 1 January 2018 and applies to contracts executed from this date or where there is no written contract – building work commenced from this date.

The Scheme is designed to ensure there is a clear process to incentivise developers and builders to build well and work collaboratively with owners corporations to minimise building issues in new residential high-rise buildings and make sure any defective building work is readily identified so it can be fixed promptly and cost-effectively.

Developers are required to lodge a building bond with NSW Fair Trading for residential and mixed-use high-rise strata buildings of four storeys and over. Buildings that are three storeys or under may be covered under Home building compensation cover.

The amount secured by a building bond is to be two percent of the contract price for the building work. The purpose of the building bond is to secure funds (up to the amount of the bond) to pay for the costs of rectifying defective building work.

The Scheme consists of eight stages and the length of the Scheme is up to three years. The Scheme includes:

  1. Building bond lodgement - by the developer
  2. Building inspector appointment
  3. Interim inspection and report
  4. Rectification of identified defective building work
  5. Final inspection and report
  6. Determination of cost to rectify defective building work
  7. Payment of the building bond
  8. Completing the process

Who is affected?

Key participants involved in the Strata building bond and inspections scheme include:

  • Developer – of the strata scheme
  • Owners corporation (owners in a strata scheme)
  • Strata inspector panel (SIP) – made up of authorised professional associations in the Strata Schemes Management Regulation 2016 (the Regulation), through which a building inspector is a member
  • Building inspector - a member of a strata inspector panel
  • Builder (contracted by the developer, or is the developer) performing the building work

The following NSW government organisations regulate and administer or provide specialist tribunal processes (upon application), throughout key stages in the Scheme:

How will the Scheme be administered?

Strata building bond and inspections scheme portal

The Strata building bond and inspections scheme is administered by an online portal (the portal) and is used for stage one of the Scheme – Building bond lodgement.

Developers must register to use the portal to facilitate the building bond lodgement process required for stage one.

Details on how to use the portal are included in the developers page, as only the developer is required to use the portal at this stage.

Email communication

The Strata building bond and inspections scheme is administered by electronic communications. All correspondence required for the Scheme will be via email.

Written notices suite

For stages 2 to 8 of the Scheme, the Secretary will provide a package of all written notices required under legislation to key participants after the building bond has been approved by the Secretary.

The written notices suite may be prepopulated for key participants, using the information provided by the developer in the portal. These written notices can be used by the key participants to complete their obligations under the Scheme.

The Scheme stages

The following is a general overview of the Scheme stages. For key participant specific details, please refer to the specific key participant information (from the menu on the right side).

Important: The guideline below has been simplified and for full obligations and mandatory requirements, reference should be made to legislation and Secretary’s guidelines.

We have created a diagram (PDF, 51.64 KB) to help you understand each step in the process below.

1. Building bond lodgement

The developer (not the builder) is responsible for the lodgement of the building bond with the Secretary, before any occupation certificate is issued for occupancy in the strata scheme.

The time it takes for the developer to obtain the building bond from an approved issuer may vary and preparation should commence as early as possible.

The building bond may be a bank guarantee or ‘bond’ from an approved issuer.

The amount to be secured by a building bond is to be 2% of the contract price for building work. It is the total price paid under all applicable contracts for the building work as at a time just before the Developer makes application for any occupation certificate (OC) which allows people to occupy the building – whether conditional or interim OC. For example, at practical completion not the contract price before or at the start of construction - to include all variations, additions and price fluctuations etc.

A copy of the building bond must be lodged in the portal and the original building bond is to be lodged with and approved by the Secretary before the occupation certificate is issued for the strata scheme. Any occupation certificate (OC) which allows people to occupy the building – whether conditional or interim OC must not be issued before the building bond has been approved by the Secretary.

A penalty may apply if a developer does not lodge the building bond and receive approval from the Secretary before the issue of the occupation certificate for the strata scheme.

The building bond must comply with the Secretary’s guideline.

2. Inspector appointment

The building inspector must be a member of a strata inspector panel (SIP) which is provided by an authorised professional association.

Strata inspector panels

Inclusion on a SIP means that these associations have determined that the building inspector is suitable to carry out building inspections and produce reports for the Scheme.

The building inspector and developer must be independent of each other. Failure to disclose a connected person relationship may result in penalties.

A strata inspector panel (SIP) can only be provided by authorised professional associations as listed in clause 45 of the Strata Schemes Management Regulation 2016. A strata inspector panel (SIP) may be established by any of the following:

(a)  the Housing Industry Association

(b)  the Master Builders Association of New South Wales

(c)  the Australian Institute of Building

(d)  the Australian Institute of Building Surveyors

(e)  the Australian Institute of Building Consultants

(f)  the Institute of Building Consultants Inc

(g)  Engineers Australia

(h)  the Australian Institute of Architects

(i)  the Association of Accredited Certifiers.

Each of these associations will have their own processes and criteria to determine if a person is competent to perform building inspections and produce reports for the purposes of the Scheme. Specific information should be obtained directly from the above professional associations.

Each SIP will have a register of members who are qualified to be building inspectors for the purposes of the Strata building bond and inspections scheme. This register will be available on each association’s website and contain the details and experience of each building inspector, including their contact details.

To access the webpages of the authorised professional associations above, please use the links in the above list.

The first inspection: interim inspection

Within 12 months of the issue of any occupation certificate (OC) which allows people to occupy the building – whether conditional or interim OC, the developer must appoint a building inspector to carry out the interim inspection.

To appoint the building inspector, the developer must have the approval of the owners corporation. If the owners corporation does not approve the developer's proposed building inspector or the developer fails to organise one within the 12 month period, the Secretary will arrange the appointment of the building inspector.

If the Secretary arranges the appointment of the building inspector, the approval of the owners corporation is not required. The developer must also pay an additional fee to the Secretary for arranging this appointment.

The developer must pay for all building inspector costs, such as the costs of obtaining an inspection and report, even when the inspector is appointed by the Secretary. This includes the Secretary’s service fee to appoint the building inspector.

The second inspection: final inspection

The developer must, not later than 18 months after the issue of any occupation certificate (OC) which allows people to occupy the building – whether conditional or interim OC, arrange for the building inspector who prepared the interim report on the building to carry out the final inspection and provide the final report. This arrangement is required later in the process and is explained at stage 5 below.

The Secretary has published two guideline documents regarding the appointment of building inspectors.

View the guidelines for developers and owners corporation (DOCX, 306.07 KB) or the guideline for the Secretary’s process (DOCX, 328.1 KB).

3. Interim inspection and report

The interim inspection is conducted between 15 and 18 months after the issue of the occupation certificate. The interim inspection is carried out to identify any defective building work in the strata scheme.

The building inspector will arrange with the owners corporation a suitable time to carry out their first inspection of the strata scheme, known as the interim inspection. The building inspector is required to give the owners corporation and any owner and occupier of any affected lot, 14 days written notice of their intention to enter any part of the parcel of the strata scheme.

The owners corporation, any person who has exclusive use of common property, a strata managing agent, building manager or manager of the common property, and any owner or occupier of a lot are required to provide reasonable access and assistance and to not hinder or obstruct a building inspector.

Interim report

The building inspector will complete a report, known as the interim report, between 15 and 18 months after the occupation certificate is issued.

The interim report records the identified defective building work (if any), and if reasonably practicable, identify the cause of that defective building work.

The building inspector must produce the interim report in the form approved by the Secretary.

The Secretary has published a guideline and a combined interim and final inspection report of the building inspector.

View the Combined interim and final inspection report of the building inspector guideline

The building inspector must give a copy of the interim report to the Secretary, owners corporation, developer and builder (responsible for defective building work identified in the report) no more than 14 days after completing the report and before 18 months after the issue of the occupation certificate.

If there is no defective building work identified in the interim report, the developer can apply to the Secretary that a final report is not required. If the application is approved by the Secretary, the interim report becomes the final report. The bond can then be released to the issuer of the building bond (lodged by the developer) - two years after the date of building work completion (not at 18 months when the interim report is provided by the building inspector).

If defective building work was identified in the interim report, the developer should arrange with the builder responsible for the defective building work to rectify it before the final inspection is carried out – see stage 4 below.

4. Rectify defective building work

If defective building work is identified in the interim report, rectification is required before the final inspection. This period is likely to be between 18 months and 21 months after the completion of the building work.  If there was no defective building work identified in the interim report, rectification work may not be required.

Rectification of defective building work may occur at any time after the completion of the building. However, if the interim report has identified defective building work, rectification of building work is required before the final inspection.

The developer is responsible for arranging with their builder, the rectification of any defective building work recorded in the interim report of the building inspector.

If the original builder is not available, the developer is required to arrange for another builder to do the rectification work.

The builder is required to give the owners corporation, the owner and any occupier of any affected lots, 14 days’ notice of their intention to enter the lot or any part of the parcel of the strata scheme, for or in connection with rectifying the defective building work.

After providing proper notice, the builder can enter the lot only at a time that is reasonable, or at a time agreed with the owner or occupier of the lot. A person cannot unreasonably refuse a builder access to any part of the strata scheme if the builder has given proper notice.

5. Final inspection and report

The final inspection and report stage covers two points in time after the issue of any occupation certificate (OC) which allows people to occupy the building – whether conditional or interim OC:

  1. within 18 months – appointment of the building inspector, and
  2. between 21 and 24 months – carrying out of the inspection and production of the report.

  1. Within 18 months after the issue of the occupation certificate

    Appointing the building inspector: final inspection

    Within 18 months of the issue of the occupation certificate, the developer will arrange for the same building inspector who prepared the interim report to carry out the final inspection and provide the final report.

    If the original building inspector is not available, the developer needs to notify the Secretary, who will arrange for a new building inspector to conduct the final inspection and report.

    If the Secretary arranges the appointment of the building inspector, the approval of the owners corporation is not required.

    The developer must pay for all building inspector costs, such as the costs of obtaining an inspection and report, even when the inspector is appointed by the Secretary. This includes the Secretary’s service fee to appoint the building inspector.

  2. Between 21 and 24 monthsafter the issue of the occupation certificate

Final inspection

This inspection is to inspect whether the defective building work identified in the interim report has been rectified.

The building inspector will arrange with the owners corporation a suitable time to carry out the final inspection of the strata scheme. The building inspector is required to give the owners corporation, the owners and any occupiers of any affected lot, 14 days written notice of their intention to enter any part of the parcel of the strata scheme.

The owners corporation, any person who has exclusive use of common property, a strata managing agent, building manager or manager of the common property, and any owner or occupier of a lot, are required to provide reasonable access and assistance and to not hinder or obstruct a building inspector.

The final report

The final report will record:

  • any defective building work identified in the interim report that has not been rectified
  • identify any defective building work arising from the rectification of defective building work previously identified in the interim report, and
  • specify how the defective building work identified in the report should be rectified.

The final report must not contain matters that relate to defective building work not identified in the interim report.

The building inspector must produce the final report in the form approved by the Secretary.

The Secretary has published a guideline and a combined interim and final report of the building inspector.

View the Combined interim and final inspection report of the building inspector guideline.

The building inspector must give a copy of the final report to the Secretary, developer, owners corporation and builder (responsible for defective building work identified in the report) no more than 14 days after completing the report and before 24 months after the issue of the occupation certificate.

If there is no defective building work identified in the final report, the bond is released in full to the issuer of the building bond (as lodged by the developer). See stage 7 below - Paying the building bond.

If defective building work is identified in the final report, the cost to rectify that building work must be determined. See stage 6 below – Determining the cost to rectify defective building work.

6. Determining the cost to rectify defective building work

After the final inspection, if defective building work has been identified in the final report, the cost to rectify defective building work must be determined.

Determining the cost to rectify defective building work:

Two-step process:

Step 1: The developer and owners corporation are required to make an agreement regarding the cost to rectify defective building work. The result needs to be provided to the Secretary within 30 days after the final inspection report has been distributed by the building inspector.

Agreement reached by both parties:

  • both parties reach an agreement on the cost to rectify the identified defective building work, and
  • each party provides the deed of agreement and makes application to the Secretary to release the agreed amount from the bond.

The whole or part of the amount secured by the building bond is realised and claimed. See stage 7 below - Paying the building bond.

If the Secretary does not receive the deed of agreement within 30 days after the final report has been distributed by the building inspector, the Secretary will arrange an appropriately qualified person to determine the cost – step 2 below.

Agreement not reached by both parties:

Step 2: The Secretary will arrange for an appropriately qualified person to determine the cost to rectify the defective building work.

If the parties do not agree on the cost to rectify the defective building work, the Secretary will arrange for an appropriately qualified person to determine the cost to rectify the defective building work.

The Secretary has published a guideline regarding the determination of the cost to rectify defective building work by appropriately qualified persons.

View the Determination of the cost to rectify defective building work by appropriately qualified persons guideline

The summarised process is:

  • the Secretary will arrange for an appropriately qualified person to determine the cost to rectify the defective building work identified in the final report, for example a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors or the Royal Institution of Chartered Surveyors, and
  • the developer and the owners corporation will equally share the cost of the appointment of this person, and
  • the appropriately qualified person will provide their determination in their report.

The building bond is then realised and claimed based on the amount determined by the appropriately qualified person. See stage 7 below - Paying the building bond.

7. Paying the building bond

The whole or part of the amount secured by the building bond may be claimed or realised by the Secretary between two and three years after the date of completion of the building work.

If the cost to rectify the defective building work is less than the amount secured by the building bond, that amount is paid to the owners corporation. If the cost to rectify the defective building work is more than the amount secured by the building bond, the whole amount of the building bond is paid to the owners corporation.

The developer must take any necessary steps to enable the Secretary to claim or realise an amount of building bond given by the developer and required to be paid.

The Secretary may refuse to claim or realise an amount, or reduce the amount otherwise payable if the Secretary is satisfied that the developer or builder responsible for defective building work was unreasonably refused access to the strata parcel for the purposes of rectifying that work.

The Secretary will provide the owners corporation, the developer and the builder 14 days written notice of any proposed payment from the building bond.

The payment of a building bond may be triggered by the following events:

Consent

The whole or part of the amount secured by a building bond may be claimed or realised by the Secretary for payment to the owners corporation, with the consent of the developer, on application to the Secretary by both the owners corporation and the developer, at any time in the process, but no earlier than two years after the date of completion of building work and before three years.

Interim report – no identified defective building work

A building bond must be claimed or realised, two years after the date of completion of building work or within 60 days after the final report on the building work is given to the Secretary by the building inspector, whichever is the later.

In this instance, if the developer is not required to arrange for the final report, the interim report becomes the final report.

For example, if the interim report becomes the final report 18 months after the completion of the building work, the building bond may be claimed or realised at the earliest two years after the date of completion of building work for which the building bond was given. The building bond will not be paid at 18 months and 60 days of the date of completion of the building work because two years is the later. The whole amount secured by the building bond will be returned to the Approved issuer.

Final report – no identified defective building work (rectified)

A building bond must be claimed or realised, within 60 days after the final report on the building work is given to the Secretary by the building inspector. The whole amount secured by the building bond will be returned to the Approved issuer.

Final report – identified defective building work (not rectified)

A building bond must be claimed or realised, within 60 days after the final report on the building work is given to the Secretary by the building inspector.

Stage 6 requires the determination of the cost to rectify defective building work. When agreement is reached (step one), the Secretary will claim/realise the building bond after providing requisite notice.

If agreement is not reached, (step two), once the Secretary receives the report from the appropriately qualified person, the Secretary will claim/realise the building bond after providing requisite notice.

8. Completing the process

The process should complete no more than three years after the date of the occupation certificate for the building to which it applies.

Variation of time requests

The developer, owners corporation or building inspector, may have made application to the Secretary to vary the times for reports and other matters. This may result in the length of the Scheme being extended.

Reviewable decisions

Certain decisions of the Secretary are reviewable decisions. This may result in the length of the Scheme being extended.

Tribunal orders (NCAT)

A developer, the Secretary or the owners corporation can apply to the NSW Civil and Administrative Tribunal for an order specifying the contract price for building work to determine the amount to be secured by a building bond. This may result in the amount of the building bond, provided by the developer, being varied.

Feedback

During any stage or at the completion of the Scheme, the contact person for each participant in the Scheme may provide feedback to stratabond@customerservice.nsw.gov.au.

Closing the process

Once the administration of the Scheme is complete, the information and documents relating the building bond will be stored in accordance with NSW Government record keeping policy.

Owners corporation obligations

The owners corporation must within a reasonable time, use any money they receive from the building bond to:

  • fix the defective building work identified in the final report of the building inspector, this includes the common property or any other part of the parcel, or
  • for costs related to the rectification.

After the defective building work is fixed, the owners corporation must repay to the developer any amount of a building bond that is not required. The owners corporation must give the developer written notice of the completion of the rectification of the defective building work.

Penalties may apply for failure to comply with this requirement.

This does not prevent the owners corporation from retaining any part of a building bond and using it for any purposes, with the consent of the developer.

Key terms

The definitions of these identified terms, are included in the Strata Schemes Management Act, Strata Schemes Management Regulation or other Act or Regulation as referred. Legislation and Regulation are updated from time to time and it is the user’s responsibility to refer to the current version at the applicable point in time.

The content below is general in nature and should not be relied upon.

Approved issuer

The building bond must be issued from an authorised deposit-taking institution or a general insurer authorised to conduct new or renewal insurance business, who are regulated by the Australian Prudential Regulation Authority (APRA).

The issuing authority must be listed on the:

* Register of authorised deposit-taking institutions, or

* Register of general insurance (authorised to conduct new or renewal insurance business), which is maintained by APRA.

Building bond

The developer (not the builder) of a strata scheme must give the Secretary a security - a building bond. The amount secured by a building bond is to be 2% of the contract price for the building work.

The building bond may be either a bank guarantee or ‘bond’ issued by an approved issuer and must contain the unique identifier number issued by the portal.

The building bond must be lodged before any occupation certificate (OC) is issued to allow occupation (including conditional and interim OC) for any part of a building affected by the work. A penalty may apply if a developer does not lodge the building bond with the Secretary and receive approval, before the occupation certificate is issued.

The building bond must comply with the Secretary’s guideline.

See sections 207 and 208 of the Strata Schemes Management Act 2015

Contract price

Section 189 of the Strata Schemes Management Act 2015; Part 8 of the Strata Schemes Management Regulation 2016

Generally:

The contract price for building work is the total price paid under all applicable contracts for the building work at the date just prior to the issue of any occupation certificate (not the contract price before construction commences). The amount secured by the building bond is calculated at this time (not at the start of the build) to include all variations, additions and price fluctuations etc.

All work that is conducted in relation to the contract will determine the bond amount. This includes, but is not limited to:

  • construction and fit out costs (not including appliance and prime cost items)
  • demolition and site preparation
  • excavation
  • car parking
  • costs for the common property that is included in the property plan, including landscaping, pools, fencing and gates
  • professional fees, and
  • taxes applied in the calculation of the as-built construction.

Cost report

When there is no written contract for the building work (for example where the developer is also the builder), or the parties to the building contract are connected, the contract price is the price set out in a cost report prepared by a quantity surveyor. The quantity surveyor must be a member of the Australian Institute of Quantity Surveyors or the Royal Institution of Chartered Surveyors and must not be connected to the developer or the builder.

A cost report prepared by a quantity surveyor must include:

  • all work that is conducted in relation to the contract, as list above under Contract price, and
  • a certificate by the quantity surveyor that they have inspected the as-built drawings and specifications for the strata plan.

NCAT determination of contract price

The NSW Civil and Administrative Tribunal (on application) may make an order specifying the amount of the contract price of building work - to determine the amount of a building bond.

For further details on the NSW Civil and Administrative Tribunal, refer to ‘Tribunal orders – contract price and access to a strata scheme’, under ‘Key terms’ below.

Building work

Sections 189 and 191 of the Strata Schemes Management Act 2015

Connected person

Sections 7, 195, and 197of the Strata Schemes Management Act 2015

Defective building work

Section 189 of the Strata Schemes Management Act 2015

Developer

Section 189 of the Strata Schemes Management Act 2015

Final report

Section 189 of the Strata Schemes Management Act 2015

Interim report

Section 189 of the Strata Schemes Management Act 2015

Occupation certificate (OC)

See sections 6.4 and 6.9 of the Environmental Planning and Assessment Act 1979.

For the purposes of the Strata building bond and inspections scheme, ‘the’ or ‘any’ occupation certificate issued for the strata scheme refers to the first occupation certificate (OC) issued which allows people to occupy the building – whether conditional or interim OC.

Also, refer to section 3C of the Home Building Act 1989.

Owners corporation

Owners corporation means an owners corporation constituted under section 8 of the Strata Schemes Management Act 2015 for a strata scheme.

Residential building work

Residential building work has the same meaning as it has in the Home Building Act 1989.

Secretary

Section 4 of the Strata Schemes Management Act 2015, defines the Secretary as:

  • the Commissioner for Fair Trading, Department of Finance, Services and Innovation, or
  • if there is no person employed as Commissioner for Fair Trading—the Secretary of the Department of Finance, Services and Innovation.

Strata inspector panel (SIP)

A building inspector must be a member of a strata inspector panel. A strata inspector panel can only be provided by an authorised professional association, as listed in the Strata Schemes Management Regulation 2016.

A strata inspector panel may be established by any of the following:

(a) Housing Industry Association

(b) Master Builders Association of New South Wales

(c) Australian Institute of Building

(d) Australian Institute of Building Surveyors

(e) Australian Institute of Building Consultants

(f) Institute of Building Consultants Inc

(g) Engineers Australia

(h) Australian Institute of Architects

(i) Association of Accredited Certifiers

Each of these associations will have their own processes and criteria to determine if a person is competent to perform building inspections and produce reports for the purposes of the scheme.

Inclusion on a panel qualifies the person to be a building inspector.

Applications for review of a decision

An application for review of the Secretary’s decision must be made within 14 days after notice of the decision has been given.

A developer, owners corporation or owner of a lot of a strata scheme to which a reviewable decision is related and a builder who carried out building work or who is responsible for defective building work, to which a reviewable decision relates, can apply to the Secretary for a review of a reviewable decision.

The following decisions of the Secretary are reviewable decisions:

  • a decision to appoint a building inspector to carry out a final report under section 200 of the Act
  • a determination by the Secretary under section 200 of the Act that a developer is not required to arrange for a final report
  • a decision under section 212 of the Act to vary the period within which an interim report or final report is to be provided, or other action is to be done, under Part 11 of the Act
  • a decision that the whole or part of a building bond may be claimed or realised for payment to an owners corporation, developer or other person.
  • This decision by the Secretary is not reviewable if the amount has already been paid in accordance with the Secretary’s decision.
  • If an application to review a decision to pay the whole or part of an amount secured by a building bond is made in accordance with the application process, the amount is not to be paid until the application for the review is determined or withdrawn.

The application must be lodged through the stratabond@finance.nsw.gov.au email box, be in writing and signed by the applicant. It must specify the decision to be reviewed and the reasons for the application. Applicants should provide any extra information and the reason why that information was not previously provided, and an email address where that decision will be sent.

See section 213 of the Strata Schemes Management Act 2015 and clause 56 of the Strata Schemes Management Regulation 2016.

Tribunal orders - contract price and access to a strata scheme

Access

The NSW Civil and Administrative Tribunal (on application) may make an order requiring the occupier of a lot in a strata scheme or any other person to allow access to the lot or any other part of the parcel for the purpose of or in connection with an inspection or rectifying defective building work.

An application may be made to the Tribunal for an order by an owners corporation, the developer, a building inspector or a person entitled to enter any part of a parcel of a strata scheme to perform an inspection or rectify defective building work (such as a builder).

Contract price

The NSW Civil and Administrative Tribunal (on application) may make an order specifying the amount of the contract price of building work - to determine the amount of a building bond. If there are other incidental proceedings being dealt with by a Court, then the application must be made by the Supreme Court of NSW.

An application may be made to the Tribunal for an order, by an owners corporation, the developer, or the Secretary. A determination under this section of the amount of the contract price of building work does not bind a court or tribunal in any other proceedings.

See section 211 of the Strata Schemes Management Act 2015.

Written notice

A written notice includes email notifications.

The Strata building bond and inspections scheme communications is administered by electronic transmissions.

Written notices for the Scheme are available in soft copy and will be provided by the Secretary to the key participants.

The written notices may be prepopulated from the information provided by the developer when the building bond is lodged in the portal. Key participants can use these prepopulated written notices to complete their required actions under legislation.

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