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2% Building Bond Scheme – It’s Coming Are You Prepared?

2% Building Bond Scheme – It’s Coming Are You Prepared?

Published on October 24, 2016

Headline Message

Construction Industry participants, especially builders and developers should be prepared for the impact of the 2% Building Bond Scheme which is effective from 1 July 2017.

The scheme is a consumer protection mechanism targeted at identifying building defects in strata buildings within the 2 year statutory warranty period and providing funding for rectification of building defects, where it is not mandatory to have Home Owners Warranty insurance in place.

Building Industry participants should take steps before 1 July 2017 to ensure projects are compliant with the 2% Building Bond Scheme.

6 Point Action Item Strategy

  • Developers should have in place facilities to obtain bonds for 2% of building works costs. Builders should be prepared for Developers to request provision of sufficient security until a 2% building bond matures. 
  • Bonds should be able to be claimed during the 2 to 3 year period from the date of the occupation certificate.
  • A cost report from an independent quantity surveyor must be obtained to set the contract price used to calculate the 2% building bond where projects have no written contract, or the builder and developer are related parties.
  • Developers may give consideration to ensuring building contracts contain an adequate defect liability period and that builders provide sufficient security to offset the 2% building bond.
  • Developers may also give consideration to passing the costs of the 2% building bond on to purchasers of completed strata buildings.
  • Developers need to carefully manage the time frames in the legislation for a building inspector to perform interim and final building inspections, and for notifications to be made to the Secretary of the Department of Finance, Services and Innovation (“the Secretary”).

Key Features To Note

  • The Building Bond Scheme will apply to
    • building works in the construction of new strata buildings where contracts are entered into on or after 1 July 2017; or
    • where there is no contract, building works in the construction of new strata buildings commenced on or after 1 July 2017.
  • The Building Bond Scheme only applies to the construction of new strata buildings that are exempt from requiring Home Owners Warranty insurance.
  • Independent building inspectors must be appointed by a Developer, with the prior approval by an owners corporation at a general resolution, where lots equating to 1/3 of the unit entitlements are sold within 12 months from completion (i.e. the Initial Period ends 12 months from completion).
  • If the Initial Period ends later than 12 months from completion the Secretary has the power to appoint a building inspector.
  • Whether appointed by the Developer or the Secretary, the Developer must meet the costs of the building inspector.
  • There are strict notification requirements for Developers to keep the Secretary informed in relation to the appointment of a building inspector, or where a building inspector can’t be appointed.
  • An Interim Report is to be prepared by the building inspector between 15 months to 18 months from completion.
  • The Developer and Builder will then have an opportunity to rectify defects identified in the Interim Report and can access the scheme upon giving 14 days written notice.
  • A Final Report is to be prepared by the building inspector between 21 months to 2 years from completion. That report will address defects identified in the Interim Report that haven’t been rectified, or any defects arising from rectification works.
  • The 2% building bond can be accessed to fund rectification of any building defects identified in the Final Report,
  • Fines which be imposed if various aspects of the building defects bond scheme are not complied and it is important for developers to be aware of their obligations to avoid the risk of prosecution which in addition to financial penalty can affect reputation and divert resources from revenue raising arms of a business.

Further Assistance

We can assist in providing strategic advice to you on the building bond scheme or assisting you with the mechanics of the scheme.  Should you require further information please do not hesitate to contact the writer.

Disclaimer: This article contains general advice only and does not constitute legal advice.  Readers’ own particular facts and circumstances may change the general advice in this article and it is recommended that readers obtain legal advice in relation to their own individual facts and circumstances.

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