Greater protections for strata owners at the cost of developers.

On 11 December 2023, the Building Legislation Amendment Bill 2023 received assent, introducing changes to the building and construction industry, including to building bonds for strata properties. These changes aim to offer greater protections for strata owners.

Building Bonds to Increase

Under the Strata Schemes Management Act 2015, developers are required to pay a building bond before applying for an occupation certificate for apartment buildings. Strata owners can make a claim from this building bond to remedy significant building defects in the common property that are discovered in the first 18 months of occupation. 

Currently, a building bond is equivalent to 2% of the contract price. However, from 1 February 2024, building bonds will be increased to 3% of the contract price, increasing the pool of resources to rectify defects in a building. 

As an alternative to building bonds, decennial liability insurance was introduced in 2022. Decennial liability insurance provides greater protections to strata owners, as it is:

1. for a period of 10 years,
2. on a strict liability basis (no need to prove the fault), 
3. for an amount up to the full construction value, and
4. available even if the developer (or builder) is no longer trading.

It is expected that building bonds may be phased out over the next five years and decennial insurance will become mandatory.

What does this mean for owners?

This change means that strata owners have greater access to remedies for any serious defects that arise after they purchase a strata property.

In addition to remediation, the other changes to the building legislation aim to prevent defects, by:

1. increasing inspection powers during the building process, 
2. disqualifying contractors that are likely to become insolvent, 
3. suspending certifiers, engineers and other practitioners whose work is likely to cause harm, and 
4. expanding government investigative and enforcement powers to include class 1 buildings (houses).

These changes aim to restore confidence in the market for apartment buildings, by reducing the risk that purchasers will have to pay significant financial levies for major building repairs only a few years after a building is completed.

What does this mean for developers?

Developers will need to monitor the quality of their contractors’ work more closely, to avoid a stop work order or successful insurance claim. 

Developers will also need to consider whether to obtain a building bond or decennial liability insurance. Decennial liability insurance is still new to the market, with the first being issued earlier this year by Resilience Insurance. Remediation rights under a decennial liability insurance policy may be different to those for building bonds, so developers should also consider this when determining whether insurance is the preferred option.

If a building bond is preferred, this is best obtained before 1 February 2024 at the lower 2% rate. 

It is thought that decennial liability insurance is a better alternative to the building bond, but the cost-benefit analysis remains to be determined by developers. 

Should you require assistance with a new development or a claim for building defects, please reach out to our building and construction team.