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NSW residential development update: Raft of new legislative requirements for the construction industry in NSW

10 August 2020
June and July 2020 brought a raft of new legislative requirements for the construction industry in NSW. Defect bond penalties increased, and new requirements were imposed to obtain an occupation certificate. 

The residential development market in NSW has received a lot of legislative attention recently with some significant implications for industry participants to consider. The key legislative updates include: 

  • Defect bond scheme - The Strata Schemes Management Amendment (Building Defects Scheme) Act 2018 (NSW) ("Amending Act") and the Strata Schemes Management Amendment (Building Defects Scheme) Regulation 2020 (NSW) ("Amending Regulation") commenced on 1 July 2020. The amendments increase the requirements for providing the bond, the duration of the bond and significantly increase the penalties for non-compliance;
  • Enhanced compliance and enforcement - The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) ("Residential Apartment Buildings Act") will come into force from 1 September 2020. The legislation introduces new requirements for developers to obtain an occupation certificate, and enhances the powers of the Secretary of the NSW Department of Customer Service ("Secretary") to investigate and enforce compliance; and
  • Duty of care for residential construction work - The Design and Building Practitioners Act 2020 (NSW) ("Practitioners Act") commenced on 11 June 2020, introducing a duty of care for persons who carry out construction work to exercise reasonable care to avoid economic loss caused by defects to current and subsequent owners. The duty of care is non-delegable, cannot be contracted out of and applies retrospectively – see our update in relation to this here. 

What is the Defect Bond Scheme?

Under the Strata Schemes Management Act 2015 (NSW) (as amended by the Amending Act and Amending Regulation), the defect bond scheme commenced on 1 January 2018 and requires developers of certain residential and mixed-use building projects (which are over three storeys in height) to lodge a bond of 2% of the contract price with NSW Fair Trading ("Defect Bond Scheme"). The intention is to ensure there are funds available to address defective work identified in a final inspection report. The developer must lodge the bond in order to receive an occupation certificate. The scheme generally applies for projects where home warranty insurance is not required.

Key updates to the Defect Bond Scheme - Effective 1 July 2020

  • Contract price - The definition of 'contract price' for the purpose of calculating the amount of the bond (2% of the contract price) has been broadened to encapsulate the “total price paid or payable under all the applicable contracts for the building work regardless of when the amounts become payable”. Previously, the position had been that it was the total price paid "under all the applicable contracts for the building work as at the date of issue of the occupation certificate".
  • Occupation certificate - Developers must now lodge the bond prior to applying for an occupation certificate. Previously, the bond was to be lodged before the occupation certificate was issued.
  • Duration of the bond extended - The length of time the bond must be in place for has been extended by six months to at least 30 months after the date of the occupation certificate. Previously the requirement was 24 months.
  • Claim period extended - The Secretary may make a claim on the bond within the later of two years after the completion of the building work for which the bond is given, or 90 days (previously 60 days) after the building inspector's final report is given to the Secretary.
  • Increased penalties - $1.1 million - The maximum penalty for a developer failing to lodge the bond has increased significantly to 10,000 penalty units (currently $1.1 million), with an ongoing penalty of 200 penalty units (currently $22,000) for each day the offence continues. This is a substantial increase from the previous maximum penalty of 200 penalty units (currently $22,000).

Noteworthy elements of the Residential Apartment Buildings Act

The Residential Apartment Buildings Act will come into force from 1 September 2020, introducing new requirements for developers to obtain an occupation certificate and providing for greater powers to investigate and enforce. The new legislation also integrates with the regulated design elements of the Practitioners Act due to commence on 1 July 2021. 

Key elements of the Act for consideration
Occupation certificates - Developers are required to provide a notice of expected completion of building work for residential apartment buildings to the Secretary at least six months (but no later than 12 months) before applying for an occupation certificate.

It will be an offence under the Residential Apartment Buildings Act if the developer fails to provide the notice of expected completion or an update (where circumstances have changed). Developers risk a maximum penalty of 1,000 penalty units (currently $110,000) for failure to give the notice, and 500 penalty units (currently $55,000) for failure to provide an update.

  • A 'serious defect' under the Act, in relation to a building, means a defect in a building element that is attributable to a failure to comply with relevant performance requirements of the Building Code of Australia ("BCA"), Australian Standards or the relevant approved plans; 
  • A 'building element' has the meaning given to it in the Practitioners Act which includes:
    • fire safety systems;
    • waterproofing;
    • an internal or external load-bearing component of a building that is essential to the stability of the building or a part of it;
    • a component of a building that is a part of the building enclosure; and
    • those aspects of the mechanical, plumbing and electrical services that are required to achieve BCA compliance.
Powers of the Secretary - New powers of the Secretary introduced under the new law include:

  • Prohibition order - Issuing a 'prohibition order' to prohibit an occupation certificate being issued, or strata plan being registered. This may occur where a notice of expected completion (or a completion amendment notice) has not been provided, a serious defect exists in the building or a building bond required under the Defect Bond Scheme has not been given to the Secretary;
  • Stop-work order - Issuing a developer with a 'stop-work order' if the Secretary is of the opinion that the building work is, or is likely to be, carried out in a manner that could result in significant harm or loss to the public or occupiers or potential occupiers of the building to which the work relates, or significant damage to property; and      
  • Building work rectification order - Issuing a 'building work rectification order' to a developer if the Secretary has a reasonable belief that building work was or is being carried out in a manner that could result in a serious defect to a residential apartment building.

Action by you

Developers, builders and designers in particular should ensure they understand the impact of the above legislative updates and seek advice on improvements to their building contracts to manage their compliance more effectively. 

If you require further information or have any queries in relation to this legal update, please contact Alex McLeod or Brent Henderson.

Further Reading