The Impact of the New South Wales Building Defect Funds on Strata Developments

A range of reforms to strata laws were recently introduced in New South Wales, designed to simplify some of the previous processes and make things fairer for everyone. Key changes introduced in the reforms include:

• Measures to make strata managers more accountable
• Approval for the greater use of modern technology by owners to conduct meetings, vote and communicate
• A new process for the collective sale and renewal of strata schemes
• A more straightforward dispute resolution process
• An allowance for greater tenant participation in meetings
• A new three-tier renovations process, which does away with the need for approval for cosmetic renovations.

Another reform that was introduced and which is the main focus of this article, is the introduction of a building bond and mandatory defect inspection reports.

The NSW Building Defect Fund

This new reform applies to building work on residential and partially-residential strata properties more than three storeys high, which are not covered by the Home Building Compensation Fund.

The HBCF fund currently protects residential home buyers by requiring builders to take out insurance on any building work they carry out which is valued at over $20,000.

The new reform now also requires builders of high rise strata properties to guarantee their work. They must lodge a bond with the NSW Department of Fair Trading equal to 2% of the contract price for building the strata property. This money will be held by Fair Trading until a final inspection of the building work is carried out, and will be used to rectify any defective work that is identified.

If defects are found, the builder responsible for the work must pay for them to be fixed. They must also organise and pay for a building inspector to conduct a final inspection to confirm that the defects have been rectified.

If the builder fails to do this within a specified time frame, the owners of the strata property can put in a claim for the bond and use it to pay for the cost of rectifying the defects themselves. If no defects are found or the builder pays for them to be fixed, the bond money is then returned to the builder after the final inspection.

Current warranties

The new reforms in NSW will help to strengthen the current warranties that exist by clarifying the difference between a general and major defect. A general defect is one which does not pose a structural threat to the building or have the potential to render it uninhabitable, and such non-major defects are covered by a two year warranty.

A major defect is defined as a defect in a major element of the building (i.e. foundations, walls, roof) which would be likely to cause the collapse of the building or render it uninhabitable or unable to be used for its intended purpose. This is covered by a much longer six year warranty.

The problem is that some of the most common defects in strata properties are in fire safety systems and waterproofing elements, which have the potential to make a building unsafe or uninhabitable. But until the reforms, these were treated as general defects, leaving strata owners exposed to additional costs to repair such defects, which generally emerged after the expiry of the shorter two year warranty period.

Since the reforms were introduced however, fire safety systems and waterproofing have been included for the first time as elements of a building that could have major defects, and should therefore be covered by the extended six year warranty. Defective fire safety systems and waterproofing will now be considered in their own right, based on their likely impact on the habitation or use of a building.

Call for reforms to be adopted in SA

Recent research by the University of New South Wales revealed that 72% of buildings had defects and a staggering 85% of newer buildings built since 2000. This reflects a widespread concern that defects are a significant and systemic issue in the strata sector and that there are insufficient obligations on builders to rectify shoddy workmanship.

Too often the costs of rectifying defects falls back on the owners, and it seems unfair that they should have to pick up the tab for the mistakes or incompetence of others.

Therefore, Strata Community Australia (SA), the peak body for the strata sector in South Australia, is recommending that South Australia adopt the same reforms introduced in NSW, requiring SA builders to also pay a defects bond of 2% of the contract price and fund independent building inspection reports of their work.

And as a member of SCA, Strata Data is right behind such a recommendation. At Strata Data, we believe this would go a long way towards reducing the number of defects in strata building works, would resolve disputes more quickly and cost-effectively, and would generally help to restore confidence in the quality of strata high-rise buildings. Click here to find out more about our strata management solutions.