On 27 September 2018, the NSW government enacted amendments in relation to residential strata schemes. In introducing the bill, Minister for Innovation and Better Regulation Matt Kean MP said: “Currently more than two million New South Wales residents are working as strata industry professionals or strata owners, or are living in strata-titled townhouses or units.”
The amendments are aimed at reducing defects arising from defective construction of residential strata schemes. The Amending Act is called the Strata Schemes Management Amendment (Building Defects Scheme) Act 2018. It makes changes to Part 11 of the Strata Schemes Management Act 2015 (the Act) and will take effect when the government announces so in the NSW Government Gazette. The Legislation Review Committee indicates this will happen ‘once the regulations are operational’.
Who is affected by this amendment?
Firstly, Part 11 only applies to contracts entered into on or after 1 January 2018.
Secondly, Part 11 only applies to ‘residential building work’ carried out on any part of a multi-unit dwelling strata scheme of at least four storeys.
Thirdly, Developers cannot contract out of these provisions.
At its core, Part 11 was intended to ‘streamline the identification and rectification of defects for the benefit of strata residents, builders and developers’. The Act contains the following provisions:
- A developer must arrange for an inspection report. This means they must appoint a qualified, impartial and independent person as a building inspector, generally within 12 months of completion of the building works;
- This building inspector must carry out an inspection of the building work and provide an interim report between 15 months and 18 months after the completion of the building work. This interim report must identify any defective building work and attempt to identify the causes of the defective work;
- Within 18 months of the completion of the building, the developer must then arrange for the same building inspector to provide a final report on the building work;
- The building inspector must carry out a final inspection and provide the final report to all parties between 21 months and 2 years after the completion of the building work. This report is to identify both defects not rectified, and defects arising from attempts to rectify defects. The report also must specify how defects should be rectified;
- All costs of inspection and reporting are borne by the developer;
- Before commencing a development, a developer must also lodge a building bond which is worth 2 percent of the total development contract price, it is to be given to the Secretary of the Department of Finance, Services and Innovation (the Secretary);
- The 2 percent bond will be used by the owners corporation of a building as security for funding to rectify any defects in the building that arise. It can be claimed up to 2 years after the date of completion of the building work, or within 60 days after the building inspector’s final report – whichever is later; and
- The Secretary, owners corporation or the developer can apply to the NSW Civil and Administrative Tribunal to have the contract price determined by the Tribunal..
Some of the decisions made by the Secretary are reviewable, but such an application for review must be made within 14 days after notice of the decision is given.
Developers of strata schemes need to be aware that there are now new requirements in relation to lodging a bond and providing information to authorities in relation to the contract price. Additionally, the Secretary has been given increased investigative powers in relation to the contract price, building bonds and building defects.
The amendments are as follows:
- The Amending Act now makes it mandatory, before an application can even be made for an occupation certificate, for the developer to give the 2 percent building bond to the Secretary. Failing to do this will attract a significantly increased penalty: originally $22,000, the maximum penalty is now $1.1 million and an additional $22,000 for each day the offence continues;
- There is also a new penalty where a developer provides the Secretary with false or misleading information about the contract price or amount required to be secured by the bond (maximum penalty: $1.1 million for corporations, $22,000 for any other case);
- A requirement that the developer and owners corporation agree on the amount required to rectify any building defects identified by the inspector. They may use a wide range of methods to determine the cost. If they cannot agree, the Secretary may appoint a quantity surveyor to determine this amount;
- The deadline for an owners corporation to claim the secured amount to rectify defects has been extended, from 60 days after the building inspector’s final report is issued to 90 days;
- The Secretary may consider it appropriate to release the developer from the bond, if the interim report does not identify any defects, or if some of the amount has been claimed and both the owners corporation and developers agree to cancel the remaining amount;
- Where the building bond given by a developer is insufficient to cover the amount required to be secured, the Secretary may recover the required amount in court as a debt from a developer. The owners corporation may then claim from the Secretary;
- The Amending Act grants new powers of investigation and enforcement of Part 11 to any officer authorised by the Secretary. These powers are for the purposes of investigation, monitoring and enforcing compliance with Part 11, and/or for obtaining information and records to be used in administering Part 11. For these purposes:
- An authorised officer may by notice in writing to a person require them to provide information or records;
- An authorised officer may require a person or the director of a corporation to answer their questions, if they suspect this person has knowledge about Part 11 matters;
- An authorised officer may enter premises at any reasonable time, with or without a search warrant, and do certain activities: make examinations and inquiries, direct a person to produce records, examine and inspect records, copy records, and seize anything suspected of being connected with an offence. Where the premises are predominantly residential, a warrant or the consent of the occupier is required for entry;
- An authorised officer may obtain a warrant to enter and search premises for evidence of contravention of Part 11;
- Penalties for refusing to comply with these requirements, or obstructing an authorised officer, gives rise to penalties up to $4400 for a corporation, or $2200 for any other case. This is unless reasonable excuse can be shown, such as client legal privilege or a privilege against self-incrimination; and
- A building inspector is protected from action, liability or claim where they act in good faith and for the purposes of their Part 11 functions. Professional associations will however have powers to impose conditions on the functions of building inspectors. A person authorised by the Secretary is also protected from liability, however the Crown may be sued.
The NSW government is taking a keen interest in the processes of identification and rectification of defective building works in strata schemes. It is also clamping down on attempts to circumvent the Act.
In this changing legal environment, it is essential that parties involved in constructing residential strata developments, including developers and owners corporations, understand these changes to their rights and obligations. For developers affected by these provisions, the first deadline to be met could be as soon as 1 January 2019 for the appointment of a building inspector.
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