Strata Schemes Management Amendment (Strata Bond) Regulation 2024 (NSW)
The increase to the strata building bond from 2% to 3% has been delayed for the fourth time. This article recaps what is a strata building bond, explains when it will not take force and why the delay has occurred.
Recap on what is a strata building bond
A strata building bond is a security paid by developers for residential strata buildings. Before applying for an occupation certificate, the developer must lodge the strata building bond with the NSW Fair Trading Secretary.
The strata building bond is normally released approximately 24 to 26 months after completion. If not, the strata building bond may be used to rectify those defects and the balance (if any) is released back to the developer.
The value of the strata building bond
As reported in our previous article, the Building Legislation Amendment Act 2023 (NSW) amended the Strata Schemes Management Regulation 2016 to increase the value of the strata building bond required to be lodged by a developer from 2% to 3% of the contract price for building work.
When the required strata building bond value increases
The increase was originally scheduled for 1 February 2024. However, it was subsequently delayed to 1 July 2024 and then to 2 November 2024.
The newly implemented Strata Schemes Management Amendment (Strata Bond) Regulation 2024 (NSW) delays the increase once again, this time to 1 July 2025.
Why the delay?
The NSW Government is pushing for the market to adopt the use of Decennial Liability Insurance (DLI) rather than the strata building bonds. DLI is insurance in favour of an Owners Corporation against serious defects of critical building elements, such as the building’s structure, fire safety systems and waterproofing, over a period of 10 years on a strict liability basis. It is intended as a direct option for Owners Corporations to pay for remedial works, rather than an insurance of last resort.
However, the market has not gotten on board with DLI just yet, as insurers are reluctant to offer DLI in the form the government seeks. And where DLI is available, it is prohibitively expensive.
Key Takeaway
Prudent developers will ensure that the amount of security withheld in their construction contracts with builders matches the value of the strata building bond it is required to lodge. We expect construction contracts to generally include 3% contract price retention for the defect liability period from 1 July 2025 onwards (assuming the increase is not delayed further).
The government will continue to push for change, but, as the DLI market develops, there is a period for developers and builders to prepare for anticipated changes.
If you would like to discuss this article with us, please contact Brett Vincent, Partner, or Jordan Russell, Foreign Lawyer, on (02) 9261 5900.