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Off the Plan Purchases – When Things Go Wrong

Property Law

Since 1 January 2018, developers constructing high-rise residential or partial-residential strata properties (of four or more storeys) in NSW have been required to lodge a building bond with NSW Fair Trading equal to 2% of the building contract price.  The aim of the building bond is to encourage high quality development of strata properties and to provide purchasers with greater security against building defects.

How does it work?

Developers are now required to arrange for the building work to be inspected by a qualified building inspector (prescribed by the Regulations) approved by the owners corporation.

The inspector is required to provide an interim inspection report, identifying any defective building work between 15 and 18 months after the Occupation Certificate (OC) is issued. The developer must then rectify any defects identified in the report between 18 and 21 months after the OC is issued. A final inspection report is then prepared by the inspector (between 21 and 24 months after the OC is issued) to ensure any defects raised in the interim report have been rectified. No new defects can be raised by the inspector, which were not identified in the interim report.

Where defects are identified in the final inspection report, the owners corporation can claim all or part of the bond to pay for the rectification works. However, both parties must be in agreement as to the amount to be released. If the parties cannot agree on the amount to be paid, the Building Bond Secretary will appoint a suitable person to determine the amount.

Moving forward

At a time where many people are opting for ‘high-rise living’, the new regime encourages developers to rectify defects quickly and efficiently (to avoid forfeiting all or part of their bond) and provides purchasers with some peace of mind that funds are secured in the event of building defects.

Developers

For developers however, the new regime will result in a large amount of money being unavailable for long periods of time, pending the above process. Developers will have to consider the costs of paying the bond, building inspection reports, the potential risk of losing the bond if the owners corporation were to make a claim, legal costs and its effect on cash flow.

Owners

Whilst the bond provides some security in relation to building defects, there are risks that even a 2% bond may be insufficient to cover the costs of rectifying seriously defective building work as seen in the Opal Tower situation. In these circumstances an option open to the owners corporation is to explore potential litigation.

Atkinson Vinden has a significant property practice assisting a range of parties including developers, builders, and purchasers. We can assist with advice and representation in relation to any disputes over building defects.