Increase to the Defects Bond For New Apartments

The strata building bond and inspection scheme.

The strata building bond & inspections scheme (SBBIS) was introduced in 2018 to secure funds from the developer that can be used to rectify defects on new apartment buildings four storeys or higher.

This building bond may be used to fix defects identified during the SBBIS building inspections. If not needed, the bond is returned to the developer.

The whole process comprises eight stages and is managed across two online portals. The NSW Planning Portal is used for Stage 1 – Building bond lodgement. Once approved, the Strata bond case is moved to the Strata Hub for Stages 2 to 8.

A recent increase to the defect bond

The Building Legislation Amendment Act 2023 (BLA Act) passed through Parliament on November 21, 2023.

The legislation introduced various amendments impacting several regulatory frameworks within the construction industry, including the Strata Schemes Management Act 2015 (NSW) (SSMA).

A notable adjustment to the SSMA involves raising the building bond amount from 2% to 3% of the contract price for building work which will be applicable to building bonds issued on or after February 1, 2024.

Why has the bond been increased?

The elevation of the prescribed building bond amount aligns with the NSW Government’s objective to promote the adoption of decennial liability insurance (DLI) as a preferred alternative to traditional building bonds. DLI was introduced in November 2022 as a voluntary alternative option to the building bond scheme.

DLI functions as insurance in favour of an Owners Corporation, offering protection against severe structural defects in the strata scheme for a decade. This insurance, perceived as a superior alternative to the Strata Bond and more favourable for apartment owners. It is part of a bigger initiative to increase consumer confidence in the apartment market that has suffered a bad reputation due to building defects.

Section 211AA of the SSMA stipulates that a developer obtaining DLI is exempt from the obligation to secure a building bond.

Many industry experts believe however that the increase to the building bond is premature. The NSW Government’s Decennial Liability Insurance Ministerial Advisory Panel Advice to NSW Government discussion paper assumed that a certain level of market maturity would exist before the building bond was increased.

Furthermore, there is a restricted availability of insurers offering decennial liability insurance (DLI) to the market. Resilience Insurance is the only insurer to date that has introduced coverage in a format accepted by the NSW Government as a viable substitute for the conventional building bond.

Where to next?

For developers with buildings near completion, will need to consider whether it is feasible to obtain DLI or pay the increased bond. The bond is lodged prior to application for occupation certificate (OC). DLI is generally obtained around the time the construction certificate is issued.

For owners that have purchased a new apartment nearing completion, either option the developer chooses will ultimately result in more consumer protection against defects.


Dec 2023


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