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Implications for Developers in the amended Strata Schemes Management Bill 2015

On 28 October 2015 the Strata Schemes Management Bill 2015, which incorporates the Strata Schemes Development Bill 2015 (jointly the Bill), passed both houses of parliament and is awaiting ascent from the Governor General. The Regulations accompanying the Bill are still in the consultation process however the Bill is expected to come into force in mid-2016.

The Bill contains a number of significant amendments relevant to investors, developers and builders in the multi-dwelling residential market. These include:

  1. A new process to facilitate the collective sale or renewal of strata schemes; and
  2. A defect bond and inspection regime which is carried out in the first two years after building is completed.

Collective Sale or Renewal

The new process for the sale or renewal of strata schemes empowers strata owners to make a collective decision about what to do with the building as it ages and provides that decisions on the renewal or sale of the building now will not require a unanimous decision of the owners but will only require support of 75% of the lot owners. This is likely to increase the stock of buildings available for development as it will be easier for owners to undertake renewal or sale of the strata scheme to developers.

The Bill aims to encourage collaboration to ensure that owners receive appropriate compensation. It contains five provisions to protect owners during the process. Firstly, the renewal process will not automatically exist and owners must opt-in by passing an ordinary resolution of 50 percent of the owners.

Secondly, there is a transparent renewal process in which any proposal must be assessed at a number of stages by both the strata committee, the owners corporation and a renewal committee formed for assessment of the proposal. Financial or other interests must be disclosed and an owner who owns 25 percent or more of the lots must declare that fact. A renewal plan must be developed which details all aspects of the proposal including the price, planning approvals, construction details, relocation requirements and other requirements depending on the nature of the proposal.

The third protection is that owners are to be provided with details of the compensation they will receive and provided with time to obtain independent advice. The proposal must then pass with a 75 percent or greater majority as a fourth protection.

Finally, by a general resolution of a 50 percent or greater vote, the owners corporation must apply to the Land and Environment Court to give the plan effect.

It is obvious that the above process may take a considerable time to implement however it has been found in jurisdictions, such as New Zealand, where similar provisions have been enacted, that the reforms went well and have improved the quality of housing stock.

Building Defects

The Bill, at Part 11, contains a new method of ensuring rectification of defective building work in a timely manner by way of a defect bond and an inspection regime which is carried out in the first two years from completion of the building (Defect Regime). The aim of the Defect Regime is to encourage developers and builders to build well and fix any problems early in the life of the building.

The Defect Regime applies to new residential and mixed used strata buildings, renovations that are not covered by the Home Building Compensation Fund (Home Warranty Insurance) and where there has been a registration of a new strata plan. Part 11 is not intended to incorporate minor cosmetic renovations on existing strata schemes.

In summary, the Defect Regime provides that the developer:

  1. Must no later than 12 months after the building work has been completed appoint a qualified person to carry out an inspection report on the building work (Interim Report);
  2. The building inspector must be approved by the Secretary of the Strata Committee but it is not necessary for the Secretary to require approval by the owners corporation;
  3. The building inspector must not be connected with the developer although a building inspector appointed by the developer does not mean that the inspector is connected with the developer;
  4. Within 18 months of completion the developer must arrange for a building inspector to inspect the building work and provide a Final Report on the building work no later than two years after completion;
  5. The developer, builder and owners corporation including the Secretary have to be provided with a copy of the reports;
  6. The developer is to bear of the cost of the Interim and Final report;
  7. Subject to certain conditions, a builder may enter the property to rectify any building work before the building inspector undertakes the final inspection;
  8. The Final Report is not to include any defects not listed in the Interim Report;
  9. The Secretary may amend the time limits for inspections or provisions of the report as reasonably necessary;
  10. The developer must give the Secretary a security (a building bond) for the building work to which this part applies before the Occupation Certificate are issued for any part of a building for which the building work was done;
  11. The building bond is to be 2% of the contract price for the building work and may be in one of various forms such as bank guarantees or another form of security subscribed by the regulations for the purposes of this section;
  12. The building bond is to be kept in a nominated account and the statutory overseer notified;
  13. The whole or part of the amount secured by the building bond may be claimed or realised by the Secretary for payment to meet the costs of rectifying the defective building work identified in the Final Report if the developer or builder does not rectify the work;
  14. A building bond must be claimed or realised within two years after the date of completion of the building work of which was given or within sixty days after the final report on the building work is given to the Secretary by the building inspector, whichever is later.

The Defect Regime will not limit the owners, or owners corporations, legal rights in relation to the defects including the statutory warranty provisions of the Home Building Act 1989 which provides statutory warranties for up to six years for defective structural building work.

The Defect Regime is similar to the retention and defect liability provisions in most standard contracts. Developers will now be subject to similar provisions and need to factor in the financial and contractual amendments that will be required.

It would also be prudent to consider the downstream contractual arrangements for defect liability periods and retention to ensure that the developer is not caught short where a contractual liability period expires but the Defect Regime provisions are still in force. It may be more efficient to consolidate the contractual provisions to align with the Defect Regime requirements otherwise contractors may claim that their liability to rectify defects has expired.

Alternatively, if a usual 12 month defect liability period applies the developer should ensure that the Interim Report is provided in time for any defects that are the responsibility of the subcontractor or builder to be notified to the relevant contractor within the 12 month period.

Kreisson building and construction team is experienced in all aspects of building law. We can advise and act on:

  • Contracts;
  • Security of Payments;
  • OHS; and
  • Disputes.

To obtain our contact details and information on other legal services we provide to the building industry please visit us at www.kreisson.com.au or phone Kelvin Keane on 02 8239 6515.

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The information contained in this article is offered as general advice only and may not apply to the reader’s specific circumstances. It is recommended that the reader obtain advice relevant to their specific circumstances should they wish to proceed further.