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Building bond to increase from 1 February 2024

29 January 2024

#Property, Planning & Development, #Construction, Infrastructure & Projects

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Building bond to increase from 1 February 2024

Update: [On 19 January 2024 the NSW Government passed the Strata Schemes Management Amendment Regulation 2024 which amended the date for the increase in the Building Bond from 1 February 2024 to 1 July 2024. References to 1 February 2024 in this article should now be read to be 1 July 2024].

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

The BLA Act makes various amendments to several pieces of legislation regulating the construction industry including the Strata Schemes Management Act 2015 (NSW) (SSMA).

One of the significant changes to the SSMA is the increase of the building bond amount from 2 per cent of the contract price for the building work to 3 per cent. This will apply for a building bond given on or after 1 February 2024.

Decennial liability insurance

The increase to the prescribed building bond amount supports the NSW Government’s aim to encourage the use of a decennial liability insurance (DLI) over a building bond.

By way of background, DLI was introduced in November 2022 as a voluntary alternative option to the building bond scheme.

DLI is an insurance in favour of an Owners Corporation against serious structural defects in the building in the strata scheme. It provides protection for a period of 10 years and was considered, in theory, a better alternative to the Strata Bond as it provides 10 years of protection and was not an insurance of last resort.

Section 211AA of the SSMA provides that a developer that obtains DLI will not be required to obtain a building bond.

However, at present there are limited insurers who will provide DLI to the market with Resilience Insurance being the first provider to offer coverage earlier this year in a form accepted by the NSW Government as an alternative to the building bond.

Market maturity?

In the NSW Government’s Decennial Liability Insurance Ministerial Advisory Panel Advice to NSW Government discussion paper dated August 2022, the NSW Government flagged its intention to increase the building bond over time to encourage the industry to take up DLI.

However, the discussion paper assumed that a certain level of market maturity would exist before the building bond was increased. To this end the discussion paper considered that the building bond would not increase to 3 per cent until two years after the first DLI product entered the market.

The view of many industry experts is that the increase of the building bond has occurred pre-maturely. Whether the NSW Government will defer the increase in light of these views however is yet to be seen.

Takeaways

Developers with buildings nearing completion should consider whether they can procure a building bond prior to 1 February 2024 to ensure that they are not affected by the increase.

Where it is not feasible to obtain a building bond before 1 February 2024, developers will need to consider the impact that the increased bond will have on its feasibility. As part of this analysis, developers may also wish to consider whether obtaining DLI is a more feasible outcome for the development.

We also note that some buildings already under construction may not be eligible for DLI as generally it is an insurance product that is obtained around the time the construction certificate is issued.

If you have any questions regarding these changes, please get in touch with our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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