Bond, developer bond

Recent changes in Victoria reforming certain aspects of building regulation with the objective of protecting purchasers of residential apartments will create regulatory and contractual complexities for developers of residential apartment buildings. The reforms take effect on 1 July 2026 (unless proclaimed earlier). In this piece we provide a brief overview of the reforms and suggest some ways in which developers can seek to manage the risk through their contracting arrangements with their builders before the reforms come into effect.

The Building Legislation Amendment (Buyer Protections) Act 2025 (Act) requires developers of apartment buildings over three stories to provide a bond of 3% of the total project cost to the soon be established Building and Plumbing Commission (BPC)^[1] at the time the developer applies for an occupancy permit (the Developer Bond).

Importantly, these changes do not apply to build-to-rent scenarios or cases where the developer remains the owner.

Role of the building assessor

The building assessor is appointed by (and paid for) by the developer, following the approval of the assessor’s nomination at the first meeting of an owners corporation for a residential apartment building. The BPC may also appoint a building assessor itself in certain circumstances (which primarily relates to scenarios where either the developer or building assessor is not complying with the regime).

The building assessor’s role involves:

• the preparation of a preliminary report specifying any reportable defective building work, which must be finalised on or before the date that is 18 months after the occupancy date for the residential apartment building; and
• the preparation of a final report specifying the reportable defective building work and the preferred method by which such work needs to be rectified, which must be finalised on or before the date that is 24 months after the occupancy date.

Interestingly, it is not yet clear what defects will be ‘reportable’ by the building assessor for the purposes of this new regime. This is expected to be prescribed by regulations.

It is, however, clear what kind of defects in residential apartment buildings will be treated as defective building work for the purposes of this regime. Defective building work means domestic building work which is defective. ‘Defective’ is defined to include a breach of the warranties in section 8 of the Domestic Building Contracts Act 1995 (Vic) (DBCA) or a failure to maintain a standard or quality of building work specified in the contract under which the work is carried out. As these concepts are tied back to ‘domestic building work’ which is, in turn, defined under the DBCA to include preparation of plans or specifications for the carrying out of work, it seems likely that negligent design and engineering services are caught by this regime, effectively meaning that the Developer Bond secures the proper design and construction of a residential apartment building of more than 3 stories.

The Developer Bond is released to the developer if the preliminary report does not disclose any reportable defective building work. However, the timing on release is not clear where either a preliminary or final report discloses reportable defective building work. It is possible that this will be contained in the forthcoming regulations.

Recourse against Developer Bond

As the Developer Bond is primarily intended to operate as security for rectifying defects, itis available to be claimed against by the owners corporation(s) for the residential apartment building.

A claim may be made to the BPC for the payment or release of an amount secured by a Developer Bond including where the owners corporation needs to pay for the costs of rectifying defective building work identified in the final report prepared by the building assessor.

The BPC then has the power to approve or reject the owners corporation’s claim. The Act does not make clear what factors or criteria the BPC is required to consider when making its decision to either approve or reject the claim, meaning that there is some risk associated with challenging the BPC’s decision in this regard.

Where approved, the amount paid to the owners corporation must be used for the purpose for which claim was approved by the BPC. Any amount unspent must be refunded to the developer.

This means it could take about 2 years after the occupancy permit is issued for a final report for a call on the Developer Bond.

It will be important to ensure that, during this period of time, developers attempt to maximise their back-to-back contractual rights against the builder that was responsible for designing and constructing the residential apartment building.

Position on developer statutory liability

Although the Developer Bond creates an exposure for the developer in relation to defective design and construction of a residential apartment building, the new regime does not purport to create any direct statutory liability between a developer and an owners corporation. Put another way, the effect of this regime is not that developers can be sued by owners corporations for the quality of the design and construction of residential apartment buildings.

However, by requiring provision of security which could be valued at many millions, and given the broad remit of the defects that may be captured by a building assessor in their reports, developers are now effectively standing behind the statutory warranties given by the builder under the DBCA and also taking the risk of recovering any loss incurred by reason of a claim on a Developer Bond from the builder (either through a claim against the builder or recourse against the builder’s security).

This shift places greater onus on developers to ensure construction quality and compliance, with the effect that many developers should be considering how to amend their construction contracts to best mitigate the risks created by the Developer Bond regime.

How can developers protect themselves?

Developers can try to take proactive measures in their construction contracts. One immediate challenge is that the size of a Developer Bond may be significant, and the period of time for which a Developer Bond needs to be available to the BPC is long, making a complete pass-through of the risks associated with this regime to the builder potentially problematic. 

While the Act does not appear to disallow the Developer Bond being directly provided by the builder, such an approach will likely create inadvertent consequences for the developer’s financing arrangements. As such, developers should be considering how to structure their security arrangements with the builder to ensure substantial alignment with the Developer Bond requirements under the Act.

Typically, the amount of security provided by builders during the defects liability period (DLP) is for 2.5% of the contract sum and is releasable approximately one year after practical completion (which coincides with DLP expiration). In contrast, Developer Bonds must be for 3% of the total project cost and may not be returnable for about 2 years after the occupancy permit is issued.

In view of the above, developers may wish to consider establishing an enhanced regime for security under their construction contracts whereby:

• the initial security amounts to 5.5% of the contract sum;
• 2.5% is returnable to the builder on practical completion of the project; and
• the remaining 3% is retained until the Developer Bond is released.

These changes would enable better back-to-back recourse against the security provided by the builder to the developer, and ensure that there is sufficient leverage for builders to remain accountable for addressing defects that arise within the longer legislative timeframe.

There are a number of challenges with this approach, including that:

• the cost of the extra security will ultimately be borne by the developer;
• there is likely to be market pushback to an enhanced security framework by builders; and
• that an increased security requirement may risk capping out the builders’ bank guarantee facilities. This might in turn lead to a shrinking of the builder market able and available to perform work at a particular value.  

Conclusion

As developers adapt their construction contracts in response to the enhanced requirements set out in the Act, builders will inevitably incorporate these additional costs into their pricing structures, and the financial burden of the changes will ultimately be passed onto consumers as developers and builders seek to recoup these expenses. It remains to be seen how the market will respond to this reform, although it is noted that the experience in New South Wales, which introduced developer bonds in 2018^[2], has been that the cost of such bonds is not generally passed through to the builder or the subject of an equivalent back-to-back security.

The reform introduced by the Act reflects the pattern seen with various levies that have been introduced in recent years, such as those related to cladding and fire safety, which have similarly increased overall project costs.