Introduction

In a significant move aimed to enhance consumer protections in the housing sector, the Victorian Government has enacted the Building Legislation Amendment (Buyer Protections) Act 2025 (Vic) (Act). A key feature of this legislation is the introduction of a developer bond scheme for certain multi-storey residential developments.

Background

From 1 July 2026, developers of certain residential apartment buildings will be required to pay a financial bond prior to applying for an occupancy permit. This bond, set at 2% of the total build cost, will be held by the Victorian Building Authority (VBA) for a period of two years following the issuance of an occupancy permit. The bond may be in the form of a bank guarantee, surety bond or other prescribed form of security.

The developer bond scheme will only apply to residential apartment buildings of more than three storeys, which have long been exempt from the requirement of domestic building warranty insurance. In this regard, the scheme operates to provide a financial safeguard for the rectification of defects post construction, even where the appointed builder is insolvent. If a developer fails to procure the rectification of assessed defects within the prescribed period, the VBA may authorise the developer's bond being drawn upon in order to fund remediation works.

The introduction of the developer bond scheme is part of a broader initiative to restore consumer confidence in Victoria's construction industry. While the legislation seeks to protect consumers, the financial and other implications for developers are potentially significant.

New Occupancy Permit Requirements

Developers will now be prohibited from applying for an occupancy permit unless the developer bond has been paid. Developers must also notify the VBA of their intention to apply for an occupancy permit six to 12 months before submitting the application. Failure to comply with either requirements will attract penalties of up to 500 penalty units (being almost AU$100,000) for individuals and 2,500 penalty units (being almost AU$500,000) for corporations.

As an additional compliance measure, a purchaser of an apartment under a residential off-the-plan contract of sale may rescind that contract if an occupancy permit issues without the required developer bond being in place. In such cases, the purchaser will be entitled to a refund of the deposit paid together with penalty interest determined in accordance with the Penalty Interest Rates Act 1983 (Vic).

Access to and use of the Developer Bond

The developer bond scheme contemplates inspections for the purpose of determining the potential application of bond monies to defect rectification. The Act requires the developer to appoint a building assessor to undertake post-completion inspections (at the cost of the developer) to ensure defects are identified and addressed within the two-year bond period.

A preliminary inspection and report must be completed within 18 months of the occupancy date to identify any reportable defective building work. If no defects are identified in the preliminary report, the VBA will release the bond in full back to the developer. However, if defects are identified, the developer must procure that they are rectified and engage the building assessor to conduct a final inspection to confirm that the defects have been rectified. The final inspection, and the provision of a final report, must be completed within 24 months of the occupancy date.

Where issues identified during the preliminary inspection are not resolved by the final inspection, the owners corporation or building assessor may submit a claim to the VBA to access the developer bond for the purpose of funding the required rectification works. Where a bond claim is approved, the owners corporation must arrange for the rectification of the defective building work to occur as soon as possible after payment.

The VBA may otherwise release the bond upon an application from the developer with the consent of the owners corporation or in other "prescribed circumstances (if any)". Any requirement for owners corporation consent will create substantial scope for disputes to arise between developers and owners corporations in relation to bond claims. In this regard, the scheme contemplates that an affected person (which includes both an owners corporation and the developer) may apply for internal review of the determination of a bond claim and, ultimately, for determination of such claim by the Victorian Civil and Administrative Tribunal.

Transitional Arrangements

The legislation does not provide any transitional arrangements for existing projects. As such, it appears that projects presently in construction (or pre-construction) will be subject to the requirements of the bond scheme if an occupancy permit is sought after 1 July 2026. This is in contrast to approaches in other jurisdictions, such as the Strata Building Bond and Inspection Scheme in New South Wales, where transitional exemptions applied to projects where building contracts were entered into prior to the introduction of the scheme. The requirement to fund a developer bond on existing projects is unlikely to be well received by developers, who are unlikely to have allowed for the cost in their feasibilities.

Other Reforms Under the Act

The developer bond scheme is part of a suite of reforms introduced under the Act. Other notable changes include the transition of domestic building insurance to a "first resort" model, allowing homeowners in residential apartment buildings of three or less storeys to access insurance coverage promptly when defects are identified, rather than only in cases where the builder has disappeared or become insolvent.

The Act further strengthens the VBA's powers to order the rectification of incomplete, defective and non-compliant building work at any time during the construction phase and up to 10 years after the occupancy permit is issued. The VBA may issue rectification orders to:

• Builders, and any other person who carried out the work; and
• Developers, where the building work is for the construction of a residential apartment building exceeding three storeys.

Where a rectification order is made for a residential apartment building in relation to a "serious defect", the developer will be unable to apply for an occupancy permit, register a plan of subdivision or complete an off-the-plan sale until the defect is rectified.

Implications 

The legislation imposes a material new financial obligation which will require allowance in feasibilities for large residential apartment projects, many of which are already strained by challenging sales conditions and the high-cost construction climate. The legislation also contemplates stricter timelines for compliance and increased regulatory oversight of defect rectification.

From the consumer perspective, the regime will provide a financial safeguard for rectification of defects which attaches directly to the developer even in scenarios of builder insolvency.