Leaky Homes: Updating advice for trust and conveyancing / property lawyers

(Part 1 of 2) February 2010

Many of you will have seen the recent media reports following regarding the Government's investigation into the extent of the leaky home crisis and Councils' efforts to have the Government contribute to a portion of leaky home remedial costs on a no fault basis. The Government has maintained that it has no liability and has indicated that while it may be prepared to provide loans to home owners, it will not contribute any significant sum towards actual repair costs. Accordingly, the status quo remains and affected home owners are required to bring claims in the Weathertight Homes Tribunal or the Courts to recover compensation. As such, lawyers involved in conveyancing and trusts need to remain alert to the developing legal issues.

Trust Traps

There have been two significant developments in relation to claims by trusts. The first is that contrary to earlier determinations, claims for general damages (stress) by trustee owner / occupiers (e.g. Mr & Mrs Jones who live in the house and are trustees of the Jones Family Trust) are now being dismissed on the basis that trustees are not legally entitled to claim for stress. Given that the Tribunal and High Court usually award general damages of $20,000 - $25,000 per owner (i.e. $40,000 - $50,000 for Mr & Mrs Jones) this often has a significant financial consequence.

The second and more significant issue relates to contributory negligence and the consequences of transferring the property to a family trust. There have been a number of recent cases in both the Tribunal and the High Court regarding owners who had some limited knowledge of possible leaks and later transferred the property to a family trust. In those cases the Tribunal and the Court have both found that the trustee purchasers were contributorily negligent for purchasing with knowledge of the defects (even when that knowledge has been quite limited) and have significantly reduced the amounts of the awards to which the owners would otherwise have been entitled.

Further, there has been a recent case in which the High Court found that a purchaser was contributorily negligent even though she had no knowledge of the leaks or building defects. The Court's reasoning was that given she purchased the property in May 2005, after there had already been considerable publicity about the leaky homes crisis, and because she failed to obtain a pre-purchase inspection report prior to committing to the sale and/or making other enquiries to protect her position, she was contributorily negligent. While this case was not one involving a trustee owner, the principle applies equally to trustee purchasers.

The consequences in these cases for the owners have been significant as findings of contributory negligence have reduced their claims by between 20% and 75%. Accordingly, for a standard $200,000 claim this will mean a shortfall of somewhere between $40,000 and $150,000.

What you need to know - Advice to clients

Owners wanting to transfer their property into a family trust should be advised that if they are aware that their home may have leaks or building defects, then there is a significant chance that their ability to pursue the parties responsible (e.g. the Council, the builder, architect etc) for the cost of remedial works will be significantly compromised. In addition, even if the owners are unaware of any issues themselves, the trustees would be well advised to obtain a pre-purchase inspection report prior to purchasing the property in order to protect themselves from an allegation of contributory negligence.

Finally, if the owners transfer the property to a trust, they run a significant risk of foregoing any claims for general damages (stress) to which they would otherwise likely be entitled (regularly in the sum of $50,000 for husband and wife owner occupiers).

This is the first in a two part series. The article in next month's newsletter will provide an update on the recent cases involving claims against vendors under clause 6.2(5) of the ADLS sale and purchase agreement.

Nathan Smith is a civil litigator with expertise in building and construction law.

Read part 2 of this story