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

(Part 2 of 2) March 2010

With record numbers of cases reported, the leaky homes crisis is showing no sign of abating. To the contrary, the Weekend Herald recently reported (27 Feb) that the Government's experts panel estimates that 90% of all apartments, monolithic homes and multiunit homes built between 1992 and 2005 will leak badly. In response, the most recent comments from the Minister of Building and Construction indicate that the Cabinet is currently considering extending the time limit for reporting claims from 10 to 15 years. For those reasons and others, lawyers involved in conveyancing and trusts need to remain alert to leaky home legal issues.

My last article provided an update on recent leaky home cases involving claims by family trusts and the associated issues on which trust and conveyancing / property lawyers should be advising their clients. This article provides an update on recent cases involving claims against vendors under the vendor's warranties in clause 6.2(5) of the ADLS sale and purchase agreement.

Vendor warranties

By way of background and to recap my previous advice, a plain reading of clause 6.2(5) of the ADLS sale and purchase agreement provides that owners who have building work carried out which requires a building consent are warranting that that work was properly completed and that the building does not leak.

Given the almost universal use of the ADLS agreement there have inevitably been a number of high profile casualties of these warranties including sports personality Matthew Ridge and a civil litigation partner in one of the top three Auckland law firms.

While the most recent revision of the ADLS agreement no longer contains sub-clause (d) - the clause requiring compliance with the Building Code, subclause (b) still requires the work to comply with the building consent (i.e. the plans and specifications) and in all likelihood those documents will in turn include a requirement to comply with the Building Code. In short, the revision is unlikely to change the ultimate outcome.

The Weathertight Homes Tribunal decisions in 2009 in relation to the enforceability of vendor's warranties were inconsistent. There were a number of decisions issued mid to late last year in which claims against vendors were dismissed on the basic reasoning that as the original owners had had no real involvement in the building process they should not be responsible. However, the most recent decisions appear to have returned to the previous position whereby contractual claims based on vendor's warranties are not dependent upon the involvement, or lack thereof, of the vendors in the physical building process.

Possibly the biggest risk that vendors warranties pose is their ability to indefinitely extend the limitation period for bringing a claim. This is because the 10 year longstop in the Building Act does not apply to contractual claims (as opposed to a tortious claim for negligence) - the contrary position was recently unsuccessfully argued in the High Court. Rather, the 6 year contractual limitation only begins to run from the date of possession. For example, if Mr & Mrs Jones carried out renovation works in 1998 and then sell their home this year, then they will continue to be liable until 2016.

As I have previously written, it is also crucial to remember that if a private certifier (e .g. Bay Building Certifiers) carried out the inspections and issued the building consent and code compliance certificate, then the vendors will be unlikely to have any ability to pass on the repair costs to the local council. As the private certifiers have long since passed into liquidation knowing who issued the Code Compliance Certificate is very important. This information should be readily available from the Council file. In effect, if a private certifier issued the Code Compliance Certificate then the document may well be worthless. While the owners may be able to pursue the builder or sub-trades involved, in many cases those companies will have long since passed into liquidation.

What you need to know - Advice to clients

Vendors should be advised that if any building works requiring a building consent were carried out while they owned the property, then they are providing a warranty that those works were completed in accordance with the Building Code (and therefore that the house does not leak) regardless of whether or not 10 years has elapsed since the work was completed. In addition, if a private certifier issued the Building Consent and Code Compliance Certificate then the owners will have no ability to pass on any of the repair costs (which are regularly $200,000 to $300,000) to the local Council.

Purchasers should also be provided with similar advice in relation to the consequences of a private certifier issuing the Building Consent or the Code Compliance Certificate. They should also be advised of the consequences of a vendor attempting to remove or amend clause 6.2(5) in the sale and purchase agreement.

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