Leaky homes are not as common in Central Otago as they are in wetter parts of the country, but they do exist here.
A recent High Court decision (Johnson & Ors v Auckland Council) develops the law around the extent of a buyer’s liability for failing to complete proper due diligence checks when buying a leaky home. The case shows that the compensation paid to a buyer will be reduced if the buyer does not take adequate care when deciding to buy, even if the Council has been negligent.
This will have implications for agents in circumstances where buyers ask them whether the purchase should be conditional on a builders report.
Facts
The case dealt with buyers who bought a residential property at a mortgagee sale. Substantial alterations had been carried out before the sale, and a code compliance certificate had been issued by the Council. However, the works carried out were more extensive than covered by the building consent – the building consent did not include the re-cladding of the house. As a code compliance certificate only covers the work in the building consent that it relates to, the code compliance certificate in this case did not cover all of the works that had been carried out.
The work turned out to be defective, so the house was not weather tight. The buyers claimed $1.925m in damages from the Council on the basis that it was negligent in issuing the code compliance certificate.
The Council admitted that it had been negligent, but said the buyers had significantly contributed to the loss by not getting a builders report or making other enquiries about the soundness of the house.
Decision
The High Court said that a buyer who relies on a code compliance certificate negligently issued by Council is not exempt from the consequences of their own negligence.
In this case, the buyers were experienced owners of valuable property, and knew the building could be a leaky home. The house had monolithic cladding, and there were visible signs of moisture damage, so the buyers should have known that there was potentially a problem, but they took a calculated risk to proceed with the purchase. The Court said that a prudent purchaser would have obtained a builders report and checked the records available from Council. In this case, a check of the Council records would have shown that a lot of the work that had been carried out that was not covered by a building consent or by the code compliance certificate. Also, the standard vendor’s warranties and undertakings had been deleted from the agreement, so this should have made the buyer cautious about whether there might be problems with the house.
The Court also said it was not relevant that the buyers had not received legal advice, as it would have been negligent for a lawyer to advise a client that a code compliance could be relied on, and nothing more needed to be done. Any lawyer would have known that Councils had not been meeting their statutory obligations, so that checking Council records and taking other steps was advisable.
The Court said that the buyers were substantially “the authors of their own misfortune” and reduced the damages that would have otherwise been recovered against the Council by 70%.
Lessons
It was stressed that each case will be decided on its own facts. This means that there may have been a different result if the facts were different – if, for example, the buyers had been inexperienced property purchasers, or if the Council records were not available, or if the defects were not obvious, etc.
However, this case makes it clear that:
• Anyone advising a buyer (including agents, if asked by the buyers) must take care to inform them as to the steps they should take to reduce any risk.
• A code compliance certificate cannot be seen as an absolute guarantee of a building’s quality and compliance. Depending on the circumstances, a buyer may have to make further enquiries, rather than merely relying on a code compliance certificate or LIM.
• Because of the widespread knowledge of the leaky building problem, buyers and their advisors should be on notice of the need to investigate any such risk, especially where certain types of construction have been used e.g. monolithic cladding, no overhanging eaves or flashings etc.
• It is important to check the scope of work covered by any code compliance certificate (and the building consents) issued by Council, as buyers may not be able to rely on those certificates alone. Therefore, it will probably become standard practice for lawyers to advise buyers that they must obtain a building report. This will not only tell the purchaser if there are any issues, but it will also be good evidence that the buyer carried out adequate due diligence if there is future litigation.
If you are asked by a buyer whether they should make the agreement conditional on getting a builder’s report, you should recommend it. In the case of a mortgagee sale, they would have to carry out their investigations before the auction or tender.
Disclaimer: This information is for general background information only and is not legal advice.
