Leaky Buildings

Early this year Woodhouse J in the High Court held the Auckland Council liable for 30% of the difference between the value of Ross and Linda Johnsons’ leaky house, and what they paid for it.  Auckland rate-payers might be annoyed they have to pay anything at all (this left them paying $370,000) but the 70% reduction marked an important shift in the jurisprudence.  While judges once saw homeowners as innocent victims forced to rely on councils to protect them from dodgy building practices, Woodhouse J described the Johnsons as “authors of their misfortune”.

The facts in Johnson

The house had been altered extensively in the early 2000s, and there was a code compliance certificate issued in 2004.  However, the alterations went well beyond the original consent and the final certificate.  The Council conceded that it was negligent in not ensuring during its inspections that the defects in the alterations were rectified. 

The house was put onto the market in 2009 by mortgagee sale.

Ross and Linda Johnson had been looking for a house in Takapuna for a few years.  They had sold their business, presumably for a substantial sum, as they were able to repay a mortgage on their existing North Shore property and to purchase their new house for $3.91 million, without requiring finance.

The fact that the house was being sold by mortgagee sale should arguably have sent a warning signal, as should the general style of the house, which had monolithic cladding, numbers of balconies, a flat roof and no eaves.  A check of the property file by a lawyer would have revealed that the alterations went beyond the building consent, raising further alarm bells.

Linda Johnson attended thee open homes.  She took a friend to one of them, Stephen Johnston, who works in the building industry in relation to interior work.  He has never worked as a pre-purchaser inspector.  He gave evidence that at the open home Mrs Johnson coveyed to him that she knew that the house might be leaky, and that he said that he was unable to advise her on this.

The Johnsons submitted a tender for $3.6 million, and after negotiation bought the property for $3.9 million.  The contract, adapted from the standard ADLS form by the bank, stipulated that the vendor did not warranty the condition of the building, or that it was compliant with the relevant building consents.

Immediately after purchasing the property the Johnsons organized for four inspections and reports, each of which built on the previous one.  The first three were visual only, and only the last two recommended recladding the entire house. 

The Johnsons spent something in the region of $1.9 million repairing the property.

The Council’s liability

The Council was liable for its negligent inspections during the alterations and the code compliance certificate which it issued.  This part of the case is textbook leaky homes liability: the local councils issue certificates which state that the building is code complaint, the code includes a provision that buildings must be weather tight, home owners in New Zealand rely on councils to monitor building work, therefore councils are liable for what must have been a negligent inspection when the building turns out to be leaky. 

Liability for negligent inspection was extended by the Supreme Court in 2012 to commercial premises. 

Council liability represents a response by the courts to the perceived vulnerability of many homeowners, who lack the expertise to protect what is often their only large asset.  As local councils have the opportunity and power through their inspections to ensure the building industry maintains appropriate standards, it seemed just that the councils share in the responsibility for remedying the cost of repairing substandard buildings.  The judges thought that liability would also encourage council inspectors to identify problems during construction, before defects are covered up and hidden until they manifest themselves later, sometimes many years down the track.

The judiciary thought, wrongly as it turned out, that liability for building inspections would be rare in practice.  After the central government deregulated the building industry local councils were left footing the bill for the leaky building problem, a situation exacerbated by the fact that the vendors, buildings, architects and product manufacturers had often protected themselves through companies and trusts, something councils are unable to do.  The widespread feeling that the problem is the fault of the central government, which has no legal liability, has not endeared the case law to the general public.

The most important legacy of the case law is that in New Zealand local councils are the default insurers of buildings.  This was not inevitable.  When the building industry was deregulated in the 1990s, the Building Industry Commission recommended a Building Performance Guarantee Corporation – a central government insurance scheme described by Dr Brian Easton as “designed to protect buyers of new homes against the consequences of poor workmanship, the use of inferior building materials, the bankruptcy of the building, or other failures to complete a house in accordance with the contract.”  Dr Easton speculates that such a corporation would have taken action earlier because of complaints from the building industry at rising levies.  It would also have meant that the building industry contributed to the cost of the problems rather than local rate payers.

The Corporation idea is similar to the English situation.  The building industry there has formed its own self-regulating, non-government body, the National House-Building Council (NHBC).  The Council offers its own warranties, underpinned by its own warranty inspectors.  These non-government warranties are now an obligatory part of the process of building, a requirement driven by the banks.  They last for ten years and are transferrable between owners.  Other private warranty providers have entered the English market, but NHBC still dominates.

There seems to be no expectation that New Zealanders building a home obtain a warranty from an industry group, although Master Builders do offer guarantees for their members’ work which appear similar to the NHBA warranties.  A warranty from an industry group has the advantage that the group is still likely to be there if the builder is no longer worth suing.

Authors of their own misfortunes

Although the Council was liable to the Johnsons for their negligent inspections, it was ordered to pay just 30% of the difference between the price paid for the house and what it was worth with the defects. 

The finding that the Johnsons were contributory negligent, or in Woodhouse J’s words the authors of their own misfortune, represents a significant shift in the way these cases have developed up until now.  In the early cases homeowners were seen as vulnerable victims of the failure of local councils to regulate the building industry.  Woodhouse J however focused on Linda Johnson’s determination to buy her “dream house” and the way she turned a blind eye to problems which were obvious to others at the open homes. 

The development of building inspection liability was based on the rationale that New Zealanders relied on councils to inspect buildings, and to identify defects at an early stage.  Counsel for the Johnsons therefore argued that a finding of contributory negligence could never be made against homeowners in the leaky building context.  If councils were liable because homeowners were entitled to rely on the inspections, how could homeowners be punished for over-reliance?

Woodhouse J rejected the argument, holding the Johnsons 70% responsible for their own misfortune.  He was particularly influenced by the fact that the code compliance certificate did not cover all of the alterations to the property, which would have rung alarm bells to a solicitor reviewing the file.  He also highlighted that the Johnsons did not get a pre-purchase building inspection report.

Is it negligent not to get a pre-purchase inspection report?

It is now arguable in the light of Johnson that homeowners who do not get pre-purchase inspection reports are negligent.  However, would a pre-purchase inspection have told the Johnsons anything they did not already know? 

Few vendors will permit a purchaser to obtain an invasive inspection of the home for sale, yet a visual-only inspection is unlikely to tell purchasers much.  The first two inspections obtained by the Johnsons after purchase did not reveal the extent of the problems; it was only once they obtained the fourth report, which was destructive, that the Johnsons knew they were in for a full reclad.  One of the main reasons for imposing liability on councils is, after all, that once the building is completed any defects are hidden, and a visual-only inspection can only highlight aspects of the building which are characteristic of leaky buildings.

One advantage of a pre-purchase inspection is that if the inspector fails to highlight an aspect of the building which is risky, the inspector may be liable if the building turns out later to be leaky, giving another defendant which liability (who will often be insured) can be sheeted home to.  This occurred in one recent High Court case, Hepburn v Cunningham Contracts Ltd.  This is a very small silver cloud however for owners of leaky buildings who thought they were prudent in getting a pre-purchase inspection.