Leaky buildings: new guidance on pre-contractual representations

Monday 13 May 2019

Authors: Jesse Wilson and Brad Ward

​​​Earlier this month, the Court of Appeal delivered a decision on a vendor's liability for pre-contractual representations that a building did not suffer from weathertightness defects.1 The judgment distils the relevant principles and is a useful reminder of the dangers of unqualified pre-contractual statements on an issue that is critical to many purchasers.

High Court decision

The case concerned a sale by private listing. The prospective buyer asked the seller whether the unit leaked and whether it was a leaky building. The seller replied to the effect "no, the unit does not leak and it is not a leaky building". Although the seller did not know it at the time, due to latent defects, the unit had been leaking for some time causing extensive damage.

The High Court held that the seller's statement was an unqualified representation of fact which was false (though innocently made). The High Court also held that the statement induced the buyer to enter into the contract and that the buyer had reasonably relied on the statement. The buyer was awarded damages of $474,101 for the repair costs as well as $25,000 for stress and anxiety.

Appeal

On appeal, the seller argued that:

  • the statement was a statement of opinion, based on his experience owning the unit, and not a representation of fact; and​
  • it was not reasonable for the buyer to have relied on the statement.

The significance of the distinction between a representation of fact and a representation of opinion is:

  • a misrepresentation of past or present facts creates civil liability even if the misrepresentation was innocently made (i.e., without knowledge that it was untrue);​

  • ​by contrast, a statement of opinion is not a misrepresentation unless the person making the representation either does not honestly hold the opinion at the time it is expressed or there is no reasonable basis on which the opinion is held. ​

The Court of Appeal considered that the seller's comment was an unqualified statement of fact that "the unit does not leak" and "is not a leaky building".

In holding the seller liable, the Court noted:

  • The seller marketed and sold the unit himself. He actively promoted it to the buyer and he did not attempt to qualify his statements in any way.

  • The seller had superior knowledge of the property. He had owned it, carried out significant renovations, and lived in the unit for several years. The Court considered that, "backed by his superior knowledge", he no doubt felt confident in making the statements in support of his "sales pitch" to the buyer.

  • Even if the parties had understood the buyer to merely be asking about the seller's current knowledge of weathertightness issues, the seller had not disclosed all the material facts to the buyer. He had failed to disclose that, during previous renovations, he had discovered earlier leaks that were then remediated and, as far as he knew, fixed. The Court held the outcome might have been different if the seller had passed on what he knew about the history of the leaks. But he did not.

The buyer's reliance on the statements

The Court also rejected the seller's appeal against the finding it was reasonable for the buyer to have relied on the statements. On this issue:

  • The Court rejected a submission that the buyer should have asked more questions because the statements were clear and unequivocal and there was no need to ask follow up questions to clarify it.

  • The Court also rejected a suggestion that the buyer ought to have obtained her own expert reports, noting that, if anything, the fact she did not do so demonstrated her reliance on the buyer's statement. 

  • Finally, although the buyer could have included an express term relating to weathertightness in the contract, the absence of an express term did not undermine the claim for misrepresentation, and the agreement did not purport to exclude reliance on any pre-contractual representations.

I​n the outcome, the appeal was dismissed, and the High Court decision in the buyer's favour was upheld.

Takeaways

The Court was careful to emphasise that each case will turn on its own particular facts, and that it will not always be appropriate to interpret unqualified statements as starkly as in this case. In particular, the Court noted that liability should not turn on whether a layperson vendor is sufficiently astute to carefully qualify oral statements.

Nevertheless, the judgment is an important reminder that any pre-contractual statements need to be made with care and that seemingly modest qualifications can be crucial to limiting liability.

For vendors and purchasers alike, the judgment demonstrates the importance of obtaining any critical representations in writing so there is no dispute as to their scope or terms and, for vendors in particular, the importance of an express term excluding liability for any pre-contractual representations.

If you would like to discuss any of the matters raised in this article, please contact the authors or your usual Bell Gully advisor.


1 Ridgway Empire Ltd v Grant [2019] NZCA 134​.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Jesse Wilson

    Partner Auckland
  • Jenny Stevens

    Partner Wellington
  • Tim Smith

    Partner Wellington
  • Brad Ward

    Senior Associate Auckland
Related areas of expertise
  • Residential property
  • Property and real estate
  • Litigation and dispute resolution