Residential developers and financiers need to be aware of the new consumer protection measures in Part 4A of the Building Act 2004 which were introduced by the Building Amendment Act 2013 (the
BAA) with effect from 1 January 2015. These amendments are aimed at incentivising builders and tradespeople to take responsibility for the quality of their work, and introduce a significant change to the residential construction sector.
There have been guides and articles published by the Ministry of Business, Innovation and Employment and others aimed to assist builders and contractors with their new obligations under the BAA. But developers who sell “off the plan” – that is, sell land plus buildings where the buildings are yet to be constructed – also need to be aware of the changes and the consequences for sale agreements. In turn, financiers need to be aware of how these amendments may change the risk profile of such developments.
New implied warranties
New warranties are implied into all ‘residential building contracts’ between ‘contractors’ and ‘clients’ for ‘household units’. These warranties are mandatory and cannot be contracted out of. The warranties include:
The building work is carried out properly, in accordance with the plans and specifications in the contract and the building consent, and complies with the Building Code and other legislation.
All materials used are suitable for their purpose and new (unless otherwise stated).
The building work will be completed by the date specified in the contract (or, if no date is specified, within a reasonable time).
The household unit is suitable for occupation on completion of the building work.
If a specific purpose is stated in the contract, that the building work and any materials are reasonably fit for that stated purpose.
The client can require the contractor to remedy a breach of warranty, for example by repairing or replacing defective materials supplied by the contractor or a subcontractor. In addition:
For ‘substantial’ breaches, or where the breach is not capable of remedy, the client can cancel the contract or claim damages as compensation for any reduction in value of the product of the building work below the price paid.
For ‘remediable’ breaches that a contractor refuses to fix or if the breach is not remedied within a reasonable time, a client can take direct action and recover the reasonable costs of doing so from the contractor.
For all breaches, the client can also claim damages for any loss or damage resulting from the breach that was reasonably foreseeable (other than through reduction in value).
The client cannot enforce a claim where a breach is caused by certain excluded events (such as failure to carry out normal maintenance). However, the onus is on the contractor to prove this is the case.
Claims for breach of warranty must be brought within six years (usually calculated from the date the building was erected). If there is ‘late knowledge’ of a claim there is a further three year period from the date that knowledge is or should reasonably have been gained, subject to a long-stop period of 10 years. Warranties are enforceable by the client, an on-sale purchaser, and by subsequent owners of the building.
12 month defects remedy period
In addition to the implied warranties regime, the client can require the contractor to remedy ‘defects’ by serving a notice within 12 months of completion of the building work. There is a presumption in favour of the client so that the defect is presumed to exist unless the contractor can show otherwise. Contractors must remedy the defect within a reasonable time. The client can also claim damages for any loss or damage resulting from the defect that was reasonably foreseeable (other than through reduction in value). Like the warranties, the contractor isn’t responsible for defects caused by any of the specified excluded events.
Pre contract disclosure and completion information
Contractors must provide information to the clients in the form of a pre-contract checklist and then post-build information. Failure to provide the information may attract a fine of up to $2,000 per unit.
Transfer without code compliance certificate
A new fine of up to $200,000 has been introduced for commercial on-sellers transferring a household unit without a code compliance certificate, unless there is a written agreement to the contrary.
Residential developers who sell “off the plan” are ‘on-sellers’ under the new provisions of Part 4A of the Building Act 2004, and those sale agreements with residential purchasers are ‘on-sale agreements’. In an on-sale agreement, the seller takes on the obligations of a contractor and the purchaser takes on the rights of a client, so that:
Purchasers can require the seller to remedy defects within 12 months from completion of the building work.
The seller can be required to remedy a breach of implied warranty or be liable to pay damages in the same way that the contractor can under a building contract. However, purchasers do not have the right to cancel a sale agreement for a ‘substantial’ breach of warranty.
Impact on residential property developers and funders
In light of these changes, we recommend that residential property developers:
Funders of these residential developments should be aware that, regardless of what the sale agreement says, the developer is providing a set of warranties which are enforceable by purchasers and any subsequent purchaser of the property. Those warranties are enforceable against the developer for a period of up to 10 years, and have a series of presumptions and burdens of proof that are designed to assist a residential purchaser in succeeding in their claim. In addition, if a sale agreement is found to be a ‘residential building contract’ in the particular circumstances, then further consequences such as cancellation rights may apply.
Review their sale agreements to see whether changes are necessary to reflect the new warranties and defects liability period, as these are similar but not necessarily the same as a typical “off the plan” sale agreement.
Check that their building contractors are aware of the changes and have the appropriate arrangements in place to ensure they can remedy defects or breaches over the 12 month and 10 year periods (for example, relevant insurance policies) and make the required information disclosures. If their building contractors are unwilling or unable to remedy a defect or breach of warranty, the developer will still be liable to the purchaser.
Remedy breaches within a reasonable time. If not, purchasers can do the work themselves and recover the reasonable costs of doing so.
Check that a code compliance certificate is a settlement requirement of their sale agreements, or that an appropriate contracting out provision is included with reference to the new sections of Part 4A.
Consider requesting a pre-contract checklist and the post-build information from the contractor. Developers are not obliged to provide these to purchasers, but as these protections become more widely advertised we may start to see purchasers requesting such information.
Review their sale agreements to identify and minimise any risk of the agreement being considered a ‘residential building contract’ under the new provisions. If a sale agreement is also a ‘residential building contract’ then certain additional provisions under Part 4A will apply.
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.