In a decision released at the end of last year, the Supreme Court ruled that local authorities cannot require building owners to strengthen buildings to more than 33% of new building standards.1 The decision will have a significant impact on the scope of insurers’ obligations to pay for the repair of buildings damaged in the Canterbury earthquakes, as well as consequences for building owners throughout the country.
What does the Building Act say?
In summary, the Building Act says that an existing building is earthquake-prone if:
it has less than 33% of the strength required for a new building under current standards (in short, if it is below 33% of new building standards, or NBS); and
it would be likely to collapse causing injury, death or damage to other property.
If a building is earthquake-prone, a territorial authority can issue a s 124 notice, requiring work to be carried out to “remove the danger” to the building.
What did the Christchurch City Council do?
In 2010, the Christchurch City Council adopted a policy concerning earthquake-prone buildings. In the policy, the Council said that in issuing notices under s 124, it would be guided by a recommendation by the New Zealand Society for Earthquake Engineering (NZSEE) that existing buildings should be strengthened to at least 67% of NBS.
This caused reverberations for both property owners and insurers. Could local councils require building owners to strengthen existing buildings to 67% of NBS? And could insured building owners in Christchurch pass on the costs of complying with such a requirement – commonly called a “regulatory upgrade” – to insurers?
What happened to the University?
The University of Canterbury suffered significant damage in the Canterbury earthquakes. The University claimed the costs of repairing this damage from its insurer. In addition, the University argued that the City Council could serve a s 124 notice requiring the University to strengthen its buildings to 67% of NBS, which would make the buildings much stronger than they were before the earthquakes. The cost of this additional strengthening to the University was $144 million.
The University argued that it could be compelled to incur this cost because under its insurance policy, it was covered for any additional costs required by law. The University said that a s 124 notice was such a requirement, and that if the Council issued a notice, the University would get the benefit of a $144 million upgrade to its buildings at the insurer’s expense.
The Insurance Council of New Zealand, by contrast, argued that the City Council’s power is limited to making sure that the building is at least 33% of NBS, but no more.
What did the Supreme Court rule?
The Supreme Court ruled in favour of the Insurance Council. Under s 124, local councils can require property owners to take steps so that their buildings are no longer below 33% of NBS. However, councils cannot require owners to undertake work to a higher standard than 33% of NBS. To the extent that the Christchurch City Council’s policy went beyond that, it was invalid. This meant that the University could not claim from its insurer the additional $144 million cost of upgrading its buildings to 67% of NBS.
What does this mean for property owners and insurers?
The decision is good news for insurers. Christchurch property owners who suffered loss in the earthquakes cannot argue that, in addition to paying for repair costs, insurers should also pick up the additional costs of upgrading buildings to 67% of NBS. The costs of upgrading a building to a greater seismic strength than the building had before the earthquakes is to the property owner’s account, not the insurer’s account.
Although the decision is not helpful to Christchurch property owners still negotiating their insurance claims, property owners more generally now have certainty that the Building Act does not require them to upgrade their buildings to more than 33% of NBS. Any upgrade above this level is a purely commercial decision for building owners.
What about building consents?
The Christchurch City Council’s policy also said that it may require additional strengthening to be undertaken as a condition of granting a building consent for earthquake repairs. The Council again said that it would be guided by the recommendation of the NZSEE to strengthen to at least 67% of NBS.
Christchurch property owners had sought to argue that a condition to strengthen a building to 67% of NBS was a legal requirement that insurers were required to pay for under insurance policies.
However, the City Council has since accepted that the Building Act does not give it the power to impose such a requirement as a condition of a building consent, and the point was not argued in the Supreme Court. As a result, insurers are not faced with paying the additional costs of regulatory upgrades to buildings to 67% of NBS, in addition to paying for earthquake damage.
Will the proposed amendments to the Building Act change the position?
The Building (Earthquake-prone Buildings) Amendment Bill was introduced into Parliament on 9 December 2013. The Bill proposes to improve the systems for managing earthquake-prone buildings by providing for a greater role for central government, clarifying the minimum threshold before work can be required, and providing for a single national timeframe for that work to be undertaken.
Importantly, the Bill retains the existing definition of an earthquake-prone building, at 33% of NBS. The Bill also clarifies the powers of local councils, making it clear that a council can only issue a notice requiring work to bring a building up to at least 33% of NBS. Consistent with the Supreme Court’s decision, the Bill does not allow councils to require work to a higher standard.
The Bill is currently before a Select Committee, which is due to report on the Bill by 30 March 2015.
Does the Health and Safety Act impose additional obligations?
Property owners owe health and safety obligations under the Health and Safety in Employment Act 1992 (HSE Act). Arguably, the HSE Act requires property owners to follow the recommendations contained in the NZSEE Guidelines and strengthen to at least 67% of NBS, rather than merely ensuring that buildings are above 33% of NBS and therefore not earthquake-prone under the Building Act.
However, in December 2013, WorkSafe issued a “position statement” on earthquake-related hazards, which attempted to clarify the interplay between the Building Act and the HSE Act for property owners and occupiers. In summary, WorkSafe is unlikely to take any enforcement action for a serious harm incident if the owner or occupier has been complying with the Building Act and the timeframes for undertaking building work imposed by the local council. That said, owners and occupiers may still be vulnerable to enforcement action under the HSE Act if they have failed to comply with the Building Act. Further, WorkSafe may take action under the HSE Act if owners or occupiers fail to take practicable steps to identify and manage hazardous objects, including components attached to buildings such as ceilings, verandas, or glass.
What impact does a lease have?
A lease of the property may contain further obligations. For example, the lease may allow a landlord to charge the tenant for the cost of complying with a s 124 notice or repairing earthquake damage. However, if the landlord decides to strengthen the building in the absence of a s 124 notice or in excess of the requirements in the Building Act, the cost of this work is typically to the landlord’s account.
We are seeing some tenants requiring landlords to carry out earthquake strengthening work at the time that a lease is renewed or a new lease is entered into. In many cases, tenants are requiring buildings to be upgraded to a much higher standard than 33% NBS, and in some cases even requiring 100% of NBS.
Some tenants are also vacating earthquake-prone buildings while negotiating with a landlord for further work to be completed. If a tenant elects to vacate a building then it will usually be obliged to continue to pay the rent. As always, the answer will depend on the terms of the particular lease.
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.