A recent High Court case shows that, in some circumstances, buyers of a property cannot rely totally on a code compliance certificate, but may have to undertake further investigations themselves. 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 a buyer who bought a residential property in Auckland 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, so the code compliance certificate did not cover all of the works that had been carried out.
The work turned out to be defective, so that the house was not weather tight. The buyer 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 buyer had significantly contributed to the loss by not getting a pre purchase 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. Also, the whole house had been reclad, but the code compliance certificate did not relate to that – it covered only a small part of the work that had been done.
The Court said that a prudent purchaser would have obtained a pre purchase 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 irrelevant as to whether the buyers had 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 also said that it did not matter that this was a mortgagee sale where an unconditional offer had to be made. The Court said that a competent inspector could have been used at short notice to carry out a non-invasive inspection. Even a visual inspection would have found significant concerns.
The Court therefore 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%.
Summary
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 mitigate any risk. Depending on the circumstances, a buyer may have to make further enquiries, rather than merely relying on a code compliance certificate or LIM.
Also, the judge was obviously of the view that, 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.
This case also shows that 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 that lawyers will advise buyers that they must obtain a building report.
This case also shows that 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 correct at time of publication, designed as a general guide and should not replace specific legal advice on a particular issue.
