Public Sector

Leaky Home Liability: A Lesson for Leaky Home Purchasers, Owners and Litigants

The recent High Court decision of Johnson & Ors v Auckland Council represents a new frontier in leaky home litigation. The Court had to consider the extent to which the purchasers of a 'leaky home' were liable for failing to complete proper due diligence. The case confirms that compensation will be reduced if a purchaser or owner of a property fails to take adequate care of his or her own interests, notwithstanding any negligence on the part of the Council.

Background

Mr and Mrs Johnson had purchased a property in Auckland at a mortgagee sale by tender in April 2009. Soon after settlement, the Johnsons discovered that the house had weathertightness issues and would need to be completely re‑clad. The Johnsons sued Auckland Council, claiming damages of $1.925 million being the cost of the repairs and consequential losses. The Johnsons alleged that the Council was negligent in carrying out its functions under the Building Act 1991 in granting a Code Compliance Certificate (CCC) in relation to the extensive alterations to the house that were completed in 2004.

Council's Negligence

The Council admitted it was negligent in failing to take reasonable steps to ensure that defects in the alteration work were rectified and that the alterations complied with the Building Code. The Council further conceded it was negligent in issuing a CCC. However, the Council sought to mitigate its negligence by claiming that the Johnsons had failed to make enquiries and take other reasonable steps that prudent people would have taken, and these failures contributed significantly to the losses they suffered.

The Johnsons argued that they were not required to obtain a builder's report and that there cannot be contributory negligence if a CCC has been relied on. The purpose of the CCC regime is to provide an assurance of quality workmanship.

A Calculated Risk

The Council accepted that they had a duty of care, but claimed that the Johnsons, in spite of that duty of care, contributed by their own acts or omissions to the loss sustained. The Court agreed. It was observed that the style of the house and its mode of construction, as well as the prevalence of leaky building syndrome in New Zealand reasonably suggested that it would be prudent for a prospective purchaser to carry out further investigations.

Evidence was given that by 2009, prospective purchasers would typically carry out thorough investigations, such as viewing the property file, obtaining a LIM report and a builder's report. The purpose of due diligence was to manage the various risks involved in buying a property. The Court believed that the general public had become aware that the CCC regime was not bullet-proof.

Authors Of Their Own Misfortune

The Court concluded that the Johnsons took a cavalier approach. Implicit in the Johnsons' actions was a belief that the price paid at the mortgagee sale 'contained a buffer in respect of risk'. The Court found that the Johnsons were alert to the possibility that the home might be a leaky home but chose to proceed regardless. The Court noted that "it would not have been prudent to pin everything on the [code compliance] certificate".

On the basis of the Johnsons' contributory negligence, the Court reduced the damages that would be otherwise recoverable by 70%.

Paradigm Shift

The fundamental lesson to draw from the case is that a CCC can not be seen as an absolute guarantee of building quality and compliance. At the very least, the scope of a CCC must be checked. It was discovered in this case that the CCC did not relate to all the alteration works that had been carried out. It is incumbent on prospective purchasers to undertake their own checks and investigations. A builder's report should be obtained prior to the purchase, not just to see if the property has any issues, but to prove in the event of future litigation, that adequate due diligence has been undertaken. Your lawyer can assist with pre-purchase risk management and negotiation strategies.

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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