Leaky homes: 'Byron Avenue'

Where Council inspectors have failed to pick up deficiencies during a building’s construction, a Council is liable for the cost of repair even where it later has second thoughts and refuses to issue a certificate of compliance.

North Shore City was held liable in negligence over inadequate inspections during construction of a 14 unit residential development in Takapuna. The Council made nearly 100 inspection visits in the course of construction and was on the brink of issuing a certificate of compliance on completion when it was advised parts of the exterior plaster cladding were bubbling. This indicated moisture was leaking through joints between windows and the cladding. No certificate was issued.

The Court ruled that purchasers are entitled to rely on a Council to properly carry out progress inspections. This ensures faults can be identified and remedied before the building is closed in.

Purchasers were entitled to recover damages from the Council for cost of repairs.

In some instances, purchasers were aware there were cladding problems before they were legally committed to the transaction. These purchasers were held partly to blame for their losses and damages were reduced by up to 25 per cent for contributory negligence.

In one case, the purchaser’s lawyer had been negligent in failing to tell her that she could get information from the Council about the issue of a certificate of compliance. The lawyer was negligent, but the purchaser had to accept responsibility for this negligence and also accept a reduction of 25 per cent in the damages payable.

‘Byron Avenue’ – Court of Appeal (22.03.10)

08.10.003

Leaky homes: 'Sunset Terraces'

Council liability for leaky homes extends beyond standalone dwellings to include multi-unit apartments. Attempts by North Shore City to limit its liability failed in the Court of Appeal.

At issue was liability for replacing rotting timber framing and the cladding on a 21-unit two-storey residential development in Mairangi Bay. Historically, the courts have only allowed damages for a property’s loss of value where the loss relates to public health issues – dwellings must be capable of human habitation.

The Court ruled that Building Code rules designed to prevent homes leaking are intended to ensure dwellings are fit for habitation over at least a 50 year period. This brings contemporary “leaky home” problems within the historical rule. It made no difference whether the residence is a standalone building or a multi-unit development.

The Court further ruled that Council liability for homes built in breach of the Building Code applied not only to the first buyer, but also extended to subsequent purchasers of a leaky property.

‘Sunset Terraces’ – Court of Appeal (22.03.10)

08.10.002

Fair Trading: Red Eagle Corporation v. Ellis

Having a reputation for good business judgment and integrity means liability follows for honest but misleading statements made without qualification or reservation. Two Auckland businessmen fell out when a loan went sour.

The Supreme Court was told that Auckland businessman, Mr Tony Falkenstein, was approached by a longtime business acquaintance, Mr Rick Ellis, for short-term development finance. Mr Ellis was assisting a Sydney woman in setting up a paua farm in Singapore. She had asked him to source a three month $250,000 loan to fund the closing stages of the project.

When approaching Mr Falkenstein for assistance, Mr Ellis told him the woman owned substantial Sydney real estate having a net worth of some two million dollars.

At Mr Falkenstein’s request, Mr Ellis obtained details of her assets and liabilities which appeared to confirm the substance of her claimed net worth. Mr Ellis did not personally check the accuracy of the information provided from Australia and did not tell Mr Falkenstein that the information was unverified.

Loan documents were signed by the woman and an unsecured advance for $250,000 handed over. The loan was not repaid, the Australian woman was bankrupted and Mr Falkenstein found out that she did not own the properties she claimed to own.

He sued Mr Ellis, alleging a breach of section 9 of the Fair Trading Act 1986: misleading or deceptive behaviour.

The court said Mr Falkenstein advanced the loan because past experience showed that he could trust Mr Ellis’ integrity. Mr Ellis had initiated discussions about the loan. Mr Falkenstein relied primarily on the information provided by Mr Ellis about the value of the Sydney properties. The woman provided a schedule of her (supposed) assets and liabilities which appeared to confirm the accuracy of what Mr Ellis was saying. This schedule alone was not the reason for making the loan.

The Supreme Court ruled that statements made by Mr Ellis about the borrower’s financial position were misleading. He was liable to make good Mr Falkenstein’s losses.

However, the amount to be recovered was reduced by 50 per cent. The court said Mr Falkenstein could have better protected his position by taking steps to find out who did own the properties.

Red Eagle Corporation v. Ellis – Supreme Court (12.03.10)

12.10.002