Legal & Finance

By Joanna Pidgeon, Hesketh Henry

In a recent decision, Body Corporate 188529 & Ors v North Shore City Council & Ors (No 3) (HC, 30/4/2008; Heath J, Auckland, CIV 2004-404- 3230) the court looks at the standing of a body corporate to sue in watertight homes cases. This case also looks at the duty of care the council owes to owners and subsequent owners in multi-unit developments built under the Building Act 1991.

Background
Sunset Terraces is a residential two storey 21 unit development in Mairangi Bay built over 1997 and 1998 with untreated framing and monolithic cladding. The units were not water tight and the wooden framing of the units rotted. Some of the owners and the body corporate sued the developer, the designer and the council to recover damages.

The losses claimed comprise the cost of driveway repairs, repairs to the exterior units and professional and other fees. The buildings need to be reclad with a ventilated cavity to comply with current building code requirements. Some owners had undertaken remedial work which was defective and these costs were being claimed also as a failed attempt to mitigate loss.

The developers are alleged to have been negligent in failing to exercise proper skill and care in the construction of the units and ensuring that the building work complied with the Code, and that they were negligent in their capacity as project managers supervising the building works.

The Council was sued in negligence for failing to exercise reasonable skill and care in performing three functions cast on it by the Building Act:

Issuing a building consent;
Inspecting the work carried out under the consent; and
Issuing code compliance certificates (“CCCs”).

The designer was sued for negligent preparation of plans and specifications for the purpose of obtaining a building consent, and for failing to exercise due care and attention in certifying practical completion of the construction work.

Can a body corporate sue for damage to all units?
Does the body corporate have standing to sue the council, developers and designer for their alleged negligence? This is the right to sue in respect of the individual units and the common property in the unit title development.

A body corporate can sue, but the Unit Titles Act 1972 expressly states that it is authorised expressly to “sue for and in respect of damage or injury to the common property caused by any person, whether that person is a unit proprietor or not”.1 This suggests that the body corporate cannot reach beyond the common property. Whilst the 2002 and 2006 watertight homes legislation gave the body corporate exclusive standing to sue there is no room to “engraft upon the Act the notion of a statutory agency or quasi-trusteeship akin to that adopted for claims under the watertight homes legislation.”2 Body corporates can only sue
for damage to common property, not to individual units. The body corporate was successful against the developer for the negligent construction work of the driveway as it was common
property, but not for the construction of the units.

Does the council owe a duty of care in tort?
There is historic case law establishing the principle that a local authority owes a duty of care in issuing building permits, and when inspecting houses during construction, to both present and future owners. The council suggested that the Court shouldn’t follow those precedents established in Hamlin3 due to changes in the socio-economic fabric of New Zealand society and because the Building Act was passed in 1991.

The Judge declined to follow the council’s submission and found that the public has three fundamental expectations when buying a home which is reflected in the provisions of the building code:4

1. That the building will be structurally sound. The objective of the structural requirements in cl B1 of the Code was to safeguard people and property from injury and damage caused by structural failure 2. The need for durability which is addressed in clause B2 of the Code, to ensure that throughout a building’s life it will continue to satisfy other objectives of the code such as structure and watertightness 3. The need for a building to be watertight as set out in cl E2 of the Code which requires buildings to be constructed to provide adequate resistance to penetration by, and the accumulation of, moisture from the outside to safeguard people from illness and injury.

The council’s duty to third parties was to “exercise reasonable care and was not an absolute duty to ensure compliance”.5 After the passing of the Building Act 1991, prospective purchasers could obtain a Land Information Memorandum which is supposed to be an accurate record of the information which the council holds about the property. The existence of this mechanism to allow purchasers to find out what has been done by the council suggest that Parliament contemplated purchasers obtaining these reports to
protect their interests.

In assessing the duty of care it is necessary to weigh the desirability to compensate someone who suffers damage which could have been avoided and the desirability of not making the ratepayer or taxpayer an insurer against loss.6 Courts are much more reluctant to find a duty of care owed when the building is a commercial one rather than a residential one.

There are two key issues
– the degree of proximity or relationship between the parties, and the wider policy considerations which either strengthen or negate the existence of a standard of care.7 These units in question were residential units to be acquired by individuals, and whether it is a single unit or a multi unit development, the potential vulnerability of a potential purchaser is the same. The council would have been aware of this end use and its liability to potential purchasers and put appropriate processes in place to manage the risks of issuing a building consent, inspections and deciding whether it could obtain a CCC. This is a duty owed
only to homeowners.

In this instance the damage had manifested itself by March 2000. The council argued that as
damage is an essential element of the cause of action in negligence no cause of action accrued in favour of those who purchased units after the date on which damage became obvious, rather than arguing that the action was statute barred. However, the key point is whether the purchaser had knowledge of the existence of the manifestation of the damage.

The Council was found to be negligent in two of its three core functions– inspection due to inadequate systems and issue of CCC (the developer asked an inspector to leave as he was too pedantic and council relied on a letter from a tiler regarding the decks and most of the water ingress came from the decks), but was found not to be negligent in its issue of a building consent. The developer was also found to be negligent. Whilst the designer did owe a duty of care, he was found not to have caused any loss.

It was alleged that owners were negligent and at least partly caused their own loss
by failing to make adequate pre-purchase inspections of the properties. This was found not to be the case. It was also alleged that some of the owners who carried out repairs were negligent by failing to obtain building consents for the repairs which subsequently failed.
This issue was deferred for further consideration at the intended quantum hearing,
as was the allegation of lack of maintenance. Whether the costs of the failed attempt to mitigate losses with repairs could be claimed was also deferred.

Result
Four of the five individual owners who sued were successful in claiming against the council. While the primary cause of loss was bad building (85 per cent liability was attributed to the developers) the council was liable for 15 per cent and, as the developer was insolvent, the council will end up bearing the cost as the‘last man with any financial means standing’. The council was found to have a duty of care in performing its three key functions (issuing consents, inspecting and issue of CCCs) to subsequent purchasers of residential units. Moreover, a purchaser may still be able to claim for loss if he/she acquire the unit after the damage has manifested itself. The Building Act 2004 is being amended this year to ensure that repairs carried out for watertightness problems must have building consents, but that requirement was too late forthis development.

For further information contact:
Joanna Pidgeon,
Partner,
Hesketh Henry,
Tel: 09 375 8715, or Email: