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The High Court has recently issued an important decision dealing with a Council's duties to homeowners when performing its functions under the Building Act 1991. The decision is Body Corporate 188529 v North Shore City Council, commonly referred to as the "Sunset Terraces" case. This FYI summarises the Court's decision and explores its implications for Councils.
The Court had to decide whether losses caused by weathertightness defects in certain townhouses could be recovered from any of three defendants: the developers, the Council and the designer. All claims were based in negligence. The Court held that the developers were primarily to blame for the "bad buildings". However, because the developers were apparently insolvent (they did not participate in the hearing), the focus of the decision is on the position of the Council, as the last "man" of any financial substance.
Although the defects in question related to weathertightness, the decision has wider application to any building works consented under the Building Act 1991 (Act).
The decision
The essence of the Court's decision is that a territorial authority owes a duty of care to any owner of a unit where it is disclosed to the Council that the intended end use of the unit is residential. This duty exists whether or not the unit ends up actually being used for residential purposes. The duty is to take reasonable care in performing its regulatory functions under the Act, and in particular at three distinct stages: issuing the building consent, inspecting work carried out under the building consent, and issuing a code compliance certificate (CCC) in respect of that work.
Facts
The case concerned a residential complex in Mairangi Bay comprising 21 townhouses which were built in 1997 and 1998. The dwellings were constructed using untreated timber framing and monolithic cladding (Harditex). The completed units were not weathertight, moisture ingress occurred and there was decay of the wooden framing of some of the units.
Council’s duty of care to homeowners
The first question before the Court was whether the Council owed a duty of care to the owners of the units. Negligence can only be established if there is such a duty of care.
The Court reviewed the case law on duties of care owed by Councils to homeowners. The leading New Zealand decision was Invercargill City Council v Hamlin, which pre-dated the Building Act 1991. In Hamlin, the Court held that a Council was liable to the owner of a single dwellinghouse for defects caused or contributed to by the negligence of a building inspector. However, until the Sunset Terraces case, the High Court had never been asked to rule on whether (and if so, to what extent) a Council owes a duty of care to the owner of a multi-unit townhouse constructed after the Act came into force.
The Court did not accept the Council's argument that the principles in Hamlin were no longer relevant because of material changes in the socio-economic fabric of New Zealand society and the enactment of the Act. It confirmed that the duty established in Hamlin still existed and applied to units within a unit-title development as well as single dwellings.
In this area, New Zealand courts have consistently drawn a line between residential and commercial buildings and declined to impose similar duties of care in relation to commercial buildings. However, what about residential dwellings which are being used for commercial purposes, for example as an office? The Court said that it was necessary for the legal test to be simple to express and predictable in application. It held that the relevant criterion should be the intended end use of a building, rather than its actual use.
The Court summarised the duty of care as follows:
"A territorial authority owes a duty of care to anyone who acquires a unit, the intended use of which has been disclosed as residential in the plans and specifications submitted with the building consent application or is known to the Council for that end purpose. The duty is to take reasonable care in performing the three regulatory functions in issue: deciding whether to grant or refuse a building consent application, inspecting the premises to ensure compliance with the building consent issued and certification of compliance with the Code."
Was the Council negligent?
Issuing the consent
The Court said that in issuing a consent the Council was making a predictive assessment about whether there were reasonable grounds to conclude that the work would be carried out in compliance with the Building Code (Code). In doing that it was entitled to assume that:
1. the developer would engage competent builders or tradespersons and that their work would be properly coordinated; and
2. a competent tradesperson would follow the instructions in the relevant technical manual.
No negligence was proved at the building consent issue stage.
Carrying out inspections
The Court said that when carrying out its inspections, the Council's obligation was to take all reasonable steps to ensure that the building work was being carried out in accordance with the building consent - it was not assuming any responsibility for ensuring that all completed work complied with the Code. It repeated the comment from earlier cases that in carrying out its inspection role, the Council could not be regarded as a "clerk of works" or as a project manager.
The Court held that the Council's obligation was to establish its own inspection regime. Such a regime should serve as a road map for the inspection process once the building consent is granted and before construction begins. It should identify what needs to be checked, and inspections should be planned at times when the work undertaken is capable of visible examination. The Council should advise the developer of the stages at which the inspections will be carried out. The obligation is then on the developer to advise the inspectors before each stage begins.
The Court noted that in the context of a multi-unit development, sample units could be identified, as opposed to a full inspection of every unit to ensure compliance.
The Court said it was impossible to lay down a rule for the number and nature of inspections required for a particular construction project. This depended on the type of structure being built, whether the design was common or original, difficulties involved in the construction process and any problems caused by the physical environment. If there was evidence that an inspector had reached an informed decision on the number and nature of inspections required, the Court should be slow to review that decision, especially given the dangers inherent in the benefit of hindsight.
There was evidence in this case that the Council had carried out between 77 and 120 inspections during the construction phase. Despite that, the Court held that the Council was negligent in its inspection process for failing to put in place an adequate inspection regime on which it could determine, on reasonable grounds, that all relevant aspects of the Code (especially relating to waterproofing issues) had been complied with.
Certifying Code compliance
The Court held that the Council had breached its duty to take reasonable care in issuing the CCCs, as it did not have reasonable grounds to be satisfied that the building work complied with the Code. Those responsible for issuing the interim CCC would have been aware that they had not seen visible evidence of waterproofing having been undertaken in accordance with the Code. In addition, sufficient steps were not taken before the final CCC to revisit the adequacy of the waterproofing even though the Council had by then been expressing concern about part of the cladding using Harditex.
Other issues
The Court made some interesting findings in other areas as well.
Position of body corporate
One of the issues before the Court was whether (and if so, to what extent) a body corporate can sue for damage to a unit title development. The Court held that a body corporate could only sue for losses caused to common property. It had no standing in relation to damage to individual units, which must be recovered by the individual owner.
Homeowner who purchases after damage is manifested
The Court also considered whether those owners who purchased their units after the date on which damage had manifested itself had a cause of action against the Council. The Court held that in this case, a purchaser or subsequent purchaser of a dwelling unit was not removed from the scope of the Council's duty of care merely because he or she acquired the unit after damage had manifested itself. However, if they had paid a discounted price to reflect the damage, that may affect the amount of their loss.
Contribution by the developers
The Court said that the primary cause of the loss was the developers and the Council was entitled to a "significant contribution" from them (no negligence was found on the part of the designer). It apportioned responsibility 85% to the developer and 15% to the Council. (This just relates to contribution as between the Council and the developers. The Council would still be responsible to the plaintiffs for the full amount.)
What does this decision mean for Council inspectors?
The lesson to be learned from this decision is that Councils must be aware of their duty of care to homeowners, and what this means in terms of processing the building consent. The Court said:
"From the Council's perspective, once it were disclosed that the units were being built for residential purposes, it would be aware that its duty of care to a prospective purchaser was triggered. It could then put in place appropriate processes to manage the risks of the statutory obligations cast upon it: In particular, the tasks of issuing a building consent, inspecting the building work and determining whether to certify compliance with the Code. If it were in doubt as to the intended end use, it would be on inquiry and ought to use its powers to obtain further information to clarify the position".
This process includes the preparation, by the Council, of its own schedule of inspections specific to each particular construction project. The inspections should cover each of the relevant aspects of the Code which require certification. The Council must advise the developer of the stages at which the inspections would be carried out so that the onus is then on the developer to advise the Council when each stage begins so that it can carry out its inspection.
At Code compliance certification stage there is still an opportunity for the Council to overcome any deficiencies in its inspection process. If inspections have not been carried out to confirm compliance with certain provisions of the Code once construction has been completed, then the Council should make inquiries, independent of its inspections, to satisfy itself on reasonable grounds that those provisions have been met. If such inquiries are made and answered adequately then a decision to certify would be reasonable and would prevail over an insufficient inspection process.
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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