In this article we outline the Government’s proposed changes to liability under the Building Act and their implications for Councils and homeowners.

Yesterday the Government announced proposals to make significant changes to the way buildings are consented. Building and Construction Minister Chris Penk said that Councils are reluctant to sign off on building consents and issue code compliance certificates because they could be held liable for all defects, leaving ratepayers to foot the bill. That risk aversion leads to delays and associated extra cost for builders and homeowners.

The proposed solution is to amend the Building Act 2004 to fundamentally change how liability for building defects is apportioned. Instead of potentially being liable for up to 100% of the cost of a building defect no matter how much they contributed to a defect, the planned reform will limit each party’s liability to their proportion of fault.

Proportional liability in, joint and several liability out

The existing law, known as joint and several liability, is intended to award a successful party enough to fix the building defects or fully compensate their loss. If some of the liable parties have gone bust or disappeared, then other parties must foot a higher share to make up the 100%. It is designed to protect an owner’s right of recovery even if it means the council, architect, engineer, builder and others involved in the construction pay more than their fair share of fault. 

Councils have highlighted how that creates unfairness for them and their ratepayers. Minister Penk mentioned Queenstown Lakes ratepayers who have each paid $10,000 in extra rates towards a leaky building settlement after the developer went into liquidation and the Council was left as one of the only solvent defendants left standing. While judgments such as Bianco Apartments [2023] NZHC 3034 regularly conclude Council’s strict apportionment of liability is only 15% of the overall damage, joint and several liability permits a successful plaintiff to recover up to 100%. Minister Penk said that Councils have paid out $330m over 10 years for defects for which they were not responsible. 

Proportional liability would limit the amount payable by a Council (or any other defendant) to its relative share of fault. The Court would first determine whether each defendant is liable at all, and then determine their relative share of the cost to put it right. The problem with this approach is that it can leave the owner with a shortfall - either because all of the responsible parties were not added to the litigation, or because some of them have gone bust. In 2014, the Law Commission concluded these risks meant that the joint and several liability rule should be retained. It recommended that the problem for Councils could be solved by a legislative cap limiting their liability to $300,000 for defective buildings. However, that proposal was not implemented. 

Managing the shortfall risk - indemnity insurance, warranties, something else?

Minister Penk acknowledged that proportional liability involves risk of a shortfall and that homeowners needed to be protected from that risk but provided few specifics about how that risk would be managed under the regime. It appears some of the concepts the Government will explore are:

• Stronger consumer protection legislation, which might provide some remedy for homeowners, but not for any other kind of building owner. 
• Requiring professional indemnity insurance.
• Implementing a home warranty building scheme, similar to arrangements in Australia.
• Improved licensing regimes so that only “trusted” businesses and practitioners are involved in construction. 
• Tightening the rules on phoenix companies to prevent people winding up their business to avoid legal liability only to begin trading under a new legal company. 

Still a lot of work left to do

Some or all of those concepts may provide adequate protection for building owners against the potential downsides of a proportional liability regime, but they each bring their own downside and potential flaws which could leave gaps for vulnerable building owners. Licensing trusted companies may be all well and good, but the collapse of Mainzeal in 2013 demonstrated that even large, well trusted construction companies can collapse suddenly and with little recourse for those affected. 

Minister Penk did not address whether the new laws would differentiate between commercial and residential owners or buildings. A series of cases, all the way up to the Supreme Court, says that there is no difference. Sophisticated owners of multi-million dollar commercial buildings are just as entitled to sue for building defects as first-time homeowners buying off-the-plan. It will be interesting to see if the proposed reforms differentiate between those parties. 

The announcement also does not address whether the joint and several liability rule will be retained for other kinds of non-construction disputes. If so, the prospect of dual systems of identifying and apportioning liability creates the potential for confusion and unjust outcomes. 

Impact for Councils

While these wrinkles will take some time to iron out before a Bill is prepared and passed into law, the proposed reforms should be greeted with cautious optimism by Councils and ratepayers around the country. If these reforms lead to lower risks for Councils and therefore lower rates increases, then that will be welcomed by many. 

Whether this reform alone will lead to faster building consents is, in our opinion, debatable. The most recent statistics showing that 95% of applications were processed within the statutory period and the overall median time was nine working days. Those statistics suggest that perceived consenting blockages may not lie with the Councils themselves. If construction is to happen faster in New Zealand, it can only be achieved by a whole package of reforms designed to delicately balance speed with the need for safe, strong and resilient buildings and infrastructure. 

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