On 11 February 2013 the High Court found that the purchasers of a leaky building had not taken reasonable steps to protect themselves against the risk that the house had weathertightness issues. Because of this, the loss they suffered was substantially their own fault, and the Court reduced the damages which would otherwise be recoverable by 70%.
The plaintiffs had purchased a residential property in Auckland in April 2009 at a mortgagee sale by tender. Substantial alterations had been carried out prior to the purchase and a code compliance certificate issued by the North Shore City Council, the predecessor to the Auckland Council.
The works carried out were more extensive than those provided for in the consent. Accordingly the code compliance certificate did not relate to all the works that had been carried out. Further, the work was defective so that the house was not weathertight. The plaintiffs claimed $1.925m in damages from the Council on the basis it was negligent in issuing the code compliance certificate.
The Council admitted that it had been negligent but said the plaintiffs had significantly contributed to the loss they suffered, because they did not obtain a pre-purchase report nor make any other enquiries about the soundness of the house. The plaintiffs said they were entitled to rely on the code compliance certificate issued by the Council, arguing that if a property is bought in reliance on a negligently-issued code compliance certificate, a purchaser cannot be found liable for contributory negligence.
Woodhouse J rejected the proposition that purchasers who rely on a code compliance certificate negligently issued by Council are exempted from the consequences of any contributory fault. The various policy arguments raised by the plaintiff as to why purchasers should be entitled to rely solely on a code compliance certificate were held to be relevant to why Councils have a duty of care, but not sufficient to give rise to a general exemption from contributory negligence for purchasers who suffer loss due to the negligence of councils in carrying out inspections and issuing code compliance certificates.
The Judge emphasised that each case must be decided on its own facts. Woodhouse J considered that the facts of this case were markedly different from the facts of leading authorities such as Hamlin and Spencer on Byron.
The important factors in that case were, first, the plaintiffs were experienced owners of valuable property who knew about the problem of leaky homes, and were alert to the possibility that the house might be a leaky home. The house was had monolithic cladding and there were visual signs of moisture damage, yet the plaintiffs took a calculated risk to proceed with the purchase.
Secondly, the code compliance certificate could not provide the assurance that such certificates have in the past because the certificate related to only a small part of the work that had been done. In particular, the whole house had been reclad but the code compliance certificate did not relate to this.
The plaintiffs did not take the steps a prudent purchaser should take, such as obtaining a pre-purchase report and checking the records available from the Council. In this case, a check of the Council records would have revealed the dissonance between the scope of the work carried out and that covered by the code compliance certificate.
Further, the fact the standard vendor's warranties and undertakings were deleted from the agreement for sale and purchase should have prompted caution as to whether there might be problems with the house.
The Judge also considered it relevant that the plaintiffs had obtained legal advice, holding that it would have been negligent for a lawyer to advise a client that a code compliance certificate could be relied on and nothing more needed to be done. Any lawyer would have been aware that local authorities had not been meeting their statutory obligations, so that checking council records or taking other steps was advisable.
The plaintiffs argued that, in the context of a mortgagee sale by tender subject to a tight timeframe, they had no option but to present an unconditional offer. They noted that there were restrictions on access to the property and they were unable to carry out invasive testing; therefore obtaining a pre-purchase report was not an option.
Woodhouse J did not think that excused the plaintiffs’ actions (or inaction). The evidence in that case established that a competent inspector could have been engaged at short notice and carried out a non-invasive inspection. Even a visual inspection would have disclosed significant concerns, making it negligent for the plaintiffs to proceed, or at least to proceed on the particular contractual terms.
The Judge noted that the plaintiffs did not seek a variation of terms so as to provide them with better protection, including the ability to withdraw, nor did they offer a lower price. If the plaintiffs were unable to secure an agreement as to price and terms that would protect them against risk, the prudent course was simply to not proceed with the contract.
Taking these factors into account, the Judge found that the plaintiffs were substantially “the authors of their own misfortune”. Accordingly it was appropriate to reduce the damages otherwise recoverable by 70%.
As to damages, the plaintiffs argued they should be compensated based on the cost of repairs, which would be the normal approach for a contractual claim. Woodhouse J reviewed the authorities and found there was no reason to depart from the normal tort approach, namely, the "diminution in value" measure. This meant that damages were calculated based on the difference between the purchase price and the market value of the property in its defective state at the time of purchase. The plaintiffs were ultimately awarded $370,500, plus $10,000 in general damages.
The extent to which this decision turns on its own facts remains to be seen. However this case makes it clear that when advising on a property purchase, practitioners should take care to inform clients as to the steps they should take to mitigate any risks. An interesting implication of the decision is that the widespread knowledge of the leaky building problem has effectively put purchasers (and practitioners) on notice that they need to investigate any such risk. In particular, it is important to check the scope of any code compliance certificate issued by a council, as purchasers now may not be able to rely on such certificates alone. A prudent purchaser should take steps such as obtaining a building report and ensuring the contract provides sufficient protection against risk.
If a practitioner fails to recommend these steps and a client suffers loss as a result, it appears from this decision that the practitioner could be liable for negligence.