On 22 December 2014, the Supreme Court affirmed the decisions of the Court of Appeal and the High Court in finding that local authorities cannot require building owners to strengthen buildings so they exceed 33% of the new building standards (NBS).
Importantly, subject to insurance policy wording, this limits the liability of insurance companies to upgrade damaged buildings in the aftermath of the Christchurch earthquakes. The decision also has ramifications for building owners and local authorities nationwide.
The Building Act 2004 (the "Act") governs performance standards of buildings. This includes the performance of buildings beyond 33% NBS during earthquakes. Buildings are considered 'earthquake prone' if the building is less than 33% of new building standard ("NBS").
After the September 2010 earthquake, the Christchurch City Council issued its Earthquake-Prone, Dangerous and Insanitary Building Policy ("the EQ Policy"). This policy was supported by the New Zealand Society for Earthquake Engineering who recommended that all existing buildings should be strengthened to 67% of NBS, well above the 33% minimum level.
Under section 124 of the Act, a local authority can issue a notice requiring strengthening work to be carried out on a building if the local authority is satisfied the building is dangerous, earthquake-prone, or insanitary. The Christchurch City Council ("CCC") claimed this section also allowed them to require buildings they considered were earthquake-prone to be strengthened to 67% of NBS under a section 124 notice, based on the EQ Policy.
The EQ Policy had wide ranging implications for building owners, tenants and insurers. Building owners had been seeking to pass on the costs of complying with the EQ Policy to insurers, who are often liable under the insurance policy for upgrades required by statute or regulations arising out of repair work.
The issue came before the courts because the University of Canterbury suffered significant damage during the earthquakes of 2010 and 2011. The CCC served a section 124 notice on the University requiring it to upgrade its buildings to 67% of NBS. An upgrade to this level would have cost $144 million more than the amount required to upgrade to the minimum 33% of NBS.
The University argued that the CCC did have the power to serve a section 124 notice to strengthen buildings to 67% of NBS and accordingly that the University was covered under its insurance for any costs required by law as part of its earthquake repairs.
The University's insurers, represented by the Insurance Council of New Zealand, argued that the CCC did not have authority to compel building owners to upgrade their buildings above the minimum of 33% required by the Building Act. As such, the insurer would not be liable for any costs required to make the building stronger than the minimum standard required at law, under the Act.
The Supreme Court confirmed the decisions made in the lower courts and ruled in favour of the Insurance Council. The court stated that a local authority's power is limited to requiring property owners to upgrade their buildings to the minimum requirement of 33% of NBS (i.e. the minimum level required for a building to be deemed not earthquake prone). CCC's EQ Policy, which recommended buildings achieve 67% of NBS, extended beyond what was legally required under the Act and was thus invalid.
This is a logical decision, as the law was not intended to enable a local authority to require a building at 32% of NBS be strengthened to 67%; while requiring strengthening in respect of a building at 34% of NBS.
The result was that the University of Canterbury could not claim from its insurers the $144 million required to carry out the additional strengthening as part of its earthquake repairs.
Impact on Building Owners and Insurers
This decision is positive for insurers but not so for building owners, who cannot rely on insurance companies to pay for the additional costs of upgrading buildings to 67% of NBS.
However, it does provide building owners with knowledge that they are not required by the Act to upgrade their buildings above the minimum 33% of NBS.
The power conferred by section 124 does not apply to buildings that are not deemed earthquake prone, even if those buildings may require new work or repairs. Neither does it apply to new buildings or a new building replacing an old building that was demolished as a result of the earthquake. All new buildings must be designed to withstand earthquakes and fully comply with the current Building Code requirements. An earthquake seismic rating under 100% is not considered acceptable for any new building.