New Zealand: Dealing with Canterbury property - beware the dangers

Last Updated: 30 July 2014
Article by David Fitchett

A myriad of post-quake property issues are only now rearing their ugly heads. We touch on some of these issues below, and invite you to contact our specialist property team for further advice.

Buying residential property

It remains essential to carry out due diligence on any earthquake damage the property may have suffered.

If the damage is yet to be fixed, it is essential that the associated insurance and earthquake claims are assigned to the purchaser.

Agreements for sale and purchase now commonly contain a variety of conditions that deal with the assignment of earthquake damage claims. The quality and effectiveness of these conditions can unfortunately vary wildly as well.

It is essential that you consult a specialist property lawyer before committing yourself to a purchase. Some of the situations we have seen recently include:

  • A vendor of a property agreed to assign over the insurance claims, but had, unbeknownst to the purchaser, already pocketed a cash payment from EQC. That vendor then made himself scarce following settlement, leaving the purchaser to eventually pay for the repairs out of their own pocket.
  • A vendor made a number of EQC claims for each separate aftershock, but omitted to pass on all of the relevant claim numbers. As a result only some of the claims were assigned to the purchaser. EQC refused to carry out any works until all EQC claims were in the purchaser's control, but again the vendor was difficult to contact once the purchase monies had changed hands.
  • The EQC claims for a house were assigned to the purchaser, but a separate insurance claim for the damaged driveway was not.

If the property is a cross-lease or unit title property, or if the access way is shared with another property, then there may be issues if neighbouring owners have two different insurers and the insurers are unable to agree as to how to share the cost of repairs. While these issues can be overcome, you should be aware that there may be an added delay before repairs commence.

Purchaser may not be entitled to the same benefits under the insurance policy

If a purchaser buys a house that has not yet been repaired, it is important that they are satisfied regarding the repair costs, and how long those repairs might take to complete. There is a real danger that the purchaser will not be entitled to the same benefits under the insurance policy.

If it later transpires that the property cannot be repaired, then the insurer may take the stance that the new purchaser is not entitled to a full rebuild but only a cash indemnity payment which may be tens of thousands of dollars less than the actual cost to reinstate the property.

A new purchaser also may not be entitled to a temporary accommodation payment from the insurer while the repairs are carried out. They would have to fund their own accommodation which is a scary prospect indeed in Christchurch's currently inflated rental market.

Assignment of settled claims

Even if the repairs have been completed we recommend that the residual benefits of any EQC/insurance claims are assigned to the purchaser. This will give the purchaser a right of action if it later transpires that the repairs were inadequate.

Furthermore, every EQC claim has both a 'building' and 'land' component to it. While the building may have been repaired, the land may still require remediation. In such a case it is appropriate that any land remediation cheque from EQC is paid to the purchaser, rather than the previous owner.

It is also important that any guarantees or warranties offered by the builder who carried out the repairs are transferred over to the new owner.

Buying 'as is where is' properties

It is now increasingly common to see 'as is where is' properties advertised. In such a case the vendor will likely have accepted a cash settlement from their insurer, and then decided to sell the property in its unrepaired state. There are a number of issues to consider before selling or buying such a property.

If you are selling:

  • If you are selling the property 'as is where is', then you should ensure that your insurer is aware of your plans. Your insurer's cash settlement offer may be conditional upon you actually repairing the property, or purchasing an alternative property elsewhere. You may be liable for damages if you instead use the cash payment you receive for a different purpose. In some cases the insurer's cash settlement will be based on the insurer retaining salvage rights to the house, and this could restrict your ability to sell the property. If you have a mortgage, your bank will also be required to consent to any cash settlement. We strongly recommend that you obtain legal advice before signing any cash settlement agreement with your insurer.
  • The sale and purchase agreement needs to be carefully worded so that it is clear that you will be keeping the benefit of any insurance claims, and that you are not providing any warranties about the condition of the property.

If you are buying:

  • If you are purchasing an 'as is where is' property, then you should consider whether the property can be insured in the future. You will not be able to obtain bank finance for the purchase without adequate insurance in place. Any contents stored in the house may also be uninsurable and this should be checked very carefully. Furthermore if no insurance is available you, as owner, could be personally liable if the house collapses or catches fire and damages neighbouring property.
  • You must consider whether the property can be safely occupied. This is particularly important if you intend to lease the property as you will have certain responsibilities under health and safety legislation (if the property is a commercial tenancy) or the Residential Tenancies Act (if it is a residential property).
  • It may be necessary to obtain a structural report to ensure the property's unrepaired state does not pose an undue risk to people or property. Local authorities have an ability to restrict access to a property which it considers is unsafe or unsanitary.
  • If you are planning on leasing the property as a residential tenancy, then you need to keep in mind that your tenant may be unable to insure their contents. This can in turn affect your ability to recover any loss from your tenant's insurers if the tenant damages the property, as commonly such damage cover would have been tied to their contents insurance.
  • You may need to factor in the cost of demolishing the property into your purchase price. The demolition cost could increase dramatically depending on the type of building products involved i.e. deep foundations or the presence of asbestos.
  • You should consider whether the land is suitable to be rebuilt on. Information on the land's general technical category is freely available, but it might be necessary to obtain a site specific geotechnical report.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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David Fitchett
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