New Zealand: When building reports are provided by the vendor: What should a purchaser be aware of?

It has long been recommended that a purchaser has a property inspected by a builder before they commit to a purchase. The building report will often give a valuable insight into the condition of the property so that the purchaser knows whether they will need to set aside money for upcoming repairs or maintenance.

It is now quite common for the vendor to obtain a building report (instead of a prospective purchaser) prior to listing their property. This gives the vendor a chance to complete any repairs themselves as well as being able to provide a clean building report which may give a nervous purchaser confidence that they're not about to buy themselves a lemon.

This practice raises a couple of questions:

  • Can a purchaser rely on a report which has been obtained by the vendor?
  • Should a vendor be worried about liability for reports they provide if the report failed to identify a potential problem e.g. structural or weather tightness issues?

Often the first reaction of a purchaser is to want to make the building inspection firm who provided the report liable for paying the cost of fixing any problems not identified in the report.

Who is liable for an incorrectly prepared building report?

This depends! Who was the report was prepared for?

The default position is that a building report can only be relied on by the person who commissioned it and to whom the report is addressed. Building reports will usually contain specific exclusions to prevent them being relied upon by others.

This will most likely prevent a purchaser being able to recover costs from the author of a building report that was obtained by the vendor. It may even mean that if a contract is signed in a purchaser's personal name, but that person later decides to nominate their company to complete the purchase, that purchasing company may not be able to recover any loss, even if the shareholders are the people who commissioned the building report.

What if you are the vendor who provided the report?

It is important to keep in mind that as a vendor you have engaged a builder to carry out the report. As you're not a building expert, you don't want to be accused of misrepresentation if your builder gets their facts wrong.

This has happened in at least one court case where the vendor provided a report as part of the pre-contract marketing information. The building inspection firm "endorsed" during the due diligence period and this endorsement was provided to the purchaser by the vendor without any additional comment by the vendor.

The building was later found to have weather tightness issues and the purchasers were considered by the court to have grounds for claiming "misrepresentation".

What can you do to protect yourself?

There are various safeguards and ways of protecting yourself whether you are the vendor or the purchaser:

  • You should carefully assess the qualifications of the building inspection firm employed to do the report, as well as the insurance held by that firm to protect it from mistakes in reports;
  • Great care should be taken with all correspondence between the vendor, the purchaser and their agents/solicitors to ensure the building report is not misconstrued;
  • The timing of the incorporation of a purchasing company should be managed, and it may be necessary to have the report readdressed to the new company; and=
  • A cautious purchaser may wish to proceed on the basis that they cannot totally rely on a report which has been obtained by the vendor. If there is any cause for concern the purchaser may need to obtain their own independent report.

If you are the vendor considering this issue at the time marketing starts, or if you are the purchaser going through the due diligence process, it can be critical to avoid the unexpected when it comes to supplying or obtaining building reports.

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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