Implied warranties for residential building work have now been greatly expanded.
These changes will impose greater liability on you, if you are:
- a residential building contractor;
- a house-building company;
- a developer offering house-and-land packages;
- someone (on seller) who, for the purpose of on-sale:
- builds a dwelling yourself;
- arranges for a dwelling to be built; or
- buys a dwelling from someone who built it or arranged for it to be built.
The Building Amendment Bill (No.4) was passed into law under urgency on 20 November, and is now the Building Amendment Act 2013. This Act imposes consumer protection obligations on anyone building or selling household units. It expands the implied warranties regime for residential building contracts so that they are also implied into every sale and purchase contract entered into by an on-seller.
These warranties are mandatory – it is not possible to contract out of them. They apply to all contracts entered into after the Act comes into force by Order in Council (likely to be early 2014).
The warranties are that:
- the building work is carried out properly, in accordance with the plans and specifications in the contract and the building consent;
- materials used are suitable for their purpose and new (unless otherwise stated in the contract);
- the building work complies with the Building Code and all other legislation;
- the building work will be completed by the date specified in the contract (or, if no date is specified, within a reasonable time);
- the household unit is suitable for occupation on completion of the building work;
- the building work and any materials are reasonably fit for any purpose stated in the contract for which they are required.
Remedies for breach
A key change to the current implied warranties regime is that, if there is any defect in the building work within one year of the building work being completed, the client can require either the building contractor or the on-seller to remedy the defect.
During this period, the onus of proof is on the building contractor and on-seller -- that is, the client merely needs to claim a defect exists and do not need to prove a breach. It will be for the building contractor or on-seller to prove no such defect exists if they dispute this.
In our view, this effectively imposes a mandatory defects liability period of one year in all residential building contracts.
After the initial one-year period, if there is a defect, the client may:
- require the building contractor to remedy the breach;
- if the building contractor fails to do so in a reasonable time, have the breach remedied by someone else and recover the reasonable costs of doing so from the building contractor;
- recover from the building contractor damages for reasonably foreseeable loss resulting from the breach.
Building contractors and on-sellers will have liability to not only the original owner of the household unit for breach of the implied warranties, but also any subsequent purchaser of the property, whether or not they were party to the original contract.
Code compliance certificates
The Bill also contains a new provision where it is an offence, with a penalty of up to $200,000, for an on-seller to settle a sale of a residential unit without a code compliance certificate being issued for the building work.
It is possible to contract out of this requirement with the purchaser's agreement, but the contracting out agreement must be in a particular form prescribed by the regulations.
We recommend that you:
- include in your contract a clear mechanism for determining when the building work is completed in order to determine when the one-year defect remedy period starts;
- provide clients documentation setting out detailed maintenance requirements for the building work. This will assist in excluding your liability where the building work isn't maintained properly;
- ensure your arrangements with subcontractors (if a building contractor) and contractors (if an on-seller) enable you to claim against them if their actions breach these implied warranties:
- check your insurance policies to ensure that you are covered for these implied warranties;
- ensure your business is properly structured to take account of this potential liability;
- don't attempt to contract out of these implied warranties or advice a client that they don't apply - that will be a breach of the Fair Trading Act.
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.