The Million Dollar Mistake – That you could easily make!

In this article, I want to share a sobering story. 

The Story

Sometimes, being a lawyer is a little like being a priest.  What I mean is that, in the course of assisting property investors, I am usually given more detail, both good and bad, with less filtering than most people get reading social media or even traditional media.

In this case, a new client called me with questions in relation to a devastating situation.  The client had purchased a home more than 10 years ago.  The home is less than 20 years old. However, recently the extent of the poor workmanship of the home builder has become clear.  The nature and extent of the defects, and resulting deterioration over time, now means that the house has to be demolished.

The cost to rebuild is estimated at $1 million.

The Problem

The client, quite reasonably, feels very aggrieved. 

There are a range of parties that have clearly failed here.

The builder was in fact an apprentice builder – who ‘borrowed’ his employer’s registration to get the building work done.

A number of trades have clearly failed to build to the required standards.

The building inspector shouldn’t have certified the building work – but for reasons that are unclear the various building stages were signed off.

Sadly, each of the above issues is all too common in the building industry.

Building Work

To put it very simply, Section 134(1) of the Building Act provides:

• Despite anything to the contrary in the Limitation of Actions Act 1958 or in any other Act or law, a building action cannot be brought more than 10 years after the date of issue of the occupancy permit in respect of the building work (whether or not the occupancy permit is subsequently cancelled or varied) or, if an occupancy permit is not issued, the date of issue under Part 4 of the certificate of final inspection of the building work.

That is, there is no claim for defective building work more than 10 years after the occupancy permit is issued.

Hence, the builder is off the hook.  The tradies who did the poor work get off scott-free.  The building inspector who approved the shoddy work has no liability.

Unlike the Limitations of Actions Act there is no exception for faults that couldn’t have been detected until after the 10-year limitation period.

Given that most people purchase a house or apartment thinking it is a long-term or even 100-year asset this is a major shortfall.  After all, who thinks that they are buying a house with a 10-year life?

Insurance

Insurance offers no help to the client.

Builder’s Warranty Insurance expires after 7 years.

Normal house insurance typically excludes claims that arise because of defective building work.

Material Facts

As an aside, there were recent (2019) changes to the Sale of Land Act that required vendors to disclose material facts and make it an offence to knowingly conceal any material facts. However, in most cases it is difficult to prove what the vendor did or didn’t know.

Concluding Thoughts

Sadly, through no fault of the client, the client will be footing the entire cost of rebuilding their home.

One successful investor put it to me that the difference between investing in property and speculating in property is due diligence.

Whether you are buying your first home or your tenth investment property – you should be investing in property not speculating.

The specific, and perhaps only protection for a client in these circumstances is a quality pre-purchase building inspection.  Now perhaps not all of the defects in this case would have been identified – but I’m pretty sure that the overall poor quality of the build would have been picked up and this should have led the client to not proceed with the purchase and avoid the million-dollar rebuild.

Equally, if you are building a home, an independent inspection of the home by a professional inspector once the home is complete and before you make the final payment also helps protect your investment.

If it needs to be said – when I purchased a property last year – the contract was conditional on both pest and building inspections – and I had the inspections done.

I also strongly recommend a Purchase Contract Review.  For $150 plus GST, I will explain the key points in the contract, identify any unusual issues you should be concerned about and suggest special conditions to tailor the contract to your needs – you can learn more about this here.

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