Building Act 2004 - implied warranties - further risks for investors?  [Jun 2009]

In light of the leaky building cases and numbers of owners seeking redress, the issue of liability for developers, builders and even vendors has become an issue of great significance for those involved in the building industry.

The issue of ‘implied warranties' could affect any purchasers of a property from a developer for immediate on-selling or Trustees who build or arrange for a house or unit to be built as an investment which is to be onsold.

The Building Act 2004 is a companion to two other statutes introduced to address the leaky homes crisis, namely the Construction Contracts Act 2002 (which applies to construction disputes), and the Weathertight Homes Resolution Services Act 2002 (which applies to leaky homes disputes).

The statutory warranties in the Building Act 2004 are a significant source of liability for residential property developers. These strict liability warranties cannot be contracted out of and are included in two types of contracts entered into from 30 November 2004:

• providing for building work to be carried out on one or more household units, and

• sale and purchase contracts for one or more household units where one party is a residential property developer

Warranties to be implied

Warranties under the Act are to be implied to all contracts for carrying out building work whether they are written into a contract or not. The warranties are:

• that completed building work will be carried out in accordance with the Building Code

• the materials used are new, unless otherwise specified in the contract, and that they are suitable for the purpose

• the building work will be carried out with reasonable care and skill, and that it is completed by the date on the contract or within the period of time specified in the contract, or within a reasonable period (if no period is specified)

• that the building work is suitable for its intended purpose.

The warranties apply for a period of 10 years from the time the building is completed. The significance of these warranties is that future owners can take legal proceedings for a breach of any of the implied warranties as if that owner were a party to the original contract.
Who is a Residential Property Developer?
The Act provides clear statutory warranties but the definition of a residential property developer is very broad and could catch out unsuspecting sellers of new household units.
It is only if a residential property developer is in trade that they will be considered to be a developer under the Act. The definition of a residential property developer is:
a person who, in trade, does any of the following things in relation to a household unit for the purpose of selling the household unit:
• builds the household unit; or
• arranges for the household unit to be built; or
• acquires household unit from a person who built it or arranged for it to be built.
A residential property developer is a person who "in trade" acquires the household unit from a person who built it or arranged for it to be built. A private individual would not fall into this category because a private individual is not in trade unless an immediate on-sale is intended..

"Trade" is defined as any trade, business, industry, profession, occupation, activity of commerce, or undertaking to:
• the supply or acquisition of goods or services; or
• the acquisition of household units or any interest in land.
A building developer is a residential property developer in trade. The definition of residential property developer may catch out parties who purchase properties from a developer and then on-sell the properties immediately.

Trustees may also innocently fall within the definition of residential property developer if the trust builds or arranges for a house or unit to be built as an investment which is to be on-sold. Also trustees who are the first purchasers of a house to rent which is then immediately on-sold for profit could also be caught by the implied contractual warranty provisions under the Act. As it is not possible to contract out of these warranties it could mean that the trustees will be liable to a purchaser for defects in the construction of the house or unit.

Whilst an owner can bring a claim for breach of warranty against the original developer, what the Act cannot do is to guarantee that the original development company is still in existence. The developer may be using a single development company which is subsequently wound up on the completion of the project. Whilst trustees are potentially liable to claimants, an independent trustee should ensure that it is indemnified by the provisions of the trust deed for any liabilities that it may incur as a consequence of its position as professional trustee.

There are no obvious or simple solutions to avoid unintended liability under the Act. Purchasers should look to deal only with well established development companies which are prepared to provide an indemnity or guarantee to protect a purchaser from the statutory obligations under the Act. Otherwise the only other way to avoid liability under Act is to not be the first purchaser of a new house if acquired for business purposes or not to build or arrange for a builder to build a house or unit that is intended to be on-sold or rented.

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