Three Meade Street Limited v Rotorua District Council
Council negligence and duty of care to subsequent purchasers of property.
This month I feature a recent NZ decision relating to a Council’s duty of care owed to a subsequent purchaser of a commercial property.
The case concerned a motel property in Rotorua. The property was developed by Three Meade Street Ltd (3 Meade) in 1995. It was in fact built by Mr Coervers who at the time was a director and shareholder of 3 Meade. This motel was designed by Mr Dalton and engineering advice was given by Browne Spurr & Kronast. Shortly after the motel was completed, Whenua Glen Farms Ltd (Whenua) the second plaintiff purchased Mr Coervers’ shares in 3 Meade. Aspects of the motel’s construction were not satisfactory. 3 Meade and the Second Plaintiff Whenua Glen Farms Ltd, brought this claim to recover losses they say they have sustained as a result of the defects. The trial proceeded as a case against the Council only as Mr Coervers was adjudicated bankrupt and the claim was discontinued against Mr Dalton. An agreement was reached with the Engineers.
The claim of 3 Meade against the Council alleges that the Council assumed a duty of care to it, to ensure that its inspection and resultant rulings were performed to a reasonable standard. Alternatively its says that the Council was under a statutory duty when exercising its powers under the Building Act 1991 including issuing building consents, the code compliance certificate and inspecting the building work. The total claim against the Council was $666,430.00 and this amount was broken into the following heads of damages:
a) Remedial work
b) Consultancy costs
c) Costs of arbitration with tenant
d) Lost rental and maintenance
e) Diminution in the value of the motel
A number of issues were dealt with by the Court.
Does the Council owe a duty of care to the first plaintiff?
It was concluded by the Court that in this instance the Council did not owe a duty of care to 3 Meade. The rationale for this finding appears to be the fact that Mr Coervers as sole director and shareholder of 3 Meade and Limberg Construction Ltd, was the person who actually built the motel. The construction process was not a true arm’s length transaction. So 3 Meade were effectively claiming against the Council for work that they had carried out through another entity. In effect 3 Meade was stating that the Council was under a duty to recompense it for economic loss sustained as a result of the consequences of Mr Coervers negligent work when Mr Coevers was also its principal shareholder and director at the material time.
Does the Council owe a duty of care to Whenua?
Whenua was the entity that bought the shares of Mr Coevers in 3 Meade. It was an investor only in 3 Meade and was not the owner of the property. It was held by the Court that in this situation no duty of care was owed by the Council to Whenua.
What standard of care exists?
Although it was concluded that in fact no duty of care existed between Council and the Plaintiffs, the Court went onto consider what standard of care might be expected of the Council. The Court concluded that in fact Parliament reverted to a performance based code as opposed to reliance on the prescriptive bylaws in force prior to the Building Act. The emphasis of the Building Act and Building Code is on health and safety.
The Court considered the expert evidence available and concluded that there was a breach of the standard of care in a limited number of instances. It concluded that there were plainly a number of instances of shoddy workmanship. However this was not the test to be applied. Instead the test to be applied was whether there were safety and sanitary issues that should concern the Council and its inspectors, and if there are, whether an inspector, conducting himself as a reasonable inspector would have noticed them, and if so, what would have required to be done about it.
Interestingly, out of the $660,000 claim that was brought against the Council, it was concluded that even if the Plaintiffs were able to establish a duty of care was owed by the Council to them, the damages flowing from the breach of duty of care would only amount to $22,000.00.