Timothy Bates and Chadleigh Danswan of Auckland law firm Legal Vision examine the North Shore City Council’s decision to appeal to the Supreme Court with regard to the council’s duty of care owed to purchasers of leaky multi-unit residential dwellings.

In the High Court decision of Body Corporate 188529 and Others v North Shore City Council and Others [2008] 3 NZLR 479 (the “Sunset Terraces” case), the North Shore City Council was held liable for breaching its duties to home owners in carrying out its statutory functions under the Building Act 1991 in respect of a multi-unit apartment development.
Justice Heath held that “a territorial authority owes a duty of care to anyone who acquires a unit, the intended use of which has been disclosed as residential in the plans and specifications submitted with the building consent application, or is known to the council to be for that end purpose”.
The council appealed to the Court of Appeal and attempted to limit this duty of care when carrying out these statutory functions to only owner/occupiers of “stand-alone” leaky properties, rather than having that duty extend to “investors” and “multi-unit” apartment complex home owners.
The Court of Appeal confirmed the High Court position, and rejected the council’s argument. Hence, the duty will extend to investors and home owners of multi-unit apartments so long as the intended end use is residential.
The council has now applied (and has been granted) leave to appeal this aspect of the case to the Supreme Court for a final determination.

Issues for determination
The following issues will be dealt with by the Supreme Court:
• Whether, and in what circumstances, a local authority which performed regulatory functions under the Building Act 1991 in relation to the construction of a multi-unit residential development owed a duty of care to purchasers of units in the building to ensure that it complied with the building code.
• Assuming the above duty exists, whether it extends to such persons who did not themselves, at the time of purchase, intend personally to occupy their unit(s) (investor owners), or persons who subsequently acquired such units from the first purchasers after a claim for breach of duty to their predecessors had accrued.
• In light of the conclusions reached on the above grounds, how these issues should be determined in the particular cases.

Importance of the council’s appeal
While it is suggested that the Supreme Court is unlikely to overturn the decision of the Court of Appeal on these issues, we eagerly await the decision of the Supreme Court.
If the decision does come down in favour of the council and limits the council’s duty of care, the ability of investors and/or home owners of multi-unit apartments to bring a leaky building claim against the territorial authorities could be significantly limited, and could, it is suggested, result in some harsh outcomes.
We will update readers on the decision of the Supreme Court.

SUNSET TERRACES IS A RESIDENTIAL COMPLEX SITUATED IN SUNSET ROAD, MAIRANGI BAY. IT IS A LINEAR UNIT TITLE DEVELOPMENT COMPRISING 21 TOWNHOUSES, EACH OF TWO STOREYS. THE DWELLINGS WERE BUILT IN 1997 AND 1998 USING UNTREATED TIMBER FRAMING AND MONOLITHIC CLADDING.

The proceedings were brought against the Developers, the Council and the Designer. The Court was asked to decide upon many issues.

Firstly, the Court was asked to rule upon whether the Body Corporate could sue for all damage to the whole complex both common property and unit property, including the damage to the units of the three owners who did not participate in the case. It was ruled, that the Body Corporate could only sue in respect of common property. This was due to the Unit Titles Act 1972. It was however conceded that the position would have been different had it been a proceeding brought under the Weathertight Homes Resolution Services Act 2006.

The Court was asked to consider whether in fact a Council owed a duty of care to owners of residential units in a multi-unit complex, the argument for Council being that it ought not to owe a duty because it is a commercial development. The Court ruled in emphatic terms that the Council owes a duty of care to anyone who acquires a unit, the intended use of which has been disclosed as residential in the plans and specifications. In particular the Court found that the Council owes a duty to take reasonable care in performing the three regulatory functions in issue:-

deciding whether to grant or refuse a building consent application;

inspecting the premises to ensure compliance with the building consent;

certification of compliance with the Code.

Four of the individual unit claims were successful. These were Units Owners which had no knowledge of water ingress issues prior to purchasing. One of these four Unit Owners was only partially successful in that he had transferred his Unit to a company after becoming aware of water ingress issues, and so his damages were likely to be limited to the reduction in value he received for the Unit from the company, ($40,000).

Twelve of the Units were owned by individuals under complicated ?Blue Chip? arrangements. The structure was that a Blue Chip company purchased the Units, sold them to individuals who then leased them back to Blue Sky, which then subleased to tenants and contracted with Owners to manage them. In relation to these Units, the Council argued no duty of care was owed to Blue Sky because it was a commercial entity. This argument failed because the Units were intended to be residences at the time Council carried out its responsibilities (see earlier finding).

But the Court did go onto find that the Council owed no duty to Blue Sky because it was only a lessee, not a homeowner leasing for profit. The individual owners however had assigned their cause of action to Blue Sky in November 2005. The Court held that the Council owed a duty of care to Blue Sky as assignee but that the 12 claims failed because there was a break in the chain of causation. There was no evidence of the 12 individual Unit Owners relying upon the Council in their decision to purchase. Their reliance was on the Blue Chip scheme instead.

Other findings made in this decision were:-

Council argument rejected that because they did not charge much for inspections they did not have a duty to carry out more inspections or do a more thorough inspection. It was held instead that Council had power to set its own fees at a level commensurate with the risks it assumed.

As regards a lack of detail being said to have led to problems with wing and parapet walls of the complex, it was held to be enough that the relevant Harditex technical information was around at the time which filled in the details.

It is generally acceptable for the Council to rely upon producer statements instead of actually inspecting construction work, but not in this case because developer had shown himself to be unpredictable and untrustworthy. In particular the Council should have gone further to check out the waterproofing of the decks.

Developer was found to owe a duty of care to all or most of the Plaintiffs. As regards the 4 successful Unit Owners against Council, the apportionment of liability between Developer and Council was ruled to be 85% Developer, and 15% to Council.

The claims against the designer failed.