Pattern light green 400x401

It is prudent to obtain a building inspection report when buying real estate. If you do obtain one, you want to know you can rely on it. However, as demonstrated in a recent High Court decision relating to a leaky building claim, this might not always be the case. In this article we look at the facts of that decision, and how you (or your company) can have recourse against the inspector, should you need to rely on their report.

The Case (Body Corporate 90315 v Redican Allwood Limited)

The decision Body Corporate 90315 v Redican Allwood Limited [2014] NZHC 1212 relates to a leaky building claim brought by the body corporate and the owners of an apartment complex at Drummond Street, Wellington. The body corporate and the owners of the complex sued those responsible for its construction and the Wellington City Council.

Before purchasing Unit 18 in the complex, Jessica Astridge purchased a building inspection from RealSure Limited (‘RealSure’). Mr Higgins, an employee of RealSure, conducted and prepared the building report. Wellington City Council advanced a third party claim against these parties, rather than the purchaser of Unit 18 or the body corporate. The Council claimed that RealSure and Mr Higgins should contribute to any damages that the Council was liable for.

The Council’s claims

This claim was advanced on two causes of action. Firstly, that Mr Higgins and RealSure had produced a report that contained negligent misstatements. While the report identified some parts of the unit as having high moisture readings, it characterised the property as being in average condition overall. The Council argued that these statements, and the omission to identify the need for significant remedial work, constituted negligent misstatements. They argued that loss had been suffered as a consequence of relying on the negligent misstatements contained in the report.

The Council also claimed that the RealSure report constituted misleading and deceptive conduct in trade under the Fair Trading Act. They alleged that the weathertightness defects should have been observed during the inspection and that they were not, or were identified in a misleading way. Furthermore, the Council claimed that the report did not identify that substantial remedial work was required in this case. As a result, Council argued that reliance had been placed upon this report, and loss had been suffered as a consequence of that reliance.

Unfortunately for the Council - and a key consideration of the Court in considering these issues - was the fact that when Mrs Astridge purchased Unit 18, she subsequently nominated the company Rastros Limited (‘Rastros’) as purchaser. The company did not exist when the building report was commissioned. The Court considered the preliminary issue of whether there was a contractual relationship between Rastros and RealSure. The Court held that no agency relationship was in existence as Mrs Astridge could not obtain authority to act as Rastros’ agent if the entity did not exist. Similarly, the Council’s argument that the contract had been assigned to Rastros for their benefit was unsuccessful. The building report prohibited assignment, was confidential and stated that it was prepared exclusively for Mrs Astridge.

Did the report constitute negligent misstatement?

The first claim advanced by the Council was unsuccessful. In determining whether the report constituted a negligent misstatement in tort, the Court considered whether there was an assumption of responsibility by RealSure and whether Rastros’ reliance on the misstatement was reasonable. In this case, the building report contained a disclaimer clause which clearly excluded third party liability. Also, RealSure had no knowledge of Mrs Astridge’s intention to nominate. They could not be aware of the existence of Rastros, which had not been incorporated at the time of preparing the report. As to the issue of reliance, the Court held that Rastros could not rely on the report. It was a contract between Mrs Astridge and RealSure alone.

There was no tenable claim against Mr Higgins either. If Rastros could not rely on the report as against RealSure, it could not do so against Mr Higgins.

Did the report constitute misleading and deceptive conduct?

The test for determining whether there is misleading and deceptive conduct is established in the Supreme Court decision Red Eagle Incorporation v Ellis [1]: ‘whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived.’ In this case, the Court held that there was no misleading or deceptive conduct. Although the Act makes it difficult to contract out of liability, the Court found that it would be unjust if the disclaimer clause contained in the report was not considered. The disclaimer clause specifically stated that third parties could not rely on the report. Furthermore, the report specifically excluded responsibility for reporting on weathertightness. The terms provided that if this was required, a specialist report must be commissioned. The Court held that a reasonable person in Rastros’ position would be aware of the limits defined in the terms and conditions of the report. They could not be misled that it gave them enforceable assurances as to the weathertightness of the building. In fact, they were not entitled to rely on the report at all.

The Court further held that if the Fair Trading Act claim against RealSure was to be struck out, it must be against Mr Higgins also. The Council did not contend that Mr Higgins had made any representation apart from the report. Further, there was no clear indication that the report was intended to be read from Mr Higgins personally.

Lessons learnt

This case highlights some key issues that should be considered when purchasing a building report, particularly where a potential purchaser intends to nominate to a third party. We suggest that if the purchaser intends to nominate to a known third party, negotiations should be had with the building inspector to amend the report so that it is addressed to the nominee as well as the purchaser, or a separate report addressed to the nominee should be requested. Likewise, if the purchaser intends to nominate to a third party not yet in existence, the purchaser should advise the building inspector, and request a separate report for the nominee once that entity is in existence.

We also think it would be prudent to ensure that your legal adviser considers the terms and conditions of the report before purchasing an inspection. Negotiations may be able to be had to increase the building inspector’s responsibility. Furthermore, if the building has characteristics which raise concerns as to weathertightness, or if a ‘standard’ building report highlights issues which raise alarm bells (such as high moisture readings), it would be wise to ask your inspector to conduct a ‘special’ inspection.

Contact the property team to find out how we can help you to protect your interests at every step of the buying process.

This article was authored by Brittany Amos, Solicitor in our Auckland office.

[1] [2010] NZSC 20 at [44]



View All