Tina Hwang of Queen City Law questions Grant Elliott of Ray White Auckland Central on the important considerations when buying and selling leaky buildings. The following is a summary of the questions and answers from the video (which may not necessarily be the legal interpretations and terms, but provides a good background of points to be mindful of). The following therefore cannot be construed as legal advice, and you should always obtain proper legal advice before signing a contract.

What are “leaky buildings”?

Leaky buildings are buildings that require remedial work to weathertightness issues, whether or not it falls within a 10-year weathertightness guarantee.  It may involve systemic failures in the building or may be isolated leaks from poor maintenance.  They cost owners (and potentially buyers of leaky buildings) significant costs to remedy.

Are more people aware of “leaky” units now?

When Grant first started, there were around 3000 apartments in Auckland Central. Now there are over 30,000 units, and it is more common for people to be aware of potential leaky units and the ramifications.

How often do you see “leaky” units on the market?

It is very common to see leaky units on the market today. There are some buyers who only buy “leaky units” as an investment. These buyers purchase “with knowledge” with the view to making money from buying cheap (with the issues and risk) and making money from this after the remediation is completed and they can re-sale at a higher value.  However there needs to be some caution when buying as it inevitably comes with big risk.  

How often does it get complicated? 

Many owners get lost when it comes to finding out what is wrong with their own building, or a building they are about to buy. Often, they do not know the extent of the problems they may face, which sometimes is not even evident from the disclosure documents from the body corporate. If the body corporate committee members or chairman never discussed the issues in a formal meeting with minutes, then there will be no records. Even when there are records, the extent of the damages and the costs to fix may be incorrect, inaccurate, incomplete and/or outdated. The amount the body corporate is likely to recover from defendants will likely be a best estimate and not necessarily accurate.  Then, the costs of legal, experts, consultants, and contingency fees may not have been properly accounted for, raising the costs to fix significant.  Then, there are the costs of owners disagreeing with how the claim should be managed and/or builders should be appointed. It almost always gets complicated.

What is important when selling a leaky unit? 

Grant recommends going to auction with agents who are well connected enough to bring the right purchasers to the bid. As there will be a niche market of buyers, marketing the units to the general public will likely fail as he has seen some agents get no bids at auction or selling for $10,000 when his contacts could easily have offered more. Auction often has terms favourable to the vendor to protect them after the sale.

What are some important questions you ask the vendors? 

The vendor will be asked how long ago the remedial issues were discovered, and what type of work has been done to date. Remedials fit into different categories. For instance, you could have a full recladding of the whole building, or earthquake strengthening upgrades, or just some specified works for drainage on a roof.  Potential purchasers would need to assess the building and documents thoroughly to detect the full extent of the issues.  

Value of the Property

There are many different factors that can affect the value of a leaky unit. Body corporates (including body corporate secretaries, committees and chairperson) is important, as there can be ones that are organised, some not so organised, some that fight internally with their owners, or units that are vacant, rented, or rented at a discounted price, which are all elements that can impact the value of the property. From a legal perspective, we would need to look at whether there was a claim in court, how far it has proceeded in court, who the defendants are, and how strong the claim is. 

Additionally, when a unit with a leaky issue is on the market, there will be ordinary or special levies. Purchasers would need to know whether levies have already been struck, what has been paid or what is outstanding. For special levies, the purchasers need to know whether they have been struck or what is expected to be struck in the future, and who is responsible for paying them either now or in future. All these points need to be stipulated in the agreement. It is important that the special conditions of the contract cover these points, and that you work with the agent to ensure these clauses are correct. The liability of the past, current and future levies is important to clarify. Furthermore, the likely chance of any recovery from any claims also needs to be set out, even though it will be difficult to provide accurate information as often it is still being litigated in court.

A lawyer would look at how much, if any, the Body Corporate would likely get from any settlement or claim, how long such claims would take, and how much legal fees and the costs to repair will cost. However, the accuracy of such assessments is very difficult to ascertain as there will be lots of unpredictability and uncertainty.  There can be a range of different situations that affect the value of the unit. A unit can have large levies outstanding that a vendor does not want to pay and essentially transfer and walk away from, or a unit that has no outstanding fees but are due to have a large levy struck soon, or vendors who have claims that are likely to be paid something, as opposed to ones that are unlikely to get a payout, or units that are heavily in dispute externally and internally with significant legal costs added to the remedial costs.  All of these factors will affect the value of the unit.  Purchasers will need to look into the expectations of the vendors or purchasers regarding the levies, and any payouts from the defendants in a settlement or court, and how much of this will likely go back into the remedial costs.  There have been owners who have been paid out money from a settlement or court, but then have taken that money and walked away, leaving a further “hole” to fill in the amount of money required to remedy the building itself.

Pre-Contract Disclosure Statement (PCDS s146)

This brings into light the importance of the disclosure requirements under the Unit Titles Act.  For more information on this, you can click here to see a video and blog on the disclosure requirements. A pre-Contract Disclosure Statement (PCDS or s146) is information that is required to be provided to a purchaser BEFORE entering a contract.

What kind of information would we expect to see on the PCDS now? 

With recent changes, the PCDS now includes weathertightness issue claims, earthquake prone issues, proceedings involving the Body Corporate, financial statements, and audit reports for the last three years. Now there are three years’ worth of Body Corporate minutes for review! These include notices and minutes, body corporate manager details, and proposed works for future years which often include hundreds of documents.

 For a leaky unit, the PCDS will typically include information on the weathertightness issues and claims, as well as proceedings involving the Body Corporate. The difficulty is not only looking at weathertightness issues, but also seismic issues, or claims between the owners if there is dispute, or claims with third parties. Different types of claims can arise, from the council, builder, roofer, and more! These all need to be identified, hence the PCDS is an essential part to review before signing an agreement.

Will the PCDS have information about the remedial works?

The PCDS should have information about the remedial works, but often there is no information. As set out above, the Body Corporate may not have documented the issues to the building in a formal meeting, or they may not have obtained proper expert reports to detail the issues or costs. Grant finds it hard when he (as an agent) is asked what problems exist within a building, as agents are not engineers and cannot give an accurate answer. The PCDS will be informative, but may not be conclusive. Also, the Body Corporate may not want to disclose sensitive information to the public if the case is still going through the court. This is the degree of risk that the purchaser’s may be taking. 

When the vendors are selling leaky units, they usually just want to get out after selling at a loss. The difficulty is that they are often assigning their rights to the proceeds of their claim (if any), which means that they must continue to assist the purchasers after the sale, in the court case. There is also a misnomer that people are assigning their claims.  This is false.  A vendor cannot assign their claim to a purchaser, but they can assign the rights to the proceeds of any claim, but working out whether there is anything to assign and how much is again difficult.  There is also a potential legal issue that once they assign, the vendor’s loss has changed from the costs to remedy the building, to a loss in sale price, and this may sometimes mean the vendor (and the purchaser) will be removed from the claim altogether with no proceeds to assign.

It is important that the Sale and Purchase Agreement clearly sets out the parties’ intention to enter into a deed of assignment and who pays the costs of this, as this can also turn into a dispute.  

What other key things would you need to cover when meeting a prospective vendor or client who wants to sell?

Grant often works with the vendor lawyers as well as the litigation lawyers to clarify whether the owner is part of the claim or not. Often the owners know, but sometimes they are unsure, and this can again affect the value of the property and how it is sold.

Have you seen vendors assisted by agents or lawyers who do not fully understand the process?

There are a range of advisors who have different levels of experience. An agent may not have the right connections or experience to properly market a leaky unit which has a niche market. It should cost no more for owners to get an agent and lawyer who can properly assist them which would also affect the result.

Conclusion

In general, it is essential to fully disclose a leaky unit with a well-versed agent who is able to tap into the right market to sell to the right type of purchaser.  Working with a good agent and a good lawyer ensures that all disclosures, legal requirements, and requisite deeds are done right, and that the owner will not be caught by further unexpected payments or obligations. The worst result for a vendor would be to sell at a loss thinking that was the end, but then being obliged to pay further special levies as documentation was not properly executed.

It is imperative that all parties to a leaky unit sale gets the proper advice and help from the right agent and lawyers.  These are just some of the issues to think about when selling or buying a leaky building. Have an experienced agent and lawyer who fully understands the process and can properly assist.

If you have any questions, please do not hesitate to contact us at property@queencitylaw.co.nz

Disclaimer:
We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.