About Us

Advising on “as is where is” written off properties

The paper below was presented by Alan Prescott at the Legalwise seminar on “Commercial and Property Law” was held at the Novotel, Christchurch on the 20th November 2015.

INTRODUCTION 

What is an “as is where is” sale? 

This paper focuses on the sale and purchase of properties which have been damaged in the Christchurch earthquake sequence and which are being sold without the damage being repaired. 

In a way all houses are sold in their “as is where is” condition unless there are specific conditions in the contract which require a vendor to undertake specified work at the property prior to settlement.  The difference here is that in many cases these properties have suffered substantial damage.  In some cases they have been written off by the insurers.  In other cases the insurers have deemed the property capable of repair but have not managed the repair process, preferring instead to make a cash payment to the owner to settle the insurance claim. 

In the early years after the earthquakes the insurers tended to manage the repair / rebuild process themselves.  Project management organisations (PMO’s) were engaged by most of the major insurers to oversee the repair / rebuild process. 

It soon became apparent that the scale of the task confronting the insurers / EQC, was beyond their resources to manage in a timely manner.  Five years after the initial earthquake many properties remain in their damaged post-earthquake state. 

In my view the insurance companies have now come to an understanding that they are not well suited to managing large scale complex building jobs.  I suspect they may also be coming under some pressure from the reinsurers to finalise the outstanding insurance claims, something that cannot be achieved quickly if they are to undertake the building work. 

As a consequence of this it has become very apparent that insurers now prefer to cash settle the outstanding insurance claims.  It is this willingness to cash settle which has created the “as is where is” market. 

The cash settlement provides certainty for the insurance company, something that the rebuild / repair process is far less likely to provide.  The challenge is for the insured to ensure that their cash settlement figure is sufficient to effect the repairs / rebuild. 

Choosing to sell the damaged property as is where is also provides certainty for the owner. 

Participants In The Market 

The increased number of cash settlements has seen the emergence of a class of buyers specifically focussing on the purchase of as is where is properties. 

The number of buyers in this market has increased with the increased frequency of cash settlements.  In the early years after the earthquake sequence there were as is where is buyers in the market but they were not as focussed as the current buyers. 

The typical buyer in the early as is where is market was an individual either cashed up, or with significant equity in other properties, who was aiming to acquire damaged houses at or near to land value.  They would not require a mortgage over the as is where is property being purchased.  Typically these purchasers acquired the properties with a view to immediately leasing them out.  This was an attractive proposition at that time given the acute shortage of rental properties in the Christchurch market.  These buyers were able to achieve very good capital returns on properties to which they did little or no work.  The rental market was such that tenants were prepared to accept damaged properties simply to get a roof over their heads.  In many cases the tenant’s rental was being met by insurers. 

These buyers were not particularly concerned about the long term sale prospects for the property.  They took the view that the high rentals they were achieving would quickly pay off the loans that they had taken out.  Their expectation was that they would be quickly left with a damaged property which would have effectively already paid for itself. 

The new as is where is buyers take a much more professional business like view.  They often employ buyer’s agents to locate properties.  Typically they will concentrate on specific suburbs where they believe that there will be demand for either renting or on sale. 

These buyers look very carefully at the type of damage the houses have sustained.  They pay particular attention to the foundations.  Some buyers will not purchase damaged houses built on concrete slabs.  They concentrate only on piled houses with concrete ring foundations.  They also look closely at the damage to that ring foundation. 

There is still a group of buyers in the market who are content to acquire the properties, effect some minor repairs and then retain them as rental properties. 

Other buyers, taking a more long term approach, will undertake extensive repairs of the type that would in the past, have been undertaken by the owners and their insurers. 

The opportunity that has arisen for these purchasers has resulted from either the insurers overestimating the repair / rebuild cost, the owners simply having lost the will to complete the repairs / rebuild themselves or a combination of the two.  It is fair to say that the years since the earthquake sequence have taken their toll both physically and mentally on property owners in the Canterbury region.  It is this that has, in some instances, provided the opportunity that now exists for the professional as is where is purchaser. 

As well as employing buyers agents to identify potential properties to purchase some of these buyers have also advertised in the media, in particular newspaper and radio, to identify potential sellers. 

What Are The Purchasers Doing With The Properties? 

There are a range of approaches taken by the purchasers of as is where is properties in an effort to convert their risk into a profit. 

Some developers are identifying properties with redevelopment potential.  Typically these purchasers will attempt to acquire the property at less than the current land value.  They are concentrating on identifying subdivisible properties in sought after suburbs within the Christchurch urban area.  They either demolish the existing house or, if it is deemed repairable may sell it to another party for a price which basically equates to the cost of removing the house off the property.  These developers then build a new dwelling, or dwellings on the land, depending on whether the section is subdivisible, for resale.  The Canterbury earthquake sequence has provided these developers with an opportunity which would not otherwise have been available to develop sought after land within the Christchurch urban boundary. 

Other purchasers are residential landlords who are looking to upsize their residential rental portfolio in a manner in which they believe is more economical than acquiring repaired or undamaged residential rental properties. 

These buyers will typically repair the houses and rent them out with the intention of holding the properties long term. 

It is often necessary for these buyers to undertake more extensive repairs than was necessary immediately after the earthquakes.  The Christchurch rental market has now returned to a point where rental property availability is back to the same level as that pre-earthquake.  Competition for tenants is now more intense and rentals have dropped back from those achieved immediately after the earthquakes.  This has meant that it is necessary for the houses to be repaired to a higher standard to attract tenants.  

A third group of buyers are simply acquiring properties with the intention of reselling them.  Some of these buyers operate in an almost wholesale market where they will identify properties, get them under contract and then on-sell them to other as is where is purchasers with contemporaneous settlement dates.  Other buyers, who are acquiring properties with the intention of reselling, are often tradespeople already active in the Christchurch market.  They are generally purchasing properties, repairing them and then on selling them.  They are utilising their contacts within the building industry to effect the repairs in such a manner that there is still a significant profit left from the on seller. 

The objective of these buyers is to undertake the repairs and bring the home up to a standard which will enable it to be insured for the end purchaser and which will be acceptable to the bank for normal mortgage lending. 

The opportunity arises for these purchasers as a result of their ability to complete all of the necessary repairs for an amount less than the repair cost assessed by the insurer.  

SELLER CONSIDERATIONS 

In the writers experience many of the as is where is sellers have simply been worn down by the insurance claim process and the large amount of time which has elapsed since the earthquakes.  They are typically unable to face the prospect of either repairing or rebuilding their damaged dwelling.  They require certainty and can achieve this by selling the property in as is where is condition. 

A primary consideration for these sellers is to ensure that they receive a fair market price for their property.  That price has two components, the insurance claim settlement and the sale price to the as is where is purchaser. 

There are of course timing considerations.  If the sale price to the as is where is purchaser is at a high enough level this can mean that the seller is able to settle the insurance claim for less than they might have accepted if the overall result is acceptable.  The problem is achieving a settlement with the insurance company and a sale at the same time so as to be able to assess the full return available. 

This paper does not focus on looking into the intricacies of the insurance settlement process.  It goes without saying that if the insurer is not actually repairing or replacing the dwelling then it is very important to ensure that the cash settlement offer would provide sufficient money to achieve the repairs / rebuild if that was to be undertaken by the owner. 

Settlement Agreement with Insurer 

Although the insurance policies typically do not provide for it, the insurers almost invariably require an owner, cash settling with them, to sign a settlement deed in which the owner acknowledges that the payment received is in full and final settlement.  

The seller always needs to consider whether the settlement deed should be signed at all.  If it is not a requirement of the policy then it is arguable that the insured should refuse to sign it.  That is a matter which requires careful advice from the lawyer. 

In practice, the client is often at the end of their tether, having been worn down by the whole insurance claim settlement process.  They simply do not have the will to enter into a further fight with the insurer over the requirement to sign the settlement deed. 

The insurers take the view that where the cash settlement is for the reinstatement cost rather than indemnity value, which is often the amount specified in the policy as being the cash settlement amount, then because the settlement is outside the policy terms that settlement must be recorded in a settlement deed. 

The insurers often also require an assignment of any EQC claim benefit available to the owner.  Whilst this assignment is often not controversial in respect of the property claim the same cannot be said for land claims including the new categories of land claim for increased flooding vulnerability (IFV) and increased liquefaction vulnerability (ILV). 

There is some dispute as to whether the insurer should ever be entitled to an assignment of any unpaid land claim.  Insurers take the view that if they have included an amount for enhanced foundations in their settlement offer then they should be entitled to any land claim payment that might be due to the owner. 

Some insurers do limit the amount of the land claim payment that they will receive to any amount they have identified in the settlement as being for enhanced foundations. 

In our experience the new IFV and ILV land claim categories are not well understood by the insurers.  Typically they will not be prepared to carve these potential payments out of the assignment document they require.  We have taken the view that the insurers should not be entitled these payments if they eventuate. 

These payments are based on the reduced value of the land as a consequence of the IVF or ILF status.  That reduced value will theoretically still apply whether or not a new or repaired dwelling is on the land. 

The payment is calculated by assessing the potential reduced value of the land.  It is paid out as a cash payment and we are aware of a number of substantial payments having being made for IFV.  In our view owners cash settling their insurance claims should be taking every step available to them to ensure that they are not assigning these rights to the insurer at settlement.  

Warranties in the settlement agreement 

The major insurers are typically including warranties in the settlement agreements whereby the owner warrants that they will be repairing / rebuilding the dwelling themselves or they will be using the full amount of the insurance claim payment towards the cost of buying another house.  Both Vero and Southern Response require statutory declarations to be signed by the owners.  The Southern Response declaration includes a specific acknowledgement that the owner intends to purchase another house and that the entitlement to insurance proceeds “has been calculated on the basis we intend to use the full amount of the Southern Response settlement payment …. towards payment of the cost of buying another house.” 

Vero also require a statutory declaration to be signed whereby the owner declares that they intend to build another domestic house at the property and that they expect to use the full amount of the settlement proceeds to achieve that. 

This creates an obvious tension for the as is where is seller.  They are not intending to rebuild or repair the house.  In some cases they may be intending buy another house with the insurance settlement proceeds and the sale proceeds but not always. 

The question must be asked, can the seller give the declaration or do they need to negotiate with the insurer to avoid that.  Any negotiation with the insurer of course carries a risk that the insurer might look to resile from or modify their settlement offer. 

Section 111 of the Crimes Act provides that; 

False statements or declarations 

Everyone is liable to imprisonment for a term not exceeding 3 years who, on any occasion on which he is required or permitted by law to make any statement or declaration before any officer or person authorised by law to take or receive it, or before any Notary Public to be certified by him as such Notary, makes a statement or declaration that would amount to perjury if made on oath in a judicial proceeding. 

That of course is a consequence that the seller will be seeking to avoid at all costs.  It is certainly arguable that if a person makes a statutory declaration but did not intend to rebuild / rebuild a house or purchase another property, in terms of the declaration, then they could expose themselves to criminal liability. 

There is however a question as to whether this section of the Crimes Act would apply in circumstances where the statutory declaration is honestly and properly made and the declarant then changed their mind after that.  The warranties do not tend to include a time limit by which the house must be repaired / or replaced. 

Section 240 of the Crimes Act may also apply if a statutory declaration is made fraudulently to gain a financial advantage.    

(1) Every one is guilty of obtaining by deception or causing loss by deception who, by any  deception and without claim of right,—

(a)   obtains ownership or possession of, or control over, any property, or any privilege,     service, pecuniary advantage, benefit, or valuable consideration, directly or indirectly; or

(b)   in incurring any debt or liability, obtains credit; or

(c)  induces or causes any other person to deliver over, execute, make, accept, endorse, destroy, or alter any document or thing capable of being used to derive a pecuniary advantage; or

(d)   causes loss to any other person.

(2) In this section, deception means—

(a)   a false representation, whether oral, documentary, or by conduct, where the person making the representation intends to deceive any other person and—

(i)   knows that it is false in a material particular; or

(ii)  is reckless as to whether it is false in a material particular; or

(b)   an omission to disclose a material particular, with intent to deceive any person, in circumstances where there is a duty to disclose it; or

(c)   a fraudulent device, trick, or stratagem used with intent to deceive any person. 

Although there does not appear to be any necessary benefit to the insurer in reporting false or fraudulent declarations to the police in our experience insurance companies are very focussed on stamping out insurance fraud.  They are prepared to take matters further even when there seems to be no necessary benefit to the insurer in doing so. 

Another consequence of course is that anyone caught out making a false declaration would not be able to obtain any sort of insurance in the future as this would be something that would need to be declared when applying for insurance.  It would undoubtedly mean that any insurer would decline cover.  In the event disclosure was not made at the point that the insurance was taken out the insurer may well seek to use this as a means to avoid paying out any claim. 

Timing of the warranty 

As I have said whilst it is common to find a warranty in respect of rebuilding / repairing or replacing of the home it is not common to find a time limit within which that action must be performed.  The question arises is there an implied term regarding the time for performance. 

There are a number of different types of implied terms in contracts.  The category most relevant to this scenario is that of an implied term imposed by the Court to give business efficacy to the contract[1]

Before an unexpressed term can be implied on the grounds of business efficacy, the following five prerequisites must be satisfied:

(1) The term sought to be implied must be reasonable and equitable;

(2) It must be necessary to give business efficacy to the contract as no term will be implied if the contract is workable without it;

(3) It must be so obvious that “it goes without saying”;

(4) It must be capable of clear expression; and

(5) It must not contradict any express term of the contract.

There are a number of cases that also deal with implied terms as to time.  In Feltex New Zealand Limited v Neilsen Property Management Limited [1974] 2 NZLR 292, Cooke J observed;

The alternative interpretation is simply that demand must be made within a reasonable time.  This would be, I think in accordance with the general approach of the law to time questions.

Feltex was approved in Shephard & Ors v All Stele Services Limited & Anor HC Auckland AP 49-SW00, 12 October 2012, where Rodney Hansen J added at paragraph [18]:

It remains the law that where no time for performance is fixed by a contract, an undertaking will be implied by each party to perform his part of the contract within a time which is reasonable having regard to the circumstances of the case: 9(l) Halsbury ‘s Laws of England (4th ed) para 929.

These cases were lease cases but the wording of both Cooke J and Rodney Hansen J are expressed in general law terms.

As far as we are aware there has been no decided case on what is an acceptable period of time to rebuild / repair or replace the dwelling in the context of warranties contained in insurance settlement agreements.

It may be that the insurers will simply never check to see whether the rebuild / repair / replacement has occurred.  They may simply be including these warranties and requiring these declarations to satisfy the requirements of their reinsurers.  Notwithstanding that it is still important that the implications are properly explained to the clients so that they are fully aware of their obligations and the potential consequences of failing to fulfil them.

Damages for breach of warranty

Under the general law in respect of vendor warranties, for instance in the sale of the business or for the sale of goods, the remedy for the breach is damages for the loss suffered.  There may also be a right of cancellation of the contract although it is hard to see how this would be of any effect given that the settlement amount has been paid.

The IAG Deed of Settlement includes a provision that the policy holder will indemnify IAG for any loss it incurs by reason of breach by the policy holder of any of the warranties in the settlement deed.  There is an argument that a policy holder changing their intention and not intending to rebuild the house after having signed the settlement agreement will not cause IAG any loss.     

Demolition 

Typically when an insurer cash settles a claim, if the house is still standing, then the settlement agreement will provide that the insurer is not responsible for demolition.  That of course is normally a requirement of an as is where is purchaser.  Unless they are a developer looking to acquire the land, only the purchaser will require the house to remain.  It is accordingly, important that the settlement agreement does not require demolition of the property. 

In the early days after the earthquake sequence, one insurer, AMI, attempted to require house owners with whom they were cash settling, to demolish the dwellings.  Their explanation for this was that they had a social responsibility to ensure that the housing stock in Christchurch maintained at a liveable standard.  I have always had the jaundiced view that in reality AMI was using this requirement as a means to achieve a better insurance settlement. 

We experienced an usual situation in a number of settlements where the settlement amount was actually reduced on the basis that the property would not be demolished.  AMI would take the estimated salvage value from the demolition off the settlement amount notwithstanding the fact that they would not be put to the expense of actually demolishing the house. 

CONDITIONS ON SALE ANS PURCHASE AGREEMENTS

Deletions and additional clauses 

It is important that the contractual conditions, both the general conditions and the further terms of sale are tailored to each individual transaction. 

There are many different variations of the special conditions and amendments to the general conditions which are used in these sales.  

In every case it is necessary to delete clause 4 of the general conditions.  The house is being sold without insurance.  Clause 4 should accordingly be deleted.  The effect of that is that the house is at the risk of the purchaser from the date of confirmation of all of the conditions.  The house is not insured so if there were to be another earthquake or some other event which destroyed the house then the purchaser would still be compelled to proceed with the purchase notwithstanding the fact that the house has been further damaged or destroyed since the date of the contract. 

A number of the vendor warranties contained in clause 6 of the general conditions will also normally be deleted, just which warranties will be deleted is a matter for negotiation between the vendor and the purchaser.  That said the warranties in conditions 6.2(1), (5), (6) and clause 6.3 are normally deleted.  Vendors also prefer to delete the warranties in clauses 6.2(7) and (8) although that is often not acceptable to a purchaser.  It is important that the implications of these deletions or lack of them, are explained to your client. 

I have included with this paper some suggested further terms of sale which should be included in as is where is contracts.  These clauses make it clear that there will be no assignment of EQC or private insurance claims and that the vendor will not be responsible for any repair or demolition of the earthquake damaged dwelling.  Although it is not included in my clauses there is also often a warranty that the dwelling is not to be demolished by the insurer. 

The other, usual further terms of sale are also often included.  It is not unusual for these contracts to include a wide ranging due diligence clause which gives the prospective purchaser the opportunity to look at every aspect of the property and the transaction to ensure that it meets the purchasers requirements. 

Fulfilment of purchaser conditions 

The greatest challenge for as is where is purchasers who are looking to utilise the security in the property being purchased as well as leveraging off other equity, is to identify a bank that is prepared to lend on these properties.  Whilst the banks generally have stated policies in respect of as is where is lends, particular clients with a close relationship with their bank may be able to obtain better terms than are published by the bank.  We are aware of at least one bank which claims not to lend on as is where is properties but which is lending up to 80% of the land value to a particular good client. 

The banks are continually re-evaluating their willingness to lend on these properties.  In recent times several banks have started to lend on a case by case basis.  Generally speaking the lending is initially limited to between 60 – 65% of the land value. 

The banks do have a different view if repairs have been completed.  This is discussed later in the paper.  This gives the as is where is purchasers the ability to leverage off the equity they have created to re-mortgage and acquire more damaged properties.  

It is still necessary for careful purchasers to ensure that there are no title defects and also to obtain a LIM.  Purchasers are generally undertaking all of the usual due diligence together with an additional level which is required to establish the long term viability of the dwelling.  I have previously discussed the sorts of things that purchasers are looking into as far as the types of damage which are acceptable and those which are not if the house is to be retained. 

PURCHASERS REPAIR OF DWELLING  

There are a number of requirements that have to be met by purchasers repairing the dwellings if they are to get them insured and persuade a lending institution to increase the loan on the property or grant a loan for a property which has not been previously mortgaged.  Each lending institution has its own requirements.  It is fair to say that these requirements can be a moving feast.  They are certainly very dependent on each individual property. 

It is by no means a straight forward matter to obtain a full mortgage on a repaired dwelling.  There is however one constant.  The bank will always require the property to be fully insured for replacement value.  The lenders will generally require full details of the repairs that have been completed.  If an engineer has been involved, which is generally the case when foundation repairs are required the banks will need to see the PS1 and PS4 certifications. 

The lender also often requires details of the original damage and the damage assessment reports prepared by EQC and the insurer. 

Is a building consent required?

The requirement, or otherwise, for a building consent to repair earthquake damaged dwellings has been given considerable media coverage in recent times.  That coverage has tended to focus on the repairs being completed by EQC without building consents being obtained.  It is clear that in many cases no building consent has been obtained even when what appears to be, on the face of it, relatively major work has been undertaken. 

The law in this area is not particularly clear but we consider that any actual building work carried out to repair a building will need to meet the current standards of the building code. 

Section 40 of the Building Act 2004 provides that buildings cannot be constructed, altered or demolished without a building consent.  It also provides that no building work can be carried out except in accordance with the building consent. 

Schedule 1 of the act lists the exceptions to the requirement for a building consent.  Clause 1 of the first schedule contains an exception to the requirement to obtain a building consent for repair and maintenance using comparable materials or replacement of any component or assembly in a building where a comparable component or assembly is used and the replacement is in the same position.  That exception does not apply where there is a complete or substantial replacement of any component or assembly contributing to the buildings structural behaviour or fire safety properties. 

In our experience exemptions from the requirement to obtain a building consent are frequently sought and obtained.  Almost anything short of a complete replacement of the foundations to a house seems to be granted an exemption. 

Clause 2 of Schedule 1 provides a catch all for the relevant building consent authority to waive the requirement for a building consent where the authority considers that the completed building work is likely to comply with the building code, or if the building work does not comply with the building code, it is unlikely to endanger people or any building whether on the same land or on other property. 

Does the whole building need to meet current building code? 

The question then arises whether a whole dwelling needs to be brought up to the current code if only parts of it are damaged.  Pursuant to section 17 of the Building Act all building work must comply with the building code to the extent required by the Building Act whether or not a building consent is required in respect of that building work.  

The definition of building work includes “work for, or in connection with the construction, alteration, demolition or removal of a building”.  “Alteration” is widely defined and includes rebuilding, re-erecting, repairing, enlarging and extending a building.  Earthquake repairs are likely to be construed as alterations. 

If the building work is regarded as an alteration by the council, then Section 112 of the Building Act applies.  Section 112(1) provides that a building consent cannot be issued for the alteration of the existing building or part of an existing building unless after the alteration the building, 

a)    Complies, as nearly as is reasonably practicable, with the building code in relation to fire escape and access for disabled people;

b)    The provisions of the building act that were complied with prior to the work beginning will still be complied with; or

c)    If it did not comply with the other provisions of the building code immediately before the building work began, it will continue to comply at least to the same extent as it did then comply. 

Section 112(2) provides that the council may allow the alteration of an existing building without the building complying with specified provisions of the code when the council is satisfied that certain requirements are met.  In particular the council can consider whether or not the building work would have taken place otherwise, whether or not the alteration would improve access for people with disabilities and improve means to escape from fire, and if those improvements outweigh any detriment in the building not complying with relevant provisions of the code. 

The take out from all this appears to be that the building as a whole, after completion of the alterations / repairs, would only have to continue to comply with the code to the extent it did before the alteration was carried out. 

Is there a requirement for the work to comply with the current code if a building consent is not required? 

The authorities in this are unclear.  We consider that even if the repairs do not require a building consent or have been granted an exemption, the repair must still fully meet the requirements of the code. 

As I have said, Section 17 of the Building Act specifically says that all building work must comply with the code to the extent required by the act, whether or not a building consent is required. 

Section 42A includes the requirements for building work that does not require a building consent under Schedule 1. 

Subsection (2) of Section 42A imposes a number of conditions on building work undertaken without a building consent.  In particular the building work must comply with the building code to the extent required by the Building Act.  After the building work is complete the building, if it complied with the building code immediately before the work begun, must continue to comply with the building code or if it did not comply with the building code immediately before the work begun it must continue to comply at least to the same extent it did before the building work began.  The building work must also not breach any other enactment. 

The wording in Section 42A mimics the wording in Section 112(1).  This suggests that the building work itself must meet the current code requirements.  The building as a whole must also comply with the building code to the extent that it did before the work commenced. 

Insurance for repaired houses

Each of the insurers has their own requirements before they will consider insuring a repaired as is where is property.  Generally speaking if a building consent was required then the insurer will require a code compliance certificate. 

The requirements where no consent was required, or an exemption was granted, vary between insurers and properties.  Insurance companies very much look at these propositions on a case by case basis. 

They are of course driven by the commercial imperative to write more business but the recent experience gleaned from the Canterbury earthquake sequence has meant that they are very careful before accepting new risk in Canterbury.  That attitude has relaxed somewhat as time has passed and we suspect this will be a continuing trend. 

Generally speaking if an engineer was involved in the repair process due to the requirement for foundation and / or structural repairs the insurer will need to see the PS1 and PS4 producer statements provided by the engineer.  They may also require the original engineers report and a detailed report on the repair process which has been followed, backed up by photographic evidence. 

If an engineer is not involved then it will normally be necessary to provide a detailed scope of the works that were undertaken and the builder will also be required to provide a PS3 producer statement.  That builder will normally need to be a recognised builder who is acceptable to the insurer. 

It is sometimes possible to arrange contract works insurance during the repair phase.  That of course has the advantage of mitigating the risk the as is where is purchaser otherwise bears until the house is repaired and insured.  There is an added advantage in obtaining contract works insurance if that is possible, in that it generally means that it will be more straightforward to obtain ongoing insurance once the repair job is complete. 

The assistance of an experienced insurance broker is pivotal in taking the uninsured as is where is building through to an insured repaired dwelling. 

Financing repaired dwelling 

Once insurance has been obtained banks are generally prepared to look at fully mortgaging the dwelling.  That is important for both those purchasers who intend to retain the property as an investment and also for those purchasers who wish to on sell to a buyer purchasing for their own use. 

All of the banks normal lending criteria will apply.  In addition to that the banks often seek similar evidence to that required by the insurer, to satisfy themselves that the repairs have been properly completed. 

OBLIGATION TO TENANTS 

Statutory protection 

If the as is where is purchaser intends to retain the property as a rental whether having undertaken comprehensive repairs or minimal repairs, there are a number of statutes which apply to govern their responsibilities. In addition to that the owner must be satisfied that the dwelling is structurally sound and safe for occupation. 

Section 45 of the Residential Tenancies Act 1986 sets out landlord’s responsibilities. Section 45 (1) (b) of that Act requires the landlord to provide and maintain the premises in a reasonable state of repair having regard to the age and character of the premises and the period which the premises are likely to remain habitable and available for residential purposes. Subsection (1) (c) requires the landlord to comply with all requirements in respect of buildings health and safety under any enactment so far as they apply to the premises. 

In Watkin v Brazier Property Investments Ltd [2012] DCR 186 Judge Keller observed that the Health Act 1956 and the Housing Improvement Regulations 1947 were relevant in a case where a house had lost power, water and sanitation following the February 2011 earthquakes. 

Failure to comply with the abovementioned provision is an unlawful act. Section 109 of the Residential Tenancies Act provides that the Tenancy Tribunal may make an order for exemplary damages against a non-complient Landlord. Section 109A gives the Tribunal the power to make an order restraining the offender from further committing the unlawful act if an order has been made under section 109. A breach of that order can result in a fine. 

The health act requires the provision of water and sanitary services. The regulations are somewhat dated but still remain in force. They include a provision requiring the house must be free from dampness. 

In addition to these statutes and regulations Local authorities are also empowered to pass bylaws under the Local Government Act. There has been some publicity in recent times regarding proposals to introduce some sort of building warrant of fitness for rental properties.  That has not yet come to pass but it is something that any purchaser of an as is where is property who is not intending to undertake repairs to bring it up to a good standard must take into consideration. 

Potential Liability for Injury 

Any owner intending to rent out a damaged property must ensure that it is safe for occupation. There is the potential for a claim in negligence against a Landlord, if for instance another earthquake caused the property to fail resulting in injury to or death of an occupier. In order for a claim to succeed a duty of care must be owed to the tenant. The Landlord must then breach that standard of care. 

If the house is not to be repaired it would be prudent for the owner to obtain a comprehensive structural engineers report which certifies that the house is safe for occupation as a home. Any remediation recommended by that report should be undertaken before the house is rented out. 

The Landlord should also consider obtaining liability insurance against any potential claim. As with any insurance, care would need to be taken to make full disclosure to the insurer at the time of application. The terms of the cover would also need to be carefully studied to ensure that claims arising from death or injury to tenants are properly covered. 

RESELLER OBLIGATIONS

Caveat emptor 

For those purchasers of as is where is properties who then decide to on sell them, whether repaired or unrepaired, consideration needs to be given to what, if any, disclosure is required to be given to a prospective purchaser. If a Real Estate agent is involved they will have disclosure requirements imposed by the agent to fulfil their obligations under the Real Estate agents act that need to be met. That may include a requirement to disclose that the property was previously cash settled by the insurer and purchased in an as is where is state. 

It is still usual to obtain full insurance claim details and an assignment of residual claim rights, when purchasing a home in Christchurch. Disclosure of those details will reveal the claims history. An as is where is seller will not be in a position to assign the residual benefit in settled insurance claims. That will immediately alert a purchaser to the fact the claim was cash settled and should alert them to the need to enquire about the damage repair status of the home. 

As more time passes I suspect the practice of obtaining claim assignments will fall away. Purchasers may then not be able to tell if the property was cash settled and sold as is where is. It is clear that it will become increasingly important for buyers to obtain comprehensive builders reports for houses erected prior to 4 September 2010. 

The commentators agree that under the general law the vendor has no obligation to disclose matters of quality. That does not preclude the purchaser having a remedy if the vendor has made a misrepresentation in respect of a matter of quality or has fraudulently concealed some defect of quality. 

The vendor need not disclose a defect in quality even if it renders the property dangerous or unfit for occupation even if the vendor created the defect (Kadissi v Jankovich [1987] UR 255). The purchaser might have a remedy if the defect means that the property is fundamentally different to that which was contracted for (Ware v Johnson [1984] 2 NZLR 518). 

Peter Blanchard in his Handbook on Agreements for Sale and Purchase of Land (3rd edition Handbook press ltd, Auckland) at pages 88 – 89 stated:

In contrast to the rules governing disclosure of matters of title, which are designed to ensure that all matters both patent and latent come to the attention of the purchaser, there is no general obligation upon a vendor to disclose anything concerning the quality of his property.  The maxim caveat emptor (let the buyer beware) applies.  There is no fiduciary duty by the vendor to the purchaser in respect of matters of quality.  A sale and purchase agreement is not of a kind requiring the upmost good faith by the vendor to the purchaser.  The vendor does not warrant under an open contract that the property is suitable for any particular use or that it has any particular quality.  Although it is common enough for a representation of this kind to be made in the course of negotiations, when it may bind the vendor. 

Neither patent nor latent defects of quality need be disclosed.  The purchaser must make up his own mind whether to purchase, relying on his own inspection and judgment except insofar as the following rules apply:

a.         A physical defect may also be a defect of title and thereby require disclosure; and

b.         The vendor must not do anything which misrepresents any aspect of the quality of the property.  He must not disguise a patent defect so as to make it latent, as by covering over cracking in a wall.  He must answer the purchaser’s enquiries honestly.  While he has not obligation to speak out, he must not do or say anything which is misleading.  The line between pure silence and misleading word or conduct may sometimes be a very fine one.  He may be caught up in a statement which turns out to be untrue even where it was honestly made and he spoke in ignorance. 

In the fourth edition of the same book, Peter Blanchard goes on to observe:[2]

Except when one of the foregoing elements of misleading conduct is present the vendor has no responsibility for a defect of quality, even if it renders the property dangerous or unfit for occupation and even if the vendor has created the defect, of is aware of its existence.  However, one New Zealand judge has been prepared to say that the rule excluding the implication of any warranty as to fitness or quality of the property does not compel the Court to reject the implication of a term as to the fundamental character of the interest being sold: the purchaser will not be compelled to accept something fundamentally different from what was contracted for. 

Sections 37 – 39 of the Property Law Act 2007 may provide some relief for purchasers. Section 37 may well apply if a vendor has failed to disclose a serious defect in the property and this becomes known to the purchaser before settlement. The court has the power to do all or any of the following ;-

(a)  Cancel the contract

(b)  Require the vendor to refund the deposit and any other amounts paid by the purchaser

(c)  Declare the purchaser has a lien on the land to secure payment by the vendor of any amounts ordered to be refunded. 

It can be seen that a vendor of an as is where is property must perform a delicate balancing act at sale time if they are proposing not to disclose the properties post earthquake history. If the property has been repaired we would recommend that full disclosure is made, including evidence of the repairs and any certifications and sign offs achieved for the work. If a building consent was necessary all of this will be evident from the LIM but it is clear that building consents for this repair work are the exception rather than the norm. 

WHAT DOES THE FUTURE HOLD?  

It is evident that going forward there will be a significant number of properties in the Christchurch property market which were cash settled and then sold on an as is where is basis.  Some of these properties will be demolished and replaced with new homes.  There will however be a significant number of properties which survived the Christchurch earthquake sequence but were damaged to a lesser or greater extent.  Some of these properties will not have been comprehensively repaired. 

This has the potential to create a ticking time bomb.  Purchasers are still generally very mindful of the additional due diligence that is required when purchasing post earthquake.  As time passes we believe that this currently rigorous approach may fall away. 

In 20 years’ time it may be virtually impossible to ascertain whether a property being sold, was originally sold as an as is where is damaged property.  As far as we are aware there is no attempt being made to establish a database of properties cash settled and then sold unrepaired. There has been talk of it in the media but it would require significant input from the insurers who may be reluctant to assist. 

There has also been some talk of this sort of information being included in the LIM.  I believe that the councils will have little appetite for undertaking the research necessary to do this.  The possibility of the council making a mistake and either including a property in the LIM as an as is where is property, when it is not, or not including it, when it is, will no doubt dissuade the councils from taking this step.  

Any purchaser acquiring such a property without knowledge of its past and then having to deal with the problems associated with it, will no doubt also look to their legal advisors.  We as a profession may well be faced with a requirement to undertake comprehensive due diligence in circumstances where the client is not prepared to pay for it.  It will be necessary for us as a profession to limit our retainer going forward so as to avoid any potential liability that might arise. 

In the writers view, purchasers acquiring as is where is properties and then completing only superficial repairs, are not acting responsibly as far as the maintenance of the standard of housing stock in Christchurch is concerned.  It can only be hoped that as time passes appropriate repairs will be affected to these properties or alternatively the state of the properties will become such that there is no option but to demolish them.

 

 

© Copyright Harmans Lawyers 2018