LawBrief April 2020 – Covid-19

Covid-19 Unprecedented Times

I was lucky enough to spend six weeks in December and January travelling through Asia and Europe with my family. The people we met on our travels often asked us about the tragedy on Whakaari/White Island, which occurred the week before we left New Zealand, or about the growing threat of the bushfires in Australia. There was little mention of what was then known as Coronavirus until the last few days of our trip. At the time, it seemed a remote and distant concern. We now realise how fortunate we were to avoid both the virus itself and the travel disruptions that followed.

In the space of a few short weeks since our return to New Zealand, I have been reminded of just how quickly things can change. We now know all about community transmission, social distancing and flattening the curve. We have seen panic buying of products as diverse as toilet paper and flour and “Friday night bubbles” now has a totally different meaning to before.

I want to reassure you that the team at Gault Mitchell is committed to supporting you during these difficult and challenging times. Partners and staff are working remotely and, in most cases, are contactable by mobile phone and email. We are also set up for videoconferences if required.

We continue to have access to your documents and files, along with access to the full range of our usual research facilities, and to a wealth of new information from the Law Society and other providers.

As a result, we have been dealing with a range of queries, mostly to do with property transactions, leasing issues, and employment and wage subsidy concerns. Many of those queries are of a general application, and you will find some articles about those issues on our website (www.gaultmitchell.co.nz) in the coming weeks. If you have any specific queries in the meantime, though, please let us know. Our contact details are on our website and at the end of this newsletter.

I am proud, but not surprised, that the Gault Mitchell team has been able to adjust so quickly and effectively to these difficult times. I am confident that we will adjust again when the lockdown is lifted, and New Zealand starts to deal with a different range of pressures and concerns. We are already starting to plan for that.

We have many essential workers amongst our clients, and we know that they have been working hard at their workplaces whilst the rest of us have been at home. We are all grateful for their efforts in such difficult circumstances.

We also have many business clients facing an uncertain future. Wellington is lucky to have many small and unique businesses –from your local bars, cafés and restaurants, to independent retailers like bookshops and fashion designers, to the full range of service providers. I urge you to support them all in the coming weeks and months.

Lastly, on behalf of everyone at Gault Mitchell, I wish you and your family and loved ones all the best. I hope that you keep safe and stay well, and I look forward to catching up with all of you soon.

Kind regards

Costas Matsis
Managing Partner
Gault Mitchell Law

The COVID-19 pandemic has seen New Zealand in full lockdown from 26 March 2020.  With the reality of new routines settling in and many businesses able to operate remotely, some real estate agents and vendors are continuing to market their properties for sale.

There are a few things to think about before you decide to make an offer during lockdown. Gault Mitchell is operating remotely, and we are available to assist you in making an offer on a property during the lockdown period and answer any questions you may have about this process.

Firstly, during lockdown you will not be allowed to visit or view a property in person, as that type of activity is not classed as ‘essential’. If you have already viewed the property you may not be too concerned about this. However, if you choose to make an offer on a property you have not viewed in person, we recommend you proceed with care and take note of our comments below regarding possible conditions to include in your offer

Due Diligence – what checks can I progress during lockdown?

Finance

Many banks have staff working remotely. However, your bank probably won’t be as responsive as usual as they will be very busy with queries from other customers related to the pandemic (e.g. urgent mortgage holidays). Some banks may also be reviewing their lending criteria to accommodate a potential economic downturn, which could mean a stricter approach to your finance.

Therefore, we recommend you give yourself plenty of time to get answers from your bank on important matters, or otherwise make your offer conditional on obtaining a satisfactory offer of finance with a timeframe that expires during or after lockdown (depending on your bank’s responsiveness).

We also recommend you check any existing finance pre-approval or offer of finance you may already have to make sure you are well within its expiry date. If the pre-approval is due to expire soon you should contact your bank and get it renewed before making any offer on a property; or make your offer conditional on finance. You should also ensure that any new lending criteria your bank may have put in place because of the lockdown, does not impact on the pre-approval you have received.

We recommend you contact us to discuss your finance and applicable timeframes as the above issues can create significant problems for you later on.

Kiwisaver First Home Withdrawals

Many Kiwisaver providers are continuing to operate remotely during lockdown. However, you must confirm directly with your specific Kiwisaver provider that they will be able to complete your withdrawal within the period you require. This is particularly important as you will not be allowed to withdraw your Kiwisaver funds and apply them towards the property after settlement of your purchase, regardless of the reason for the delay.

If your Kiwisaver balance has dropped because of COVID-19 then you should check to make sure you still have enough funds to complete the purchase.

You should also carefully check the terms and conditions of any offer of finance or pre-approval from your bank, as it may be conditional upon your financial circumstances remaining unchanged. If you are unsure whether your pre-approval for finance is affected by a drop in your Kiwisaver balance, you should talk to your bank in the first instance to confirm that it is comfortable with any change in your circumstances.

Insurance

Some insurance providers have staff working remotely over lockdown, so you may be able to get confirmation that a suitable insurance policy will be available to you on settlement of your purchase. We recommend you get this confirmation in writing (e.g. an email). If there is an expiry date on the confirmation, check that the expiry date is well after the likely conclusion of lockdown and extends to the proposed settlement date in your offer.

Title

Gault Mitchell is fully operational during lockdown and we are able to assist you in checking that the Title to a property is in order, including making sure any interests registered against the Title (e.g. any rights of way or services easements), will not give you cause for concern later on.

You should contact us prior to making your offer and we will review the Title and provide you with our comments on any potential issues that may be disclosed.

Due Diligence – what checks am I not allowed to do during lockdown?

During lockdown, Alert Level 4, some of your key due diligence enquiries will be prohibited. That’s because the nature of that work is not considered an ‘essential service’ during a pandemic.

To get around this problem we recommend you make your offer conditional on the following matters, with a timeframe that expires well after the COVID-19 Alert Level has reduced to Level 2 or below:

Builder’s report

Your builder is not allowed to inspect the property during Alert Level 4 lockdown, and this restriction may continue when the country is at Alert Level 3. You should give yourself the opportunity to have a builder inspect the property when the restrictions ease, to make sure there are no significant issues that could be expensive for you to fix, or could cause your bank to withdraw your offer of finance prior to settlement.

Some vendors may have commissioned their own builder to inspect their property and provide a report to a potential purchaser. We strongly recommend you obtain your own builder’s report rather than relying on the vendor’s report. The vendor has an interest in presenting the property in its best light and may have commissioned their builder to report on that basis. Their report may not cover all the important matters you would want it to cover. If you later discovered that the vendor’s builders report was inadequate, you would not necessarily have any right of recourse against the vendor or the builder.

LIM report

Many Councils (including Wellington City Council) are not issuing LIM reports during lockdown as their staff cannot access the databases remotely. We recommend making your offer conditional upon a satisfactory LIM report from the local Council. This way, you can satisfy yourself that Council holds no record of problems with the property, e.g. flooding problems or unauthorised building work that could have negative implications for your finance.

If the vendor has provided a copy of their own LIM report, you may be comfortable relying on it as evidence of Council’s records for the property. However, we recommend caution in doing so – if Council records are incorrect or out of date and that has negative implications for you later on, you will not have any right of recourse against the Council for their error, because you did not order the report yourself. Best practice is to obtain your own LIM report directly from Council.

Settlement Date

During the COVID-19 Alert Level 4 period (and possibly Level 3) moving to a new house is not permitted. You should make sure that the settlement date in any offer you make clearly specifies that settlement will take place within a certain timeframe after the Alert Level is reduced to Level 2 or below.

Once you and the vendor have agreed to a settlement date, the vendor is under no legal obligation to change it to suit you (provided that the vendor is able to comply with their own settlement obligations on the settlement date in the contract), regardless of whether you are practically able to move into the property or complete the necessary steps towards settlement. We therefore recommend you contact us in the first instance, to discuss your proposed settlement date.

Making your Offer

During this period, we continue to be able to provide you with advice on how to prepare your offer in a way that still ‘puts your best foot forward’ – without compromising your ability to terminate the contract later on if investigations reveal matters you are unhappy with. 

You should contact us early on, to discuss a method of signing the offer so we can make any amendments that may be necessary for your protection.

New builds are an increasingly popular arrangement for first home buyers, particularly as they are incentivised by Land Value Ratio (LVR) rules which include exemptions on lending restrictions and homestart grants. These exemptions allow for grants up to $20,000 for new builds.  

New builds include the purchase of the underlying land and a building contract. The Building Contract may be encompassed in the Agreement for Sale and Purchase of Land or it may be a separate standalone contract. In either case, the documents will include terms which favour the builder including terms which allow for variations and delays in certain circumstances. There can also be uncertainty associated with new builds about such things as time frames, costs and the standard of the work completed.

Therefore, it is important for homeowners to ensure their interests are protected and that their expectations are appropriately managed. This is a brief overview of the risks and matters for homeowners to consider relating to costs, payments, and defects under building contracts.

Costs

Most building contracts are called ‘fixed price’ contracts. However, this often does not mean that the price is fixed. It is standard for builders to include terms in their contracts which allow for cost fluctuations meaning the builder can increase the contract price if costs, such as labour or material costs, increase during the build. Specific contract terms to look out for are provisional sums, prime cost sums, and variations.

Provisional sums cover unknown additional costs relating to jobs where the extent of work required is uncertain, such as earthworks. Prime cost sums cover supply of specific materials where the cost has not been finalised, for example, the cost of floor tiles. It is important where terms are in the contract that adequate notice and consultation provisions have been included to require the builder to keep you informed about costs of any specific works or materials to prevent the contract price increasing automatically without you being notified or consulted.

Variations in building contracts are another common area where costs tend to blow up. A variation is where you or the builder agree to make changes to the work covered by the contract after it has been signed.  The costs relating to variations often encapsulate more than just the materials and work and can include builder margins, delay costs and additional overheads incurred from a variation—such as fencing or insurance.

You should make sure that a building contract provides a process for such variations to be made or requested. This should include giving written notice to the other party of the variation being requested and the time, materials, and costs involved.

This is especially important where a builder wishes to make a variation as it prevents the builder from making the variation without consulting the homeowner. Additionally, further protection can be added where a builder must obtain the homeowner’s consent before making any variation. However, builders may be hesitant to agree to such a term due to its restrictiveness and the added delays that may result, particularly in circumstances where the need for the variation is beyond the control of the builder (e.g. when substitutions are required as materials are no longer available).

Payments

An area of building contracts where disputes often arise is in relation to payments. Where possible, homeowners should ensure that payments are not made until they have received the value under the contract which the payment relates to. Key terms to watch out for relating to payments under a building contract are timing and due dates and the structure of the payments.  The payment schedule is often set out in the first few pages of the contract and this should be reviewed carefully.

With regards to timing and due dates of payment, prompt responses (whether by payment or making an inquiry) must be made to payment claims within the prescribed time frames in the building contract, or within 20 working days if no due date is specified. Where a response is not made within the required time, there is a risk of the builder suspending the building work and/or pursuing legal action to obtain payment.

Turning to the structure of the payments, it is important that the weighting of payments throughout the build are appropriately balanced relative to the progress of the work. As such, it is preferable that the payments in the final stages be greater with the final payment not being made until the Code Compliance Certificate for the property is obtained. This incentivises builders to progress the build more quickly and ensures that a property meets all the necessary building standards before the homeowner pays the full price under the contract.

Defects

It is important that a building contract holds the builder to a high standard when completing the building work and it requires that any defective work or materials be remedied by the builder at their cost.

In building contracts, work is defective when it fails to meet the standards and requirements of the contract and what counts as defective work should be defined in the contract. Homeowners should take note of terms such as those relating to the quality of materials used in their building and the workmanship of the builder to ensure that the scope of what is defective work in the contract matches up with their expectations.

Of equal importance is the timing of notifying defects to the builder.  In most cases there will be a clause in the contract setting out the timeframe for giving notice.  In addition to this there are certain statutory rights that a homeowner has regarding defective workmanship.

Under the Building Act 2004, there is 12-month period from when the building work is completed during which the builder is required to remedy any defects which are reported to them.

For any notice of defects, proof will be required to show that the defect is due to the fault of the builder.  It is important that homeowners carefully inspect their property when they take possession. It becomes more difficult for them to prove a defect is due to the fault of builder, the longer they have been in occupation of the property.

Conclusion 

With the current state of the housing market and the favourable lending rules, new builds will continue to be a popular and attractive option for prospective homeowners. Therefore, it is important that homeowners have a basic understanding of how to protect their interests and what key terms they should focus on when negotiating their building contracts.

For further enquiries please contact our team of experienced lawyers.