The legalities of the property landscape.

Transcription

1 The legalities of the property landscape. Three years down the track from the earthquakes and there are still just as many questions about buying or selling a house in Canterbury. The issues aren t any easier to deal with, just different. The Basics: buying or selling a house in Canterbury need to be added. You don t have to delay making an offer until your enquiries are satisfied because you can walk away if you are not happy with a condition. What exactly is required in your agreement depends entirely on the property. Your lawyer will be able to advise you. Buying or selling a home can be a confusing process at the best of times but doing so in Canterbury brings with it a whole set of issues. Of course, there s the usual things any purchaser will need to check out with a house purchase anywhere: title to the property (including easements and land covenants), a Council land information memorandum (LIM), a building report to identify maintenance and building code issues, and a specific weather tightness report for properties built since 1990 to check the property isn t affected by the leaky homes syndrome. The agreement for sale and purchase should contain conditions covering all of these things and allow 10 to 15 working days for the necessary due diligence. Most buyers will also need conditions covering arranging finance and possibly the sale of an existing property. And in the case of a section, the buyer may want the sale to be conditional on getting a satisfactory building contract in place. But in Canterbury, earthquake related issues affecting properties further complicate matters. While the fineprint of the standard agreement deals with most issues, it is not so helpful in dealing with earthquake damage and special conditions Due diligence on earthquake damage The fundamental question is, has the property been damaged by the earthquakes? If it has, you need due diligence done on that damage. Has the damage been fixed? If not, has the vendor made EQC and insurance claims? Most earthquake damage hasn t been fixed yet, and so if you want it fixed by EQC or the vendor s insurer, you need to have the vendor s EQC and insurance claims assigned (i.e. transferred) to you as part of the deal. Conditions that deal with assignment of earthquake related claims are commonplace in contracts for the sale of Canterbury properties and provide for a Deed of Assignment. This will transfer the benefit of the EQC and insurance

2 claims from the seller to the buyer, to be completed on settlement. There is no such thing, though, as a standard clause for the assignment of claims. You ll need to be sure you understand the nature of any insurance claims so that when you consult a lawyer, they can advise whether the provisions of the assignment are suitable before you sign the contract. If there is earthquake damage, the next key question is how much will it cost to fix the damage? You may need to engage your own professionals to assess this in borderline cases. If it is under $15,000 excluding GST, then EQC is likely to pay out the cost of repair in cash, and may already have done so. The parties need to agree who is entitled to this cash payment and that needs to be factored in the purchase price. More importantly, if the cost of repair is over the EQC cap of $115,000 including GST, then the vendor s insurer will be responsible to deal with the claim and may not allow that claim being assigned to the buyer with all of the benefits that the original owner had. Extreme care is needed with these cases. No public register However, more and more houses are being offered for sale where the earthquake damage has been fixed or the EQC and insurance claims cash-settled. These properties have their own issues. There is no public register of EQC or insurance claims and settlements, and so it is impossible to know exactly what settlement may have been reached. In some cases where cash settlements have been taken, the house may only have had cosmetic repairs or no repairs at all. Where repairs have been completed, you need to be satisfied that they have been done properly and that you will be entitled to the benefit of any guarantees or warranties offered by the builder. The key is doing due diligence on the settlement and asking the vendor for the right information. You also need to consider whether there are any out of scope claims with the private insurer affecting the property and whether there are any potential claims relating to damage to the land. Think about a geotechnical report where you have concerns about the suitability of the land. Assuming the property is in the Green Zone, check what technical category it is (easily done on ). Getting finance is more challenging when buying a property on TC3 land and there can be more hoops to jump through. Insurance is now more freely available in the residential market than it was immediately after the earthquake, but it is still not a given, especially with properties that have been cash-settled and where repairs have not been properly completed. Without insurance it will be impossible to secure bank finance for the purchase. You should also bear in mind that the sale of properties by tender or auction have the terms of the contract fixed by the seller so that you may not have an opportunity to change the contract. In these cases, satisfy all of your requirements before bidding. You can still buy that property you love, but remember that good advice and due diligence go a long way in the property process in Canterbury. Buying and selling a write off One of the newer issues facing house buyers in Canterbury is the increase in written off properties on the market. Suzy Garnett and Richard Lang are currently working with buyers and sellers of such properties. What to think about when buying an insured, unrepaired home in Canterbury: n Have you got all the conditions you need to cover the usual stuff e.g. title, LIM, building report, weathertightness report, valuation, finance, sale of another property? n Has the property been damaged by the Canterbury earthquakes? n If so, has it been fixed? If it has been fixed, have the repairs been done properly and will you get the benefit of building warranties and guarantees? n If not, has the vendor made the appropriate EQC and insurance claims? Does the contract provide for the claims to be transferred to you on settlement? n Are the repairs to the property likely to be over the EQC cap? If they are over, will you be able to take over the full benefit under the insurance claim? n Check whether there are any out of scope claims (e.g. pathways and drives) that need to be transferred. n What about land damage? What Technical Category is the land in? Do you need to get a geotechnical report? n Can you get insurance? Now that more insurance claims on earthquake-damaged properties have been settled, there are a number of properties

3 What to think about when buying and selling an uninsured, unrepaired home in Canterbury: n Will the insurance company allow you to sell the property with the damaged house on it? n Do you understand the statutory obligations around safe and sanitary houses? in the green zone where the owner has taken a cash settlement from their insurer and then decided to sell the property in its unrepaired state for a sum close to the land value only of the property. Different insurers have different approaches to whether or not they will allow a house that has been cash settled to be sold in its unrepaired state. Some insurers will not settle a claim on a badly damaged but repairable house unless the owner can provide a structural engineer s report showing that the property can still be lived in - and that any recommended repairs have been completed. They may also want a structural engineer s report following the completion of those works. Those insurance companies will also require an estimate of the salvage costs, and will reduce their offer by that estimated amount. Where insurance companies are willing to cash settle a badly damaged house so that the owner can buy a replacement property and not repair the damaged property, there are various considerations for buyer and seller. Buyer Considerations If you re buying a property which has been cash settled but not repaired, you will need to do a fairly detailed due diligence investigation. These properties will generally not be insured, because most insurance companies will cancel the insurance on the property as one of the conditions of making a cash settlement. You need to consider if you are prepared to buy a property that cannot be insured. For example, generally only cash buyers will be able to consider purchasing an uninsured, badly damaged house, as most banks will not lend on an uninsured property. As there will be no insurance on the property, a buyer needs to be aware that they will be personally responsible if the property causes damage to another party s property. This is called third party liability and is normally covered under a standard house insurance property. If any part of the house or property caused damage (i.e. through a fire or part of the house collapsing) to a neighbouring n Is the house safe to live in, and what works would be required to ensure it is safe? n Are you prepared to pay for any expenses if your property causes damage to a third party or their property? n Who is responsible for demolition? n Is there any land damage, or any Earthquake Commission claims relating to the land that need to be taken into account? n Have you had legal advice to ensure that the clauses in the agreement provide protection to you as the buyer or seller? property or person, the owner of the uninsured property will need to pay to fix any damage themselves. This also means that if you are looking at buying a property that is being sold without insurance, it could be be substantially damaged. This means you will need to be satisfied about the true extent of the damage, and whether it is

4 actually safe to occupy - together with any costs required to make it safe to occupy. You ll also need to consider whether there is any land damage. We strongly recommend that you obtain a geotechnical report to determine the likelihood of being able to rebuild a new house in the future. You will also need to consider whether there is an Earthquake Commission land claim relating to the property that you should take over. Additionally, there will be considerations surrounding renting a damaged property to a third party, which we will discuss next week. In the long term, a buyer will also need to think about the future of the property, whether that be selling the property in the same state as it was bought, or subsequent development of the land. In the current climate, it may still be difficult to insure a replacement house on the same site if there has not been insurance for some time, although it is becoming easier to obtain insurance as time passes. Seller Considerations A seller of a property which has been cash settled but not repaired will need to ensure that their insurance company is aware of their plans, and also that they approve of the seller continuing with the sale. A settlement agreement will normally contain provisions that mean the seller of the property indemnifies the insurer for any damage caused due to the house not being demolished. A seller should pass that indemnity on to the buyer of the property as it will be the buyer that takes on any responsibility to demolish the property. Most cash settled properties on the market that we have encountered have been sold privately, as some real estate agents understandably have special requirements before they will list a cash settled property. This means that the seller could be marketing the property themselves, and care needs to be taken to ensure that the property is not misrepresented to any prospective buyers. You ll need to have the agreement drawn up by your lawyers, and the agreement will need to have special clauses dealing with the state of damaged buildings. In particular, a seller of a property which has been cash settled but not repaired or demolished should seek legal advice to ensure that clauses are added to the agreement that record the state of the property, clarify responsibility for demolition, and deal with statutory liabilities for unsafe or unsanitary buildings. You can still buy the worst property on the best street, but only with tailored advice and thinking through the issues before you commit to sell or buy. Renting a write off Many buyers of cash-settled, unrepaired houses plan to rent them to provide income for repair or rebuilding. Richard Lang and Suzy Garnett say there are several issues to consider. Landlords and tenants both have things they need to consider when looking at renting a written off house, particularly as some of the responsibilities of each party under the Residential Tenancies Act 1986 and other legislation cannot be contracted out of. Landlord Considerations As a landlord, you have certain responsibilities. You must provide and maintain the property in a reasonable state of repair, having regard to the age and character of the property. However, the period that a house is likely to remain In a repairable house, the insurer should not retain salvage rights in terms of the parts of the house that have not been included in the scope of works. But in a house that has been deemed a total loss (and so will be rebuilt), the insurance company would normally retain the salvage rights. If you re a seller, you should get legal advice about your settlement agreement with your insurer.

5 habitable may also be taken into account when determining how well maintained the property must be. Additionally, you must comply with all requirements relating to health and safety. This includes the provision of adequate drinking water, together with adequate toilet and shower facilities. Also, you must provide an adequate waste removal system. Many agreements for sale and purchase of written off properties will exclude the seller from having to provide these services in a sale, but you will not be able to contract out of these requirements with any tenants. Failure to comply with these responsibilities is unlawful. A Wellington landlord was recently found to have misled tenants about the safety of the property and its earthquake risks. The landlord in that case was ordered to pay compensation to the tenants. Be honest with your tenants about the condition of the property. If you are considering renting the property, we recommend that you first obtain a structural engineer s report to confirm that the property is safe. Additionally, any works required to make the house weathertight should be completed before it is rented. Insurance is another issue. As the landlord, you are unlikely to be able to obtain insurance for the written off house itself, but you are probably also unlikely to be able to get the usual landlord s insurance covering loss of rents and damage to the property by the tenant. If the property is dangerous and causes damage to the tenant or their possessions, without insurance you may become personally liable for any such damage. The lack of insurance for the house may also affect the tenant s ability to obtain contents insurance, so you should advise your tenant that the property is uninsured. As well as affecting the tenant s ability to insure their own property, you may not be able to recover any loss from your tenant s insurer where your tenant causes damage to the property, as liability for such damage would normally be covered by their contents insurance. The Ministry of Business, Innovation and Employment (formerly the Department of Building and Housing) publishes suburb specific market rent. We recommend that you look at this information when setting the rent to ensure it is in line with the market rent. If the tenant disputes the rental within the first three months of the tenancy starting, they may apply to the Tenancy Tribunal to reduce the rent if it s considered above the market rent by a substantial amount. Tenant Considerations Tenants are in a difficult position in Canterbury as there is high demand for rental properties, and many tenants must feel that they don t have a lot of choices if they want to stay in a particular area. However, at a minimum, you need to check that the house is watertight, able to be heated during the winter months, and generally safe to be occupied. You also need to satisfy yourself that the damage will not affect your enjoyment of the property or cause harm to any people living in the property, or their guests. You do have rights if the property is not safe and sanitary, regardless of what any tenancy agreement might say. If you are a tenant, make sure you can get contents insurance if the house itself is not insured. As already noted, if you don t have insurance, as well as not having cover to loss or damage to your property, you will not have cover for any damage that you or your property causes to another person or their property. This includes the uninsured house in which you are living. Ideally you should have a clear, written agreement as to the responsibility for maintenance, provision for what happens if another earthquake significantly worsens the damage to the property, and agreement as to what you may be liable for if you cause damage to the landlord s property. You always have basic rights under a tenancy agreement. If you are concerned that those rights are not being met, contact your lawyer for more information about your rights and how you can ensure your rights are being met. Body corporates navigate earthquake issues Property owners in unit title developments need to work together to settle EQC and insurance claims. Richard Lang and Janine Ballinger look at some of the complexities. You can t pick your neighbours. You may not even like them. But when you own a property in a unit title development (as opposed to a fee simple or cross-lease title), you and your neighbours are covered by the same insurance policy. Unit title developments aren t necessarily limited to large apartment complexes. Smaller blocks of flats and small to medium commercial developments are often unit title developments, especially where a number of individual properties share common facilities such as driveways. With a unit title development, the Body Corporate takes out insurance for all of the units. Where any unit or common property has sustained earthquake damage, it is the Body Corporate that lodges the claim with EQC and their private insurer, and

6 deals with the inspections, completion and costings of scopes of repair work. And ultimately the Body Corporate will make any decisions about repair or rebuild of the damaged property. Body Corporates are funny things. They are created by statute and, as an owner of a unit title property, you are bound by the Unit Titles Act 2010 as well as any rules that the Body Corporate has passed which are particular to that development. Each unit in the unit title development is a member of the Body Corporate. At Body Corporate meetings, each unit is represented by an owner so that all owners collectively make decisions. When there are 10 or more units, the Body Corporate must establish a committee to look after the daily running of the development on the behalf of all owners. Body Corporates facing significant earthquake issues and decisions on the fate of the development need to ensure all owners are actively involved in the process and understand the outcome. One of the biggest issues facing Body Corporates is the lack of insurance cover. It has become quite apparent that unit title developments are heavily under insured and Body Corporates are scrambling to figure out how to apportion the insurance cover that is available among units and how to deal with contribution of any shortfall by the unit owners. If the Body Corporate resolves to rebuild (even without the agreement of all owners), it has powers under the Act to force owners to pay any shortfall. Another issue is how damage is assessed from unit to unit. Earthquake damage inspections of units vary from development to development and it may be that not every unit is scrutinised. Inspectors may look at a few units, scope the damage and take the average cost of repairing the damage and apply it to all units. It is then for the Body Corporate to decide whether that is appropriate given the nature of the development and the damage sustained. Serious decisions are required by the Body Corporate if the damage is deemed to be uneconomic to repair, and all owners need to agree on the way forward. The first question is whether owners want to repair or rebuild. If there is a shortfall in the insurance payout, all owners must contribute to the shortfall. Such agreement is difficult. Owners tend to want their money out rather than put more in. When a cash settlement is on offer from the private insurer there are still a few hoops to jump through. Accepting the money may seem easy, but it s not. The amount needs to be approved by the owners. Once approved, the funds come into the Body Corporate and then the biggest hurdle is agreeing on how those funds will be paid to the unit owners. There are no set rules here it is simply what the owners agree to do. A related issue is that damage may vary quite widely from unit to unit and some owners may dispute how the insurance proceeds are allocated. This can also become an issue when the unit title development is uneconomic to repair, because the distribution of the insurance proceeds is likely to be in proportion to each unit owner s ownership interest (based on the relative value of the units before the earthquake) than the extent of the earthquake damage to each unit. But some unit owners may contest this, and the ownership interests of the unit title development can be reassessed after revaluing and may change. So, an owner could take their neighbour s interest if their ownership interest increases as there are only so many interests to go around. If your interest goes up, then one of your neighbour s entitlements must go down. It follows then that those owners that lose Issues with earthquakedamaged unit title properties: n Under-insured unit title developments n Contributions from owners for any shortfall in insurance n Agreement on the basis for inspection and scoping of damage to different units n Apportionment of insurance monies among units with differing degrees of damage n Securing owners agreement to a cash settlement or reinstatement when a unit title development is so badly damaged as to be uneconomic to repair n Apportionment of cash settlements amount units on the basis of ownership interest n Reaching agreement as to reinstatement of the unit title development or sale of the site where the original units have been demolished n Due diligence needs to be completed if you are buying a unit title property that has been damaged entitlements have an interest in fighting back. When it comes to allocating insurance money to unit owners there are no hard and

7 fast rules. At the moment, various methods are being used by Body Corporates to allocate the funds out, and it can be based on ownership interest, market value, or it can be some other mechanism whereby all parties have agreed. If you find yourself in this position, where the Body Corporate is proposing resolutions as to the allocation of such funds, make sure you are aware of your rights if you are disadvantaged in the decisions being made by the Body Corporate. If the Body Corporate choses to vote on resolutions to allocate funds that not all unit owners agree on then there are minority rights that unit owners may look to pursue. Corporate is currently completing insurance negotiations, seek legal advice so that you understand your position. Similarly, if you are buying a unit title property, ask your lawyer to complete a thorough due diligence on the current situation with the EQC or insurance claim as well as the inner workings of the Body Corporate. Assess your risk, as well as your neighbours, before buying. Web of issues in cross leases lease development may not apply to another. So, when it comes to insurance issues with a cross lease property, it all comes back to what the cross lease says. If you are a cross lease property owner when was the last time you read your lease document? Have you ever read it? Do you know what your lease says in the event your property is damaged or destroyed by an earthquake? To get a result, all owners must ultimately work together and agree on the final method of payment. Compromises may be needed so that all owners on board. The last thing you want is for some owners effectively holding out - which results in everyone suffering. Once an insurance settlement is distributed, the owners still have to work together on further decisions. Even once a unit title development is demolished, the title to the land is still based on the physical boundaries of the former units. So unless the units are being rebuilt exactly as they were, the owners must agree either to the cancellation of the unit plan or the completion of a new redevelopment plan (as well as agreeing on any changes to the newly redevelopmed units). If the unit plan is to be cancelled, will the land be marketed and sold? If so, by who? What is an appropriate price to sell at? Should the Body Corporate obtain a valuation? All of these decisions require the input of unit owners. The Body Corporate needs to be confident that all owners will sign a sale agreement if and when presented at an appropriate amount, as any delays with unit owners signing could jeopardise the offer. The issues are many and varied. If you own a unit title property, and the Body Navigating your earthquake damage claims with EQC and your private insurers is difficult at the best of times. What happens if you have an added complication you are an owner of a cross lease house or flat? Richard Lang and Janine Ballinger discuss what you need to know. Owners of cross lease properties face much the same complexities as owners of unit title properties in that your insurance claim affects your neighbours as well as you. The difference is that, unlike unit title properties (where all unit owners are covered by the same insurance policy taken out by the body corporate), cross lease properties often feature adjoining properties covered by different insurance policies. Cross lease properties usually feature two or more flats built on one parcel of land, with long term (999 years is common) leases giving each flat owner the exclusive use of their flat. As an owner of a cross lease property, you are bound by the terms and conditions in the lease document registered against your title. The lease forms used for cross leases are reasonably standard, but several different forms exist. What applies to one cross Lease terms Some cross lease property owners are negotiating their earthquake claims with the EQC and their private insurer, with little, or no regard to the terms of their lease. This is dangerous. It is common for the lease to require the owner of each flat to individually insure their property. The lease usually states that if a flat is destroyed by any cause, including earthquake, then the flat owner will repair and make good that destruction or damage at their cost. But the difference between a cross lease property and a normal freehold property (where the owner also insures their own property) is that a cross lease owner has obligations to the other owners of all flats in the cross lease development. This means that you do not have total control over the process. Any repair and reinstatement work on an individual flat must also be completed to the satisfaction of all flat owners. So, if you do not have adequate insurance in place and there is a shortfall in the costs

8 to repair or reinstate your flat, then you will need to fund the shortfall in cost yourself. The other flat owners can also require you to complete the reinstatement or repairs to their standards. In some cases, the other flat owners have the right to complete repair and reinstatement work and charge you for your share (based on your land share) of the cost. In some cases, the lease provides for all of the flat owners to communally insure all flats (similar to the unit title approach). In that case, all flat owners must be involved in any decisions about repair or reinstatement of any of the flats. You need to check the lease document to know which approach is specified for your cross lease development. Either way, co-operation with the other flat owners is likely to be necessary in the settlement of insurance and EQC claims. This makes sense where flats are adjoined and earthquake damage is likely to affect multiple flats in a similar manner. Different insurers and delays However, when every flat owner has their own insurance policy, which potentially means each flat is covered by a different insurance company, things get complicated. Cross lease properties are facing lengthy delays to have their repair work signed off by the EQC and their private insurer, especially where the flats are joined by party walls and each owner insures their flat with different private insurance companies. The delays are commonly because of the interaction required between insurance companies and the differing scope of works and repair strategies for repairing damage, and the timeframes for completion. For example, one insurance company may commit to replacing one flat, but the insurer of the adjoining flat may deem that flat a repair. This may lead the owner to objecting and negotiating with their insurer, which then effectively puts the first flat s rebuild on hold until the second flat s insurance issues are resolved. Another such issue is when one flat owner completes an insurance settlement with their insurer and their flat is subsequently demolished and that neighbour has no intention of rebuilding. How long will you be looking at an empty section? Do you enforce you rights against your neighbour? Do you take the opportunity? As well as issues with the actual flats, another issue is remedial work to common areas, such as the common driveway. If owners are separately insured with different insurance companies, each owner s insurer calculates the cost of repair and that flat s share of it. It is then for all owners to obtain their insurance entitlement and coordinate a repair. Further issues arise if different insurance companies differ on the repair cost and share of each flat. The differences could result in a shortfall of funds available to complete the required repair. What will you do if one owner decides that the work doesn t really need to be completed and does not engage or contribute to the work even though they have received the money to do so? The terms of the lease have far reaching consequences. There are many cross lease property owners who have completed negotiated settlements with EQC and their insurance company and will not be completing their obligations under their lease. These owners are in breach of their lease and could be exposed to legal action by other flat owners under the lease. If this is a situation you are in, or are potentially heading into it, then you need to seek advice. Issues with earthquakedamaged cross lease properties: n Cross lease properties are unlike unit title properties in that each flat owner usually has to arrange their own insurance. n Each flat owner does not have complete control over their insurance claim as all flat owners have the right to require that each flat is repaired or rebuilt to their satisfaction, even if there is a shortfall in insurance cover and the flat owner does not want to fix the damage. n Care needs to be taken when you are settling a cross lease insurance or EQC claim that any rights the other flat owners have are observed. Flat owners who cash settle their insurance claim and then do not repair or rebuild may have issues with their neighbours. n Delays can occur even if your insurer has approved your claim if other flats insurance claims have not been approved or settled. n Problems emerge when different insurers are involved and make different assessments as to common damage e.g. driveways. n Note that repairs or rebuilds which change the external footprint or envelope of a cross-lease property can create legal problems, usually requiring the consent and re-issue of leases and titles for all flat owners n Structural alterations also need the consent of all flat owners

9 Neighbours consent and footprint In repairing or rebuilding your cross lease flat, be aware that there are some things you cannot do without the prior written consent of the other land owners. The most common is to not alter, add or extend an existing building on the land or to alter the external dimensions of the flat. If you are looking to comply with your lease obligations and complete any required repair or rebuild work, then remember your lease is only for the footprint of your defined flat area. If you are looking to rebuild and are taking the opportunity to redesign your house, then you may be heading for a host of legal problems. For example, if the rebuild results in your new house straying outside the original defined area on the flat plan attached to your title, you will be in breach of your lease and will not have legal title to the part of the house which is outside the footprint of the original house. Good luck trying to sell the rebuilt house. There are ways to allow you to extend or redesign your rebuilt house, but you will need the other land owners (and their banks) to consent to this and it will involve a surveyor completing a new survey of the house and then the issue of new leases and titles for all flats that form part of the cross lease development. This is expensive and time consuming. If you are facing this situation, seek legal advice. Many people who are completing repairs to their flat are taking the opportunity to do some other improvements. If this additional work involves structural alterations, your lease commonly has a provision regulating this as well. Most lease documents state that if you are undertaking or making any structural alterations, then you need the prior written approval of all the lessors, such consent not to be unreasonably withheld. Again, if you are facing this situation you should seek legal advice about the approval process and assist you if a lessor chooses to withhold consent. If you are a cross lease property owner or looking to be one, become familiar with the terms of your lease before you settle your EQC or insurance claim and make sure you understand your obligations to the other flat owners. Take advice if you are unsure. Getting it right More homeowners are reaching a point in their insurance claims where they can start rebuilding, or having major repairs carried out to their house. But what happens if the work is not up to scratch? Richard Lang and Emma Tomblin answer this vexed question. If you have earthquake damage that exceeds $115,000 (including GST), rather than EQC managing the repair, the repair or replacement will be managed by your own insurer, and usually by a project manager appointed by them. Once the rebuild or repair job has been fully assessed, plans and specifications will be drawn up showing what work needs to take place, and then a building contract is signed. Unlike EQC repairs, even where the repair or replacement is being managed by the insurer, you, as the homeowner, normally enter into a building contract directly with the builder carrying out the work. The contract specifies the obligations on the builder to carry out the work, as well as your own responsibilities.. Part of the terms of the building contract would be provisions for the insurer to meet the costs of the work, up to whatever amount was agreed between you and the insurer. The most important thing in any building contract is the plans and specifications as these define what work is being completed. It is critical that you are happy with the plans and specifications before signing the contract. Similarly, ensure you re happy with how the work is to be carried out. If, for example, the foundation of the house must be repaired, make sure you are satisfied with how the builder proposes to do this. If in any doubt, get your own specialised advice. The building contract will specify that the builder must undertake the work in accordance with the plans and specifications, in a tradesmanlike manner and following the requirements of the Building Act and other legislative requirements. Regardless of whether a building consent is required or not, the Building Act automatically incorporates implied warranties into the contract. These mean the work must be fit for its purpose, be undertaken with reasonable care and skill and meet the requirements of the building code. One advantage in contracting directly with the builder is that if there is a problem with the work, including, for example, the quality of the cosmetic finishes, you have protection under the building contract. Similarly, though, you are responsible for ensuring that the building contract and associated plans and specifications correctly cover all the required work. Most building contracts contain defects provisions, where the homeowner can raise defects within a certain period of time, say 90 days, and have the builder fix them. The homeowner s first step will generally be to notify the builder that works require remediation under the defects provisions of the contract. If the builder disagrees, or you re not satisfied with the defect repairs carried out, most building contracts include dispute resolution procedures which the homeowner and builder could follow. Ultimately, you could sue the builder for breach of contract if the issue was not resolved. However, you need to note that the timeframe for any claim based on

10 a contractual dispute or a non-contract claim such as negligence is six years from when the cause of action arises. The usual six-year limit may be extended in certain circumstances (for example because the damage was not reasonably discoverable until a later date), but even then the Building Act 2004 imposes a maximum period of 10 years for a claim to be brought. Outside of the building contract, you may have remedies under warranties supplied with the products installed by the builder, or guarantees under any member organisation which the builder may be a party to, such as the Master Builders or Certified Builders associations. You also have remedies under the Consumer Guarantees Act if the work is not up to standard. That Act contains implied guarantees that services such as building work must be carried out with reasonable care and skill, be fit for purpose and of a quality reasonably expected. If the builder fails to meet those statutory guarantees, you could require them to remedy the defective repairs. If the result is still not satisfactory, you could have the repairs remedied by another builder and recover the costs from the original builder. Regardless of who is completing work on your property, you have a right to have the work completed satisfactorily. Make sure you get the benefit of any guarantees or warranties. Don t hesitate to raise any sub-standard work with the appropriate party, and make sure you do so within the required timeframes. Insurance Settlements You ve made it. After negotiating back and forth with your insurance company you have agreed on an amount to settle your insurance claim. Your claims manager says that they will send you a settlement agreement for you to sign and the money will be yours. Sounds so easy. Richard Lang and Janine Ballinger look at the process. The settlement agreement arrives and it is definitely more of a legal document than you expected. While your insurance company has agreed to pay what you expected, there may be lots of other clauses in the agreement, there may be a statutory declaration, and it comes with a warning to seek legal advice. What do you do? You need to do exactly what your insurance company has advised. You need to seek professional legal advice. The terms and conditions contained in the settlement agreement depend on your circumstances, the level of damage to the property, and the way the claim has been agreed to be settled. It is difficult to compare your settlement agreement to your neighbours. Differences in circumstances and policy entitlements mean that little details can have a significant impact on your settlement outcome. There are several issues to consider when you review the settlement agreement, among other things: n What claim does the agreement relate to? Is the agreement in settlement of all claims? n Is the settlement figure correct? Have the correct inclusions or deductions been made? For example, EQC payments received, insurance excesses, professional fees, consent fees, emergency works, landscape allowances, outbuildings, driveways and paths. n Who needs to sign? Does your mortgagee need to sign the agreement or approve it? Does your insurance payment get paid to you or your mortgagee? n What is the settlement date, i.e. when will you receive your funds? n What insurance will be available for your home following the payment? The agreements usually provide for your insurance to either be cancelled in full or cancelled in relation to the damage parts of your property. Can you obtain other insurance such as on-going fire cover? n How do you get further insurance cover for your property? In the case for a house that can be repaired, most agreements state that they will reinsure your property when you can show the insurance company that you have completed all of the required repair works and you notify them that the works have been completed. n Where you are rebuilding, will your insurance company offer insurance for your new home? n What is your future liability regarding EQC settlements? Usually if you receive any further payments from EQC that relate to the building, those payments must be forwarded onto your insurance company. Do you have to assign your EQC claims to your insurance company? If so, check that land claims are excluded. n Who is liable for future demolition costs? Where a property is deemed a

11 rebuild such costs tend to stay with your insurance company, but note that they are entitled to demolish as and when they see fit. If this creates a problem you need to raise it with them and see if a future date can be agreed to. n Who has the salvage rights? You or your insurance company? n What about your temporary accommodation allowance or storage costs? Does your agreement specifically state that any unused portion remains available for you to use? Once you are satisfied with the agreement, it is time to sign. Where a statutory declaration is required, you will need to see a lawyer, notary public, justice of the peace or court official to complete the declaration. A statutory declaration is a serious document and it is a criminal offence to make a false statement or declaration penalties include imprisonment. Statutory declarations usually concern the application of the insurance money you are receiving. You need to be careful that the declaration reflects your circumstances and your agreement with the insurer e.g. whether you are declaring that you intend to repair your property, reinstate your property, or purchase another property to the value not less than your insurance settlement offer. You must comply with whatever terms and conditions your insurance company has placed in the statutory declaration. If you are not going to comply, you need to discuss this with your insurance company. Even though you are nearly through the insurance process, the settlement agreement is really important and has far reaching effects. Take the time to fully understand what you are signing and seek professional legal advice as soon as you can. Earthquake Commission Land Claims A lot of homeowners in Canterbury have already settled their EQC claims for earthquake damage to their houses and may well think that s an end to it. But what about their land claims, many of which are still yet to be settled, ask Richard Lang and Suzy Garnett. EQC has now clarified its intention and processes for land claims on earthquake affected properties in Canterbury. There are approximately 77,000 properties in Christchurch with valid land claims, 7000 in the Port Hills and 70,000 on the flat land. About one third of TC3 landowners did not make land claims, however, EQC has opened land claims if there was a valid house claim. EQC have indicated that it will settle most, if not all, land claims with a cash settlement, leaving you as the landowner to complete the repair work yourself. EQC will first estimate the defined area of your land that it covers and then identify the type and extent of damage. It will subsequently assess the cost of repair, calculate the cash settlement, and advise you accordingly. Some valid land claims will be below the minimum excess of $500 so will not receive any cash settlement. If you have a land claim of more than $500, EQC will forward a land settlement pack to you which may include a cheque and will include the following: n Land settlement letter; n Settlement calculation sheet; n Assessors land sketch; n Legend (showing the assessors measurements and calculations); n Guide to Canterbury Land Claims booklet; n Guide to Settlement of Canterbury Flat Land Claims booklet (or Port Hills Claims booklet); and n Environment Canterbury information sheet. The difficulty for many homeowners will be identifying whether or not EQC has got the land damage assessment right and whether any cash settlement is fair and should be accepted. Unlike damage to buildings, which is usually reasonably obvious, land damage is often complex and technical. There are nine types of land damage identified on the flat land. Seven categories relate to physical damage that is visible. The remaining two categories still relate to physical damage, but concern increased risk of liquefaction or flooding - which may not be immediately obvious. (Some areas of Christchurch that suffered liquefaction actually have a decreased risk of liquefaction due to changes at a tectonic level). The settlement pack you receive from EQC will include a guide to assist you to determine what damage your land has suffered, and suggested methods that may fix that damage. However, the guide contains suggestions only, and you will need to engage a geotechnical engineer or other professional to form a site specific repair strategy.

12 This guide does not discuss the risk of liquefaction or flooding. Determining how you should be compensated for these increased risks could well be very difficult as fixing the land is unlikely to be an option. EQC believes that damage under these categories will be uncommon. In some cases, EQC may decide that it is not feasible to repair the land, or that it is unlikely to be repaired. The cap for EQC land settlements is not like house claims, where you may receive payments for each event totalling more than the maximum cap of $100,000 plus GST. EQC believes that, where there can be separate caps for multiple events, their maximum liability for land claims relates to the qualifying land and not the number of events. In cases of severe damage, CERA will not rezone your land. However, the data obtained by EQC may assist you to argue that your land should be rezoned. EQC is anticipating having cash settled all Port Hills claims by the end of 2013 and all flat land claims by the end of When you receive your land settlement pack, you should have a suitably qualified professional (such as a geotechnical engineer) assess the land damage and advise you on a site specific repair strategy in order to determine whether the cash settlement is sufficient. If the outcome of that assessment is that the cash settlement is adequate, then you need to decide whether you will carry out the repair work. Just as with some cash settlements on insurance claims for damage to buildings, you have the option of leaving the land in its current state and keeping the cash settlement. Of course, if you have a mortgage then your bank will have the right to determine how the cash settlement is applied, just as with any other insurance payment. But this may present an issue when you attempt to sell the property as most buyers will want to know if EQC has completed a land claim assessment. You could always complete the land repairs later, but remember the cost of repairs (and possibly the relevant standards for land repairs) may have escalated in the interim. Bear in mind that EQC has the ability to cancel insurance on the land until the land damage is fixed to a proper standard and can decline to cover any houses on land that has not been fixed. This will be recorded on the title to your property and means that future purchasers will be put on notice that there are issues with the land. On the other hand, if the professional assessment indicates that the cash settlement is inadequate, then you need to talk with EQC. You should contact your lawyer if you are in this situation. The other aspect with land claims is that if you are buying or selling a house, just as with other EQC and insurance claims, check what land claims have been made and the current status of those land claims. Ensure that any open land claims are transferred to the buyer as part of the sale and purchase transaction. Check with your lawyer to make sure that land claims are included in the EQC and insurance claims being transferred under the agreement. TC3 Zoning TC3 is probably the least understood technical category for green zoned land in Christchurch. Richard Lang and Janine Ballinger shed some light. A TC1, TC2, or TC3 land zoning means that the land is zoned green, however, the technical category describes how the land is likely to move and react if there was another large earthquake. TC3 land may suffer moderate to significant land damage from liquefaction. But the real relevance of the TC3 zoning is the standard required to repair damage to foundations or building foundations for new buildings. So what does it really mean for you? Should you purchase a house in TC3? What impact will it have on you going forward? What will your bank say? What will your insurance company say? It s true that you have to be more diligent when buying a TC3 property. But, as with most things, there are varying degrees of TC3 properties. Some properties have fared extremely well during the earthquakes, suffering only cosmetic damage and the land itself is relatively unscathed. Not all TC3 properties will require complex foundation design. If you want to buy a TC3 property that is relatively undamaged, you will still need to complete your normal property due diligence. This includes an investigation on the EQC claims and private insurer claims. TC3 zoning on a property appears to slow the EQC and insurance claim process, so don t expect that the damage you see will be repaired soon. This will impact on your ability to make the home your own as any improvements or redecoration work you might like to undertake will upset the claims process. Some TC3 properties were deemed rebuilds by the relevant insurer early on in the process. Some rebuilds have already begun and some are even completed. If you encounter a property that has already been rebuilt, at least you have the assurance that they have been constructed in accordance with the current requirements. At the other end of the scale, there are TC3 properties that have suffered significant damage to the house as well as land damage. If you are looking at such a property, your ability to finance and insure it is compromised.

13 Geotechnical report It s important to keep perspective on TC3 properties. In general, in order to build on TC3 land post-earthquake, you must supply the Council with a professional geotechnical report. This is part of the building consent process. The geotehnical engineer must be trained or qualified in assessment of foundations and liquefaction. Essentially, that geotechnical report must show that the foundation designed for the new house meets the ground requirements of the land. Even when you applied for a building consent pre-earthquake, you had to supply an engineering report on the foundation for many properties to ensure it was appropriate for the ground bearing capacity of the land. The perception that there are hefty new requirements for building is only partially true. The requirements are more thorough. But it is an expansion of what was previously required. While building new or replacement buildings on TC3 land may require more than other properties in terms of engineering advice, foundation design, and cost, buyers may be content with the existing building on the property (provided any damage is repaired). So, the TC3 zoning is not such an issue for the buyer. Of course, the TC3 zoning may have an impact on re-sale value. If you are looking at a TC3 property, one of the first things you should do is talk to your financier and understand their lending policy on TC3 properties and any conditions. They may also want specific reports so they can assess your credit application. Make sure you have these reports covered in your purchase agreement. You also need to ask your insurance company if they will provide replacement cover. If so, what conditions do you need to satisfy?. Without insurance cover, you won t be able to complete your financing requirements. While TC3 seems to have a bit of a stigma attached to it, depending on the property, buying in this category can be as straightforward as any other in Christchurch. The bottomline, as always, is buyer beware. Complete your due diligence. Ask a lot of questions on the home, the land, the EQC and insurance claims as well as identifying and satisfying insurer and financier requirements. Fully understand what you are buying and any associated risks. Dig depper if you have unanswered questions during your purchase. Use experts to complete specialist reports so you can gain a better understanding of the property. As always, seek professional advice to guide you through this process. Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose. Contact us Richard Lang Janine Ballinger Associate, Christchurch T: M: Suzy Garnett Senior Solicitor, Christchurch T: Emma Tomblin Senior Solicitor, Christchurch T: Partner, Christchurch T: M: