Property / Real Estate

Leaky Commercial Building Means Residential Apartment Owners Take A Bath

When is a residential apartment not a residential apartment?

Introduction

When is a residential apartment not a residential apartment? According to the approach taken in North Shore City Council v Body Corporate 207624, when that apartment is located in a building predominantly used for commercial purposes.

The Facts

Spencer on Byron is a multi-storey building in Takapuna. The building incorporates six residential apartments but, crucially, was designed predominantly for commercial purposes as a hotel. The building leaked and the owners of the residential apartments looked to the then North Shore City Council to fund the building repairs by making a claim of negligence against the Council.

The Court of Appeal was satisfied that the six apartments were no more than incidental to the commercial nature of the building. It considered the Council did not owe a duty of care to the owners in respect of the leaky building as the Council could not be held responsible in situations where property owners buy in a predominantly commercial complex.

The Court believed that imposing a duty of care on the Council in respect of the residential component would not be fair, just and reasonable. It was considered impossible to isolate the damage to the residential apartments as the weathertightness of the entire building is interlinked and indivisible.

The Court of Appeal also ruled that the owners could not rely on the Council's code compliance certificates. It found that code compliance certificates are issued for a specific statutory purpose (to protect the users of the building against risks to health and safety) under the Building Act 2004 rather than for the purpose of sparing or excusing the owner the cost of rectifying defects. The owners were unable to prove that they relied on the code compliance certificates when entering into their agreements to purchase the apartments. Accordingly the owners claim against the council failed.

Conclusion

Where an apartment complex is purely for residential purposes the courts have found that the councils do owe a duty of care, in their inspection role, to owners of premises designed to be used as homes.

Spencer on Byron has raised the novel issue of mixed use buildings and, in determining the outcome of this case, the Court of Appeal has signalled that not every residential apartment is created equal. It is important to note that the owners may seek leave to lodge an appeal to the Supreme Court. So this may not be the end of the matter.

Given the outcome of this case we recommend, if buying a residential apartment in a mixed use building, purchasers must:

  • look for the primary or predominant use that the complex states when the building consents were first applied for;
  • ascertain the break down between common property and individual unit property;
  • check if the apartments used for residential purposes are subject to commercial leases and if so, for how long;
  • make any agreement conditional on a Land Information Memorandum;
  • carry out a thorough due diligence investigation.

When buying any residential apartment it has always been important to see a lawyer before signing an agreement - now the outcome of Spencer on Bryon has made this vital. Let caveat emptor (buyer beware) serve as a warning to all purchasers. Seek legal advice first to avoid taking a bath later.

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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