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Councils paid out $1 billion for faulty buildings in past decade

Monday 29th April 2019

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Building consent authorities are estimated to have stumped up about $1 billion during the past decade in compensation for defective buildings, including leaky homes.

Of that, about a third of the bill was to cover the tab of failed builders and developers who more often than not dodged their liability, with the council-backed agencies usually the last entity standing. 

Sapere Research Group estimates there were about 8,800 building defect disputes between 2008 and 2018 - spanning the height of leaky homes litigation - involving $3.8 billion of damages for residential properties. And while building consent authorities carried the can in part for other failed parties, homeowners are thought to have been left out of pocket by about $458 million. 

Including commercial property, the estimated damages rise to $4.7 billion for the 10-year period. 

A 2009 PwC report estimated it would cost about $11.3 billion to fix 22,000 to 89,000 leaky homes between 2002 and 2020. That estimate underpinned a government initiative under which it and local councils would each stump up a quarter of repair costs, leaving the homeowner to cover half the bill. 

At the time, the government expected to spend $1 billion over five years, but homeowners tended to instead go to court, where they could pursue full cost recovery, meaning the programme didn't attract the expected uptake. 

Building and Construction Minister Jenny Salesa this month unveiled plans for a major reform of building law to deliver safer and more durable buildings, a high-performing building sector, and a more efficient regulatory system. The low-key announcement accompanied a 190-page discussion document and supporting reports, including the Sapere research. 

Sapere's research drew on 138 disputes, mostly in the Weathertight Homes Tribunal and some in the High Court, through the 10-year period with a total value claimed of $145 million. The consultancy then extrapolated that out, using the assumption that about 95 percent of disputes were settled before a hearing and that settlements would typically lead to a smaller payout. 

Sapere said builders were typically ordered to pay about a third of awarded damages, as were developers. However, the research suggested builders avoided their responsibilities about 48 percent of the time because they couldn't be found or were no longer operating. Avoidance among developers was even higher at 68 percent. 

That's an area that's plagued successive governments for years, with two bites at insolvency law reform over the past 20 years to clamp down on phoenix companies - where assets are transferred to a near-identical entity to dodge liabilities - which were seen as a major problem in the building sector. 

The Ministry of Business, Innovation and Employment commissioned the Sapere research for the planned reform, which focuses on building products and methods, occupational regulation, risk and liability, the building levy and penalties. The ministry specifically wanted an up-to-date picture of the risks faced by consenting agencies. 

"Concern is often raised about building consent authorities being the only party left to compensate homeowners when building defects arise. This can mean that the total amount paid by BCAs is disproportionate to the role they played in contributing to that defect," MBIE said in a discussion document on the proposed reforms. 

MBIE proposes the risk and liability settings for consenting agencies be left as they are, but that any payout is capped. Officials said more work needs to be done to figure out the costs and benefits of a cap and how it would interact with guarantees and insurance products. 


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