Home
Loading

 

PLEASE NOTE: This article was published on the date listed below and may now contain information that has since been updated or changed. We have retained this article as it may still contain helpful comments. However, we advise you to make an appointment to see us for the most up to date information on this topic.

March 2002

Building Contracts

For many New Zealanders a house purchase is their largest investment. It involves risk and potential cost if the purchase does not proceed to plan. For this reason it is important to see a lawyer before committing to a contract. The same precautions should be taken when contracting a builder. Although the builder might be perceived to be ‘on the same side’ and the contract devoid of ‘fine print’, people can overlook the fact that there are two parties to the building contract who have competing interests.

Building involves a range of practical and legal issues, which need to be thought through. This article is not long enough for a full discussion of those issues, but some common issues that need to be considered are discussed below.

Finance

It is important that the availability of bank finance coincides with the need for progress payments. This seems a relatively simple matter, but it is imperative to ensure the level of funding approved can be drawn down as required.

People who do not seek legal advice may over look that the bank will require security before making any advances. If the security is a mortgage over the section where the house is being built, this will need to be registered. This is a problem if the house is being built on a section in a new subdivision where the boundaries may have been pegged, but the title has not been issued - which is quite common. No mortgage can be registered in this case and no advances will be made.

If the building contract is unconditional, this situation can be embarrassing and costly for the ‘homeowner’. The builder will generally want a legal arrangement to be put in place to guarantee payment. The builder may also require payment of penalty interest for late payment of instalments.

Solvency Issues

In many ‘buy and build’ packages the house is built on a section that is not yet owned by either the builder or homeowner. The purchase of the section occurs when the house is built, by contemporaneous settlement. That is, the builder buys the section from a developer, and on the same day on-sells it to the homeowner. Problems arise if either the developer or the builder becomes insolvent after the house has been substantially built and paid for, but before the settlement.

Similarly, if the builder has not been paying for materials from the instalments, suppliers may have claims to recover materials from the site.

There is an inherent risk involved in making payments for an item before it is completed. However, the risk can be minimised by caveating the title, sighting copies of prior contracts, and investigating the reputation of the builder.

Plans and Specifications

Always agree on the plans/specifications before construction starts, and have them recorded in writing. Most builders are working on a number of projects at any one time, and use sub-contractors to carry out much of the work itself. While the builder will genuinely intend adhering to verbal agreements to deviate from the plans, verbal agreements are easily overlooked, particularly by sub-contractors who were not party to the relevant conversation. The risk is that the alteration will not be able to be incorporated, or worse still, that the builder will treat it as an alteration at additional cost to the homeowner.

Alterations

While there is minimal risk in making alterations, homeowners need to be aware that the cost of changes to the plans during construction are often more costly than anticipated. What may seem a simple change to the design may add significant cost to the final bill.

Foundation Work

Does the contract price include all necessary foundational work?

Often any foundation work beyond a certain cost or a certain type is an "extra" that the homeowner has to pay for. The cost of additional foundation work on soft soils can add significant cost to the end price of the house, particularly if an engineer needs to be called in. If additional foundation work is to be an extra, the contract should be conditional upon the homeowner investigating and being satisfied with the likely additional cost.

Maintenance Periods

The maintenance period is the period of time after construction is complete, during which time the homeowner might identify defects that require fixing, at no extra charge. It is important to allow sufficient time to get over the euphoria of a new home, and for the new house to be ‘used’ so that any problems can be identified. While many building contracts will allow 30 days, it is preferable that a longer period of 60 to 90 days be specified.

Conclusion

Building a home involves issues that most people do not come across every day. A building contract is a contract like any other - it involves two parties with competing interests. The consequences of ‘getting it wrong’, even if it is a problem that can be resolved, can be costly. A visit to us should be considered an investment, just as much as the investment in the house itself.