Buying property is one of the biggest financial investments that a person can make, and it is not without risk. For purchasers, problems can arise when a vendor knows about a defect (for example a leak, a history of flooding, unconsented work, or recurring dampness) and does not disclose it, or if they give a misleading answer that creates the impression there is no problem. Under New Zealand law, a purchaser’s rights when a hidden defect comes to light is hugely dependent on the context (the terms of the agreement, the nature of the defect, what was said or withheld by the vendor or their agent before the contract was signed, and when and how the defect was discovered).
In this article, we give an overview of the legal issues at play and outline some practical steps a purchaser can take to protect themselves and their investment.
A hidden defect is a problem with a property which may not be obvious on an ordinary inspection and could therefore not be discoverable until after settlement has occurred. Common examples include water ingress, rot, mould, drainage issues, defective cladding, unsafe electrical or plumbing work, unconsented works and damage to flooring or walls. Sometimes, from a purchaser’s perspective, the issue is not so much the defect itself, but the seller’s conduct for example, a direct denial of known leaking, a half-truth about earlier repairs, the deliberate placement of furniture during inspections to cover a “problem area” like a stain on the carpet or a hole in the wall, or the omission of relevant information that leaves the purchaser with a false impression about the condition of the property.
A fundamental aspect of property law in New Zealand is the principle of caveat emptor, namely: buyer beware, and that is always the starting point when a hidden defect arises post-settlement. Under this principle, purchasers are expected to carry out their own due diligence prior to entering into an unconditional agreement to purchase a property. This includes completing title checks, obtaining and reviewing LIM reports and building inspection reports, and obtaining legal and other specialist advice where appropriate. A failure to complete adequate due diligence, where due diligence would have identified the defect in question, may leave a purchaser without recourse unless the conduct of the vendor displaces the application of the “buyer beware” principle in the particular circumstances.
Caveat emptor does not protect a vendor (or their agent) who:
• Misrepresents the condition of the property;
• Actively conceals a known problem; or
• Breaches contractual warranties.
So, while the starting point for assessment is “buyer beware”, the law distinguishes between a purchaser failing to investigate, and a purchaser being induced to buy by misleading statements, omissions, or false assurances.
If a (previously hidden) defect comes to light and the vendor (or their agent) has misrepresented or concealed the defect, or has otherwise breached a warranty, there are several legal avenues which a purchaser may be able to pursue:
1. A claim for breach of contact or breach of warranty
• The ADLS/REINZ standard agreement for sale and purchase of real estate contains specific warranties about the state of the property and the status of consents, notices, or work completed at the property. Provided these standard terms have not been deleted or amended in any way, these may provide a remedy for a purchaser where a vendor is in breach.
2. A claim of misrepresentation under the Contract and Commercial Law Act 2017 if the purchaser entered the agreement because of an untrue statement of fact made by or on behalf of the vendor.
3. The Fair Trading Act 1986 may apply in circumstances where the misleading or deceptive conduct occurred in trade (e.g. where a real estate has been misleading or deceptive in their marketing of the property).
• A vendor states the house has never leaked, despite evidence that they have knowledge of repeated water ingress.
• Cosmetic repairs are carried out to conceal an underlying issue before marketing the property- for example painting over water damage to conceal an underlying leak, without addressing the cause of the damage.
• A vendor describes works undertaken as minor maintenance when they were in fact substantial damage repairs.
• A vendor warrants that all works undertaken at the property have the requisite consents. In reality, the vendor undertook works at the property which required consents, without obtaining consent for those works.
• A real estate agent advertises a property as having "magnificent sea and city views" despite knowing impending construction is about to commence which would block these views and diminish the property’s value.
• A purchaser asks the real estate agent direct questions about the property’s weathertightness, and the agent deliberately withholds a previous building or moisture report they received which includes adverse findings about the property.
• A real estate agent does not disclose in marketing material that a planned road-widening project will necessitate compulsory acquisition of part of the property’s front yard.
The purchaser’s rights and how they can be exercised are heavily dependent not only on the nature of the defect, but also on timing:
• If the defect is discovered before settlement, the purchaser maybe able to: claim compensation or request remediation of the issue; defer settlement pending receipt of further information about the likely cost of remediation or diminution in value; or in more serious cases cancel the agreement if the legal criteria for cancellation are met.
• If the defect is discovered after settlement, the purchaser may still be able to sue for damages due to misrepresentation, breach of warranty, breach of contract, or misleading conduct. The available remedies can include compensation for repair costs, diminution in value, associated professional fees, and in some cases consequential losses.
Notify your lawyer immediately if you discover any defect with a property you are purchasing (or have purchased) which had previously been concealed. Early advice is crucial for understanding the legal avenues which may be open to you and how to frame any claim.
Not every defect discovered post-settlement will lead to a successful claim. A purchaser still has to prove the relevant legal elements, such as the statement that was made, the vendor’s knowledge or responsibility, reliance, causation, and loss. Cases often turn on fine factual questions: what exactly was said, what was known at the time, what the purchaser’s own inspections showed, and whether the defect was actually concealed or simply undiscovered. For that reason, the paper trail around the transaction can be just as important as the physical defect itself.
As the strength of any misrepresentation claim is heavily influenced by the extent of the purchaser’s due diligence enquiries and the paper trail surrounding the purchase, thorough legal advice during when purchasing a property is key. In order to protect your investment, it’s important that costs are not cut when it comes to professional pre-purchase advice. Our specialist team of property lawyers at McMillan&Co. can assist you when you are in the market to purchase a property by:
• Providing general guidance about things to look out for and consider when looking for a property to purchase (including red flags).
• Reviewing and advising you on property information packs for properties you are interested in.
• Reviewing the Agreement for Sale and Purchase before you sign to ensure that the due diligence and other conditions sufficiently protect you.
• Ensuring that queries to the vendor and agent about the property and its condition are made clearly and in writing, so if things go awry, there is a paper trail you can rely on.
• Assisting with your due-diligence enquiries, including reviewing and advising you on LIM, Building and other specialist reports.
• Negotiating with the vendor on your behalf if a hidden defect is discovered pre-settlement.
• Advising you and advocating for you if a hidden defect is discovered after settlement occurs.
Where a vendor or agent hides, conceals or misrepresents a property defect, the purchaser is not necessarily without a remedy. Although purchasers are expected to make their own enquiries, the law does not permit vendors to actively mislead purchasers or to give false comfort about serious defects. Whether the appropriate response is compensation, cancellation, or a damages claim will depend on the agreement and the facts. In practice, swift legal advice and careful evidence gathering are often the key first steps.
Emily Robertson, Senior Solicitor
emily@mcmillanco.nz
“McMillan&Co. incorporates the practices of David Polson, Roger Barrowclough, Gerald Wilson, Joss Miller and McKinnon Aitken Martin.”
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