Legal advice is essential before signing a building contract

In October 2021, Labour and National made a rare joint announcement of new housing development legislation, the Housing Supply Bill, primarily aimed at increasing housing supply in major urban centres. It was expected to result in 48,200 to 105,500 new homes being built over the following 5–8 years.

In particular, councils in tier-one cities including Auckland, Hamilton, Tauranga, Wellington and Christchurch were to introduce Medium Density Residential Standards (MDRS) before August 2022. These would allow eligible landowners in residential areas to build up to three homes of up to three storeys without applying for resource consent, meaning taller housing and simpler approval processes. 

The bill passed its third reading and became law at the end of 2021, bringing significant changes for the property industry and ordinary residents alike. In the short term, it could intensify upward pressure on residential land prices as buyers and sellers factor greater development potential into their decisions. In the longer term, the wave of ‘development for everyone’ would gather further momentum, with some people even considering developing their own land and properties as a way into the property development industry.

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However, ‘development for everyone’ is no easy undertaking. Having funds and a piece of land available for development is not enough. You also need to understand an important development-related agreement: the building or construction contract (Building Contract).

 

Your building or construction contract is arguably one of the most important and valuable contracts in the development process, and it may involve substantial sums of money. Unfortunately, the enthusiasm for ‘development for everyone’ has been accompanied by a growing number of problems during property construction. Many homeowners and small developers have not received appropriate legal advice before signing their building or construction contracts, potentially setting the scene for disaster.

Seeking legal advice before signing a building or construction contract is essential. Having worked in law firms for many years and handled hundreds of cases, I have brought together some of the issues lawyers consider when reviewing building contracts. I hope this article will help you understand the importance of obtaining advice from a lawyer experienced in reviewing these contracts. Please note that this article is not a checklist, and you should still seek the necessary legal advice on your specific contract.

Carry out due diligence on the builder and their projects

Under the current Building Act 2004 (Building Act 2004), builders must provide certain information to clients both proactively and on request. This includes their legal status, such as whether they provide building services as a company, an individual or another legal entity; their dispute history, to help clients establish whether they have disputes with other homeowners; and the qualifications of the workers specifically assigned to your project. 

We also recommend learning about the builder through several channels. For example, ask other clients about projects the builder has completed, find out about the team's qualifications and experience, and confirm whether the company holds the qualifications it claims. You can also read the company's Google reviews or speak with previous clients, and ask the builder for evidence of solvency. Believe me, the last thing you want is a dispute with an insolvent builder. Also ask whether the builder will use subcontractors, and request further information about those subcontractors and their experience.

Pay closer attention to clauses about money

Understand the construction price. Fixed-price contracts are becoming less common, and even these may allow price increases in certain circumstances. For example, as material shortages in the construction industry become increasingly severe, does your building contract specify who bears the additional material costs? Can the builder add a margin to the material and labour costs specified in the contract? If so, how much? Is it within a reasonable market range? Homeowners need to understand this, as different builders pay different prices for the same materials. 

If the contract requires you to pay a deposit, make sure you understand the circumstances in which the builder will refund it, and any amounts the builder is entitled to deduct from it.

Progress payments and payment disputes are another important issue. Under the Construction Contracts Act 2002 (Construction Contracts Act 2002, CCA), builders must issue homeowners with payment claims containing specified information. If you receive a payment claim from your builder but dispute the amount claimed, you need to respond immediately. The CCA requires homeowners to respond within 20 working days of receiving a payment claim, although any timeframe specifically agreed between the parties takes precedence. This document responding to the builder's payment claim must clearly state the amount you propose to pay, which may be a partial payment or a rejection of the entire claim. If you dispute part of the amount, we recommend explaining your calculation and the reasons for withholding payment. If you do not respond, you will lose the opportunity to object and will be deemed to have agreed to pay the amount claimed. 

Clearly define responsibilities and rights

Who is responsible for obtaining building consent, resource consent and the code compliance certificate? If this is the builder's responsibility, who pays the associated costs?

In what circumstances can the builder suspend work? This is usually because of late payment, but there may be other circumstances.

What authority does the builder have to change the floor plans and materials used? At what point must they obtain your consent before making changes?

When is the builder entitled to make adjustments, such as changing the contract price? Pay particular attention to situations involving substitutions when specified materials are unavailable, unforeseen physical conditions, ground subsidence and inadequate fill.

What insurance has the builder taken out to protect their work? Make sure you can obtain evidence of cover.

What matters is the builder not responsible for? Examples include ground subsidence, inadequate fill and unforeseen physical conditions.

Sometimes a contract also allows the builder to take photographs of your property for marketing purposes. Are you comfortable with this clause?

What other responsibilities do you have? These might include identifying site boundaries and providing electricity and water.

If you need a variation, what is the process and how will the cost be calculated?

There will usually be clauses covering a breach of contract by you or the builder. It is important to understand what the builder considers a breach. What can you do if this happens?

If you breach the contract, what powers does it give the builder? These typically include the right to recover and sell any materials or goods brought to the site, and the right to mortgage the land and lodge a caveat against its title. The caveat must be removed before you sell the property.

The contract should also contain dispute resolution provisions, usually involving negotiation, mediation and arbitration. Even where the contract includes a dispute resolution process, you still have the right to refer a dispute to adjudication under the CCA.

Defining the completion date and taking possession of the site

If the contract does not already provide an expected completion date, ask the builder for one. Contracts usually state that the builder is not responsible for delays caused by your failure to meet contractual obligations, variations to the work, suspension of work, council requirements, force majeure events such as Covid-19 alert levels preventing construction from continuing, legal restrictions and unforeseen physical conditions. You should also check what notices the builder must give you if delays occur, and what additional costs may result. 

Practical completion (Practical completion) is the term most commonly used to describe when the work is complete, apart from minor defects or omissions. Practical completion usually involves a sign-off process between the builder and the homeowner.

You also need to understand when you can take possession of the site and the works.

What is the defects liability period? Standard practice is to notify the other party as soon as you discover a defect. Make sure you understand any specific maintenance obligations you may have for certain materials, equipment and appliances.

It is important to stress that the points above are only the most basic first step in reviewing a building contract: thorough negotiation and clear communication between the parties. The next step is to record what you have agreed in the contract and engage a lawyer to confirm that all its terms reflect your discussions.

Overall, getting the building contract right is a crucial step for homeowners. If everything goes smoothly, there may seem to be little difference between having a good contract and having no contract. But a good contract often proves its value when something unexpected happens, a point is ambiguous or the parties disagree. It can prevent many unnecessary disputes and give both parties the protections they should have.

Important: This article provides general information and is not intended to replace legal advice. You are strongly advised to seek your own legal advice before signing a building contract.