April 15 2015

Get a Building Report when you’re buying a new house

For many of us, buying a home is the largest purchase we will ever make. That’s why spending a few hundred dollars on a pre-purchase building report is so important as it can save you hundreds, maybe thousands, of dollars in years to come. The report is one of the final hurdles in purchasing a property, so it’s important to know the process and your rights as a purchaser and also as a vendor.

Why get a building report?

We strongly recommend that if you’re buying a property you make it a condition in the Agreement for Sale and Purchase of Real Estate that a building report is required on the property. It’s particularly important when dealing with older homes. The report may reveal hidden defects that you may not have considered an issue. Obtaining a building report, in conjunction with a Land Information Memorandum (LIM – we’ve more on this on page 4), will also make sure all renovations have had the necessary consents applied for and that they have been granted.

If the Agreement is conditional on a builder’s report, the condition is solely for the benefit of the purchaser. The standard Agreement gives a purchaser 10 working days to obtain a report that’s satisfactory to the purchaser. The report has to be prepared by a qualified building inspector in line with industry methods. The report is an objective assessment of the property as no invasive testing can be carried out.

What are the purchaser’s options when defects are discovered?

  1. If the report highlights any negative issues with the property, you have three options:
  2. You can avoid the Agreement altogether and you will be entitled to the return of any deposit
  3. You can fulfil or waive the condition, and the Agreement continues as if the condition was satisfied, or

You can try negotiating with the vendor to have the repairs carried out or to obtain a price reduction.

If you choose to cancel the Agreement or you want to raise any issues from the report, you must first provide the vendor with a copy of the report so they know the issues and the likely costs involved to remedy them.

Trying to renegotiate the Agreement

Proceeding with option three comes with risks. It’s not unknown to see purchasers try to negotiate a price reduction, only for a third party to come in with an unconditional offer. The vendor may exercise their right to cancel the original Agreement, as either party has the right to cancel the Agreement if the condition hasn’t been satisfied by the due date or by any extension period.

In a recent case¹ the court held that trying to negotiate a reduction in the purchase price doesn’t necessarily mean the condition wasn’t satisfied by the purchaser. In this case, the purchaser was found to be able to lodge a caveat on the property after the vendor had purportedly cancelled the Agreement.

The vendor’s lawyer was notified that a building report had been obtained that found several issues with the property that the purchaser wanted to be fixed prior to settlement, or they wanted a $2,000 price reduction. The vendor’s lawyer responded saying the vendor would consider the issues raised, and they would let them know the outcome. After the deadline for the condition, the vendor’s lawyer advised that the vendor wasn’t willing to address any of the matters raised, and said that the Agreement was at an end.

The court found that while there is a requirement for there to be a satisfactory building report it doesn’t require a purchaser to be happy with it. If there was no explicit notice of cancellation from the purchaser, then it could be considered that the report contained all the information that was expected. The Judge held “it is the Court’s view that it is sufficiently clear the purchaser was not exercising any rights of cancellation. To the contrary there is evidence of confirmation in terms of which consideration of modification was being explored.”

Always be realistic

Building reports need to be prepared in good faith; therefore attempts to negotiate a price decrease must be based on genuine defects highlighted in the report, such as a roof replacement costing $20,000. Purchasers need to remember they are not always signing up for a new home, so general wear and tear must be accepted and should not be a reason to try renegotiate the price.

Building reports are a very important condition in the Agreement. If you have any doubt, you should always talk with us as soon as possible.

¹ Sagar Properties Limited v Tropical Origin [2014] NZHC 1771