Residential Construction Agreements- things to watch out for!

Residential Construction has often thrown up difficult problems in NZ property law. Contracts and Agreements are widely used and tested in court making most problems expensive, stressful, and slow to resolve. This week Tina Hwang, Queen City Law Construction lawyer, examines some of the upcoming changes that will be brought to bear by The Building Amendment Bill No. 4. If you are planning a Residential construction, don’t download a free template of a Residential Construction Agreement from the internet and do it yourself. Get a lawyer involved early in the planning process and draft contracts that protect your investment and conform to the changing regulations.

The Building Amendment Bill No.4 has currently been interrupted in it’s second reading in Parliament and is expected to finish it’s second reading soon, pass it’s third reading towards the end of 2013 and be in force 2014.

House-construcThe Building Amendment Bill No.4 will ensure:

1) there is pre-contract disclosure prior to the signing of a construction agreement (much like the Unit Titles Act 2010 which now makes it mandatory for vendors to provide a pre-contract disclosure (s146) before signing an agreement and a pre-settlement disclosure (s147) prior to settlement. Contractors will need to disclose their experience, funding and a checklist for owners to become more “savvy” and aware of the procedure and risks.

2) residential building contracts are now in writing if above a certain figure (speculated to be $20,000.00, but yet to be defined by law). It will also impose other minimum requirements for residential building contracts.

3) there are remedies for consumers (in line with current proposals being made through the Consumer Law Reform Bill). There will be remedies for breaches of implied warranties and a mandatory defects liability period (currently it is common for contractors to provide a 30 or 60 day defects liability period, but this period will become 1 year by default).

4) “on-sellers” who sell a new build will be stringently subject to the same remedies and this is not just for “property developers” or owners “in trade”. If one buys with resale as a intention, they will be caught by the new provisions and be obliged with the same obligations as the Builder.

Builders should be aware of the changes as non-compliance can lead to $2,000 spot fines imposed by DBH or Council. If there is malice (lies or misleads) the fines can increase to $20,000.00.

Parties entering in a residential construction contract should be careful about:

1) the scope of works – be as specific as possible! The contract will often have a clause that states the builder may modify or amend the specifications and replace with a similar product if it is not available. Be careful that you do not contract and pay for x and get y which could contractually happen if you are not careful.

2) timelines / commencement date/ completion date – we have seen many undated construction contracts with ambiguity on when the commencement date is. There is often further confusion around the time-frame (with words like “days”, “working days”, “months”, and “calendar months” all being used loosely and interchangeably). Practical completion is often confused with dates for CCC etc and we recommend you seek legal advice before putting these terms down, which could all effect your price and end date!

3) delays – be careful to define public holidays or “bad weather” that will automatically give the contractor an extension in time. Normally construction contracts insert a clause for “inclement weather” defining the term as consecutive rain for 3 days etc. “Bad weather” is not good enough and will surely create confusion (we have seen in many cases).

4) price – people seem to mistakenly believe the price of a construction contract is the most important. If the terms of that price and scope of works are not explicitly and clearly set out in the contract, you will inevitably end up in disputes over variations. If you keep staged payments, ensure you keep records of all stages and payments made, when it was made and why (we have also seen many clients paying in lump sums despite staged payments being provided under the contract).

5) deposit / bonds – we would always recommend you pay a small fee at the start and make the installments payable linked to certain critical stages of the project. We strongly recommend holding a bond or retention until CCC is issued so that there is more motivation for the builder to attend to the required works under the defects liability period etc.

6) critical path programme – it is important to tie this into the payment schemes with clearly defined provisions on what will happen if the dates are not met.

7) liquidated damages / penalty interests – we have seen many “useless” penalty interest provisions being included. Issues have arisen because the term of the construction and/or completion date was never clearly defined meaning the penalty interest provisions are never activated. The provision should be clear on when, how much, for how long such penalty interests will be payable and under what circumstances (it is not enough to state “a penalty interest of $1,000 per week will be payable if the project is not completed within 6 months” as there is too much ambiguity there).

8) CCC – this responsibility is often tied to the owner who often mistakenly believes this is the builder’s job. This obligation will rest with the owner unless clearly defined under the contract.

9) documents – it can often become problematic if your contractor did not pay the sub-contractor, has stopped the works, and disappears with the relevant documents. You will need certain statements from the contractor/sub-contractor to lodge for CCC and you may find yourself in a mess, trying to pay further monies to the sub-contractor to pay for what should have already been yours. We would recommend inserting a clause giving ownership of the documents to you and also getting the documents as soon as the contractor obtains this so it does not become problematic later.

10) cancellation rights – valid termination of contracts can become difficult, especially if you did not get legal advice at the start and we have seen many difficult cases where the contractor has stopped works, but due to procedure, the owner has been unable to cancel immediately, further incurring costs and exposure. There are many ways to insert cancellation rights, and we would strongly recommend you seek legal advice.

11) warranties / guarantees- it is so important that you obtain all of the applicable warranties/ guarantees, even from the relevant sub-contractors and such a provision should be included in your contract.

12) variations – variations to the price can occur even in a stringent contract where there are unfortunate circumstances leading to escalated costs that are unforeseen to the contractor. For this reason, you should always have a contingency sum prepared.

Please contact Tina for further advice on construction law! For more information about Queen City Law construction law and property development services click here. To see some of our past and present property development projects click here.