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Legal advice is essential before entering into a Building Contract

Legal advice is essential before entering into a Building Contract

More and more New Zealanders are looking to build or substantially renovate their own homes. Some are even looking at dipping their toes into the property development industry by developing their own properties. All of these endeavours will most likely require entry into a building or construction contract. Nowadays these contracts can involve significant amounts of money and unfortunately we are coming across more and more issues with the construction or build of a property and clients who have not received legal advice prior to entering into their building or construction contract. This can be a recipe for disaster. In this article we touch on some of the issues which we look at when reviewing a building contract. This is not meant in any way to be a checklist and should not be considered a substitute for obtaining bespoke legal advice. We are hoping that by writing this article that you will be more informed on the importance of getting legal advice from a lawyer who is experienced in reviewing building contracts.

  1. Do your due diligence on the builder and his work. Get references from other clients on previous work performed by the builder, check google reviews and ask the builder to provide some evidence of their solvency. The last thing you want is to have a dispute with a builder who is insolvent. We also suggest asking the builder whether or not they will be using subcontractors and for more information about those subcontractors and their experience.
  2. Under the Building Act 2004 the Builder is required to provide you with certain specified information both automatically and on request. Refer our article which you can find here for more information. The Ministry of Business, Innovation and Employment have also produced a helpful guide which can be found here.
  3. Understand how the build will be priced. Fixed price contracts are becoming less common and even Fixed Price Contracts can have the price increased in certain situations – eg increase in the cost of materials
  4. Take note of when payments are required. Under the Construction Contracts Act 2002 (“the CCA”) a demand for payment by a builder is called a “Payment Claim” and must contain certain information. If you receive a Payment Claim and don’t agree that you should pay all or any of it, the CCA allows you to provide the builder with a “Payment Schedule” which is required to be in writing, it must identify the Payment Claim it relates to and must state the amount you will be paying. If this amount is less than the claimed amount you must set out how you calculated the amount and why you are not paying the claimed amount. Under the CCA you have 20 working days after you receive a Payment Claim to provide a Payment Schedule. However this time period can be changed in the Building Contract and we frequently see periods of 5 working days. You should take note of the time period under the Contract.
  5. If you are required to pay a deposit – when is the Builder required to refund this to you and what amounts can they deduct from it? Typically the deposit will be non refundable after the works have stated.
  6. Can the builder add a margin on the materials and labour being provided under the Building Contract? If so what is this amount?
  7. In what circumstances can the Builder suspend works – typically this will be where a payment is not made on time but there maybe other situations.
  8. What rights does the Builder have to vary the Plans and the materials used. When do they have to get your consent before doing so?
  9. Who is responsible for obtaining the building and resource consents and code compliance certificate – if it is the Builder’s responsibility - who is responsible for the associated costs?
  10. What insurance is the Builder taking out to protect the works? Make sure you can obtain evidence that the insurance has been taken out.
  11. What other responsibilities do you have, e.g. – to point out site boundaries, provide electricity and water.
  12. Be aware of what the Builder is not liable for – e.g. land subsidence, inadequate earth fill and unforeseen physical conditions.
  13. Understand what the process is if you want to request a variation and how this will be costed?
  14. When is the Builder entitled to an Adjustment (e.g. a change to the contract price)? Typically this would be for; substitution of materials where the original specified materials are not available, unforeseen physical conditions, land subsidence and inadequate earth fill.
  15. If the contract does not already provide an expected completion date ask the builder for this information. The contract will usually provide that the builder is not liable for delays caused by; you not meeting your obligations under the Contract, any variations to the Works, suspension of the Works, Council requirements, force majeure (e.g. a Covid-19 Alert level which prevents work continuing), legal action and unforeseen physical conditions. What notifications does the Builder have to give you if there is a delay and what increases will there be to costs as a result?
  16. Practical completion is the term most often used to describe when the works have been completed (except for minor defects or omissions). Typically there is a process which request the builder and the owner to sign off that Practical completion has occurred.
  17. When can you take possession of the site and the works?
  18. What is the Defects Warranty Period? It is standard for you to notify a defect as soon as you become aware of it. Make sure you understand any special maintenance obligations you may have in respect of certain types of materials, equipment and appliances.
  19. There will usually be provisions which apply if there is a default by either you or the Builder. It is important that you are aware of what is considered a default by the Builder and what you can do if this happens.
  20. You should also understand the rights the Builder has if you default under the Contract, these will usually consist of:
    1. A right to repossess and sell any materials or goods brought on to the site;
    2. A right to a mortgage over the site and to lodge a caveat against the title (which will need to be removed before you sell the property).
  21. There should also be dispute resolution provision in the Contract which would typically consist of negotiation, mediation and arbitration. You will still have the right to refer a dispute to adjudication under the CCA even if there is a dispute resolution procedure in the Contract.
  22. Sometimes the Contract may also provide that the Builder can take photos of your property for promotional purposes and you need to consider whether you are happy with this or not.

Hopefully this article will demonstrate how important it is to carefully review your building contract and seek legal advice before signing on the dotted line. These contracts involve significant financial liability and justify the comparatively small cost of consulting with a lawyer.

IMPORTANT: This article provides general information and is not designed to be a substitute for legal advice. You are strongly urged to obtain your own legal advice before entering into a Building Contract.

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