Property problems: Leaky building owners casting net wider

Q. I own a finance company that lends money to residential property developers for the construction of household units.

I have heard that in some of the "leaky building" court cases, the owners of leaky buildings have actually tried to sue the financier of the project, looking for compensation.

Are the owners of leaky apartments able to do this and could my finance company face a claim where a development I've financed has developed "leaky building" problems?

A. The starting point is that the plaintiffs/owners in leaky building cases are quite entitled to sue any party they can make out a reasonably arguable case against.

In leaky building cases the usual parties to be sued are the developer, the builder and the architect.

However, many owners choose to cast their net wider, whether legitimate or not, and try to involve specialist subcontractors, the project manager, the private building certifier, the manufacturers of products used in the development, the Building Industry Authority (now the Government), the Territorial Authority, the insurers of any of these parties and sometimes they even try to join any of the individual directors or people that control any of the above.

Many of the developers and contractors responsible for the construction of leaky buildings have liquidated their companies.

This sees the affected homeowners and their lawyers trying to find other parties to sue, ideally parties that might have financial resources to help contribute to the repair costs.

In a recent leaky building case, the owners of a leaky apartment block sued the financier of the project, in addition to a number of other parties, on the basis that they believed that the financier owed them a "duty of care" (ie, was negligent) in not ensuring that the apartments were constructed to a proper workmanlike standard.

The owners alleged that the financier did more than simply lend money to the developer.

They alleged the financier was heavily involved in the development of the units and should share some responsibility for the defects that occurred during construction.

The financier in that particular case wholeheartedly disagreed.

Accordingly the financier applied to the court to have the case against it dismissed.

The court assessed the background to the project and considered whether the financier owed the owners a "duty of care".

In coming to the conclusion that the financier owed no such duty, the court assessed whether the financier had any direct involvement or control in the building process and whether or not it was carrying out the business of constructing household units for profit.

In this recent case, the court found that the claim against the financier could not possibly succeed, on the facts before court, as there was no basis for the owners to have sued the financier.

The proceeding against the financier was accordingly dismissed.

How does this affect your finance company?

The question you should ask yourself is whether your finance company is simply lending money to residential property developers, as any typical financier might, or whether your finance company is so closely involved in the residential development that it could be said to be exercising control over how the building work is performed?

If it is doing the latter, and is significantly involved in discussions and directions as to how the household units should be built, then your finance company may start to find itself in the "grey area" where arguably it might face a claim for any losses that arise from defective workmanship.