How market forces failed homeowners

By ANDREW LAXON

Below are edited excerpts from the final section of former State Services Commissioner Don Hunn's investigation into the leaky building crisis, which concentrates on the Building Code and the Building Industry Authority.

Summary

The report says the 1991 Building Act - and the Building Code which it produced - was intended to simplify New Zealand's over-complicated, prescriptive building laws and reduce costs and regulation for the industry. It was performance-based (specifying what the outcomes are to be) rather than method-based (specifying how the work is to be done).

However, the report says the act needs to be reassessed because:

* The act is very much the product of its time and the laissez-faire philosophy that prevailed in the 1980s and early 1990s. Opinions on light-handed regulation, the concept on which the act is based, have changed. There is now a greater consciousness of the need to manage the balance between flexibility and intervention.

* The legislation was not enacted in the form proposed by its originators, the Building Industry Commission. If it had been, it is possible some part of the failure described in the report could have been avoided. The question is whether the version of the original proposal that was eventually passed into law integrated sufficiently all the elements required to make it work.

(In a separate section on the commission's original recommendations, the report notes that several proposed changes were dropped from the legislation, including a requirement for waterproofing standards to prevent "the deterioration of building materials" which could have made a difference.

There was also a compulsory house guarantee scheme, described by the commission as an integral part of the new system, which was not implemented. "If it had been, the scheme would have gone a long way to solving the acute problem of accountability which we have identified in our report."

As for enforcement: "In our opinion the emphasis on self-regulation and light-handed control has led to the BIA having insufficient authority to fulfil its role. As has been said, it needs teeth and needs to show them occasionally.")

* The light-handed regulatory approach in the legislation has been reinforced by the manner in which the act has been implemented and administered. It has been put to the Overview Group that ... Government intervention through the Department of Internal Affairs and the Building Industry Authority has been minimalist. The question here is whether a more rigorous approach within the same legislative framework would have picked up the problem of weathertightness earlier and avoided the serious situation in which we now find ourselves.

Consumer protection

The Building Act is concerned with achieving social objectives and is written almost entirely in terms of duties imposed on building owners and enforced by territorial authorities. It clearly accepts that providing the consumer with protection against latent defects in the construction of the building is a matter for the general law ... Such cases are frequently complicated and time-consuming, with high legal costs.

The Consumer Guarantees Act 1993, the Fair Trading Act 1986, the Sale of Goods Act 1908 and the Companies Act 1993 might have been expected to provide some readily accessible and meaningful protection to the new homebuyer. In the opinion of the Overview Group, they do not.

The Consumer Guarantees Act does not apply to a contract for the sale of "a whole building attached to land ... designed for residential accommodation". The Fair Trading Act does not offer much protection in the case of a newly constructed dwelling, and in any case would be difficult to prove. The Sale of Goods Act would be limited to consumers who had particular contractual agreements with builders and subcontractors. The Companies Act ... offers little in the way of protection to a homebuilder/buyer consumer in the event of the vendor company (say a builder or developer) being put into voluntary liquidation by the directors for the purposes of avoiding potential litigation. This leaves a homebuyer vulnerable to an unscrupulous builder or developer.

There is no industry-wide warranty scheme in New Zealand that provides a home purchaser protection against defective design, materials or workmanship. The Overview Group ... considers that the legal redress available to the homeowner when that reliance is misplaced is too slow, difficult to access, expensive and time consuming, and that the power imbalance can, and does work against the smaller home owner.

Failings of the Building Act

a) A lack of emphasis that a residential building must provide shelter to its occupants, ie, be weather-tight and durable.

Balancing the concept of flexibility and freedom of choice should be recognition of the basic human need for shelter and protection from the elements.

As the Overview Group and others have stressed, a citizen's home may be his or her castle but it is much more than that - not least being the community's guarantee of an orderly and productive society. Housing is not just another commodity. It has a special call on the Government's attention, and the regulatory framework must reflect this - it cannot be left to market forces alone, as influential as they will continue to be.

The act ... does not place sufficient emphasis on the basic human need for shelter and protection from the elements. As a consequence the aspects of weathertightness and durability requirements have not been given appropriate attention and emphasis.

b) The integration of key code provisions.

The Overview Group contends that the weathertightness of a building is fundamental to the achievement of so many of the other provisions in the code that the objective for external moisture (weathertightness) should have incorporated aspects (1) safeguarding people from loss of amenity caused by undue entry of external moisture and (2) ensuring that a building throughout its life continues to satisfy the other objectives of the code (with particular regard to durability).

c) A reliance on light-handed control.

Many of those interviewed expressed concern that the Building Act and regulations are not providing sufficient protection to the house buyer/owner.

We have been asked several times by distressed homeowners, "How can a near-new building which has a Code Compliance Certificate be leaking to the extent that major and costly repairs are required and health and safety concerns are being exposed?"

The public perception is that surely the Building Act must protect them. This may be a misconception. It is the Overview Group's view that it is the building industry as a whole that must itself answer this question by addressing the causes.

However, irrespective of the causes, there is the overarching question regarding whether the act does provide for "necessary controls relating to building works" and "ensuring that buildings are safe and sanitary". In light of the evidence obtained, the Overview Group considers it (does) not. The controls are many and varied, but the end result is considered unsatisfactory.

By way of one example, there is currently nothing to stop unscrupulous developers or builders from liquidating their companies on completion of the project to avoid claims and action from dissatisfied purchasers.

Evidence of such practice abounds and many owners interviewed have been unable or are having extreme difficulty in resolving outstanding leakage-related problems for this reason. The Overview Group was also advised of instances of developers using trusts as a vehicle for undertaking housing projects as these can be liquidated more quickly because they do not require public notification.

There is too much reliance on "voluntary arrangements, such as market forces, self regulation or self-interest" (Building Industry Commission, 1990). Currently, they are not working.

If all the parties in the process interpreted the Building Act, code and approved documents as no doubt intended by their authors and acted in a professional manner exercising their "duty of care" responsibilities, there would probably not be an issue. However, such an "ideal world" environment does not exist. Stronger incentives need to be provided.

The industry is highly competitive, disparate in its structure, and lacks formal accountability, all of which has contributed to the systemic failure of the building industry with regard to this matter.

A significant proportion of new-build housing, and in particular multi-unit complexes, is being undertaken by developers. It is in this sector of the industry that the problem is most prevalent. The building industry is too complex an environment to place so much reliance on market forces.

In addition, the Overview Group considers that the significance of the consumer/supplier power imbalance is such that a higher level of regulatory control is necessary and justified. The majority of those interviewed from within the industry advocate some increase in the level of regulatory control and the Overview Group supports this view.

The Overview Group advocates that a wide-ranging review of the current controls be undertaken to determine whether or not they are achieving the intended objectives.

The act places great emphasis on ensuring the health and safety of building occupants. But, where do house-owners obtain protection from inadequate building practices that affect their investment and the long-term viability of the building fabric that may also house high standard utilities and functional features?

The Building Act has clearly succeeded in providing the building industry with the scope to develop innovative and cheaper building solutions.

However, hand-in-hand with the service or product provider being given the ability to determine and provide design and construction solutions must go a responsibility and accountability to guarantee their performance against the Building Codes requirements. This has not happened. It is recommended that the current review of the Building Act look at ways to redress this either in this or other legislation.

The Overview Group has come to the realisation that the majority of the population knows relatively more about the pitfalls of purchasing a used-car than buying a house, and that the used-car market sector has better regulation in terms of safety and quality performance, ongoing warranty, and consumer protection.

The role of the Building Industry Authority


The report says the regulations (known as Approved Documents) which cover durability and weathertightness are inadequate, exceedingly light on detail and lack any objective or quantitative guidance.

Clearly the BIA has developed processes for the dissemination of information to the industry through its many publications and seminars. However, it is questionable whether this has adequately addressed issues such as the weathertightness problems, which appear to have been apparent for several years.

The general view of those interviewed, which is shared by the Overview Group, is that the BIA could and should be taking a more active role generally. Reasons given include: there is no Government department specifically devoted to building; the Department of Internal Affairs has only an arm's length involvement; only the BIA has direct access to Government.

It has been argued that the BIA should be more active in developing standards; monitoring and controlling new products; managing the appraisal process; providing greater assistance to industry in areas such as education; developing guidelines; and responding to technical queries and concerns.

There was some criticism that the BIA was difficult to access; slow to respond; defensive in its responses; its advice, rulings and determinations are too vague and highly qualified; frontline industry practitioners need more specific answers to their queries.

It has also been suggested to the Overview Group that more of the levy monies collected on behalf of the BIA could and should have been available to the BIA for the likes of more extensive educational programmes and to increase its staff numbers and thereby the level of service provided.

In summary, the consensus was that to date the BIA has adopted a relatively low-key administrative role with respect to its perceived responsibilities. In the present circumstances it has insufficient staff to fulfil its role and provide the level of service that is needed.

It may well be argued the BIA has been fulfilling its statutory functions, and we are not aware that any Internal Affairs Minister has questioned the BIAs performance of its role since 1991, but according to the responses received it is not meeting industry or public expectation. It may be that the potential benefits of a wider role for the BIA have only now become apparent as a result of the growing realisation of the systemic failure across the industry.

The role of councils


The original Hunn report said building inspectors were placing far too much trust in the unofficial appraisal system for products such as claddings. It said many appraisals - often carried out by the industry-run Building Research Association (BRANZ) - relied heavily on claims made by manufacturers rather than independent assessments.

It now adds: "The Overview Group is concerned at the reliance territorial authorities and building certifiers have been placing on BRANZ appraisals in relation to cladding products and systems as well as on producer statements. In many cases, these appraisals and statements are being accepted without any additional scrutiny.

"Further, the inspection regimes being applied fall short of what the Overview Group considers appropriate to satisfy the satisfied on reasonable grounds compliance test.

Recommendations

* That the BIA "advises the minister that there are features of the act and the code that are deficient and have contributed to the weathertightness problem" and that these problems should be addressed by the review of the Building Act.

* That the BIA urgently complete its review of regulations covering durability (which includes the untreated timber issue) and external moisture (including a specific method for ensuring buildings do not leak). The BIA must also review the way council inspectors and private certifiers inspect buildings.

* That the BIA and inspectors spell out more precisely what it means to be "satisfied on reasonable grounds" that a building complies with the code.

* That the Department of Internal Affairs "review the role, structure and resourcing of the BIA with a view to enabling it to provide a more comprehensive service to the public and the industry".

* That the review of the Building Act reassess how the BIA should operate to meet the needs of the act.


* If you have information about leaking buildings,
email the Herald or fax (09) 373-6421.

Herald feature: Leaky buildings

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