Leaky building and common mistake – Watson v Zhou & Anor – Court of Appeal

This month’s article considers a Court of Appeal decision which overturns a High Court decision finding of common mistake. Instead, it upholds the principle of “buyer beware” in terms of the purchase of residential property.

Facts

Mr and Mrs Watson were the owners of a residential property. In early 2020 they listed their property for sale. The Respondents were recent immigrants to New Zealand at this time and ultimately entered into a sale and purchase agreement to acquire the property after only 3 visits to the property.

An important viewing of the property took place on 10 February 2020, as the Respondents brought a builder along to view the property. Mr and Mrs Watson were also present. The builder advised the Respondents that the house was in a good condition, and shortly thereafter the Respondents entered into an unconditional agreement to purchase the property. They duly purchased the property on 19 March 2020 but within a week there were substantial leaks.

The Respondents brought a claim in the High Court on 3 grounds, namely misrepresentation (orally) and through concealment, common mistake and breach of warranty. Whilst Gendall J was not willing to find there had been misrepresentation, he did rule that there was common mistake and awarded $271,600 in favour of the Respondents in terms of section 24(1) of the Contact and Commercial Legislation Act 2017 (CCLA), and also a breach of the specific vendor warranty to the effect that Mr and Mrs Watson had not obtained a building consent for a leaking wall in the house, awarding $15,000 to the Respondents for this breach of warranty.

Mrs Watson (Mr Watson had passed away) appealed the High Court’s decision to the Court of Appeal, and there were cross appeals filed by the Respondents.

Misrepesentation

The Court of Appeal agreed that a misrepresentation was not established on the balance of probabilities against Mrs Watson. This finding remained in place.

Mistake.

The Court carefully considered carefully section 21(2)(b) of the CCLA, which provides that powers under the Act must not be exercised in a way that prejudices the general security of contractual relationships.

The case involved interpretation of the standard sale of residential real estate agreement using the ADLS/REINZ standard terms. This standard form agreement operated on the basis of the caveat emptor (buyer beware) principle applying, and the Court was minded to ensure that any relief provided under the CCLA did not cut across this principle.

The Court ruled that the general contractual framework meant that section 21(2)(b) of the CCLA restricted the exercise of remedial powers by limiting what may be accepted as a qualifying mistake. The Court ruled that mistaken beliefs such as this “the house was sound and did not leaky in any way” was not a qualifying mistake under the CCLA, as it would effectively open the flood gates to all sorts of claims being made based upon mistake in the context of hidden defects in residential properties. It would undermine the principle of buyer beware and the certainty of contract. The Court overturned the finding of common mistake in the High Court.

Breach of warranty

This was upheld as regards the non-consented wall that was leaking in the sum of $15,000. In addition, the Court of Appeal determinted that there was also unconsented drainage work that in turn breached the vendor warranty to the effect that all works had been consented. Ultimately, the Court of Appeal ruled that there was not the requisite expert evidence available on the cost of remediating this work (with the appropriate consent and Council sign off) such that it was able to make an assessment of the damages applying. This aspect of the judgment was referred back to the High Court for adjudication upon the damages associated with it.

The Court of Appeal’s rather restrictive approach to contractual mistake is to be noted though, and if contractual mistake is to be relied upon in the context of undislosed defects in the context of the sale of a residential property, then specific particularity as regards the discovered defect will be necessary. The specific issue will need to be raised with the Vendor by the Purchaser, for example “does this property suffer from water ingress”.

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co. or Building Today to anyone who relies on the information in this article.