Issue 44, Property Speaking, Spring 2023
What happens if your builder goes bust?
Choose carefully
Building a new home is an exciting process. It can, however, be quite daunting with risks of unexpected delays, cost increases and, in the worst scenario, your project going completely off the rails. In this article, we discuss how choosing your builder carefully can help to give you some peace of mind as you embark on your build.
A careful choice of builder, checking references and talking with previous customers can help give you peace of mind when starting a build. Asking us to review the contract with your builder before signing will also help.
Guarantees offer the best protection if your builder gets into financial difficulty, goes into liquidation and/or is unable to complete your project. Guarantees vary and how they apply to your build is determined by the type of guarantee that is included in your contract.
Building franchise guarantees
Nationwide builders who operate under a franchise agreement usually have a guarantee from the franchisor who will ensure that your build is completed if the local franchisee fails financially. Franchise builders value maintaining their reputation on a national level and often have significant funds to pull from other areas of their national business to ensure a customer gets their build completed. These types of guarantees provide a high level of confidence in the builders that include them in their contract and allow customers to engage with their builder with confidence.
Association guarantees
Master Build Guarantees have the Registered Master Builders Association guarantee that provides comprehensive cover for their members’ work, along with cover for 10 years if your builder goes into liquidation. An important aspect is that the guarantee is only valid if you have received written confirmation from Master Build Services.
Master Builders advertise that they are Registered Master Builders but if you are not sure, simply ask them or contact the association. You will often find that franchise builders are also Registered Master Builders, so if your franchise builder cannot complete your home, you can elect whose guarantee you want to rely on. You can find more information about the operation of the Master Build Guarantee here.
Similarly, the New Zealand Certified Builders Association (NZCB) offers a 10-year residential build guarantee (a Halo Guarantee) if your builder is a NZCB member.
You should note that NZCB guarantees only apply after the completion of your build; they will not be helpful if your builder goes into liquidation or stops working as a builder before your build is complete. However, if your builder stops working as a builder after your project is completed, the Halo Guarantee will cover claims you would have ordinarily made with your builder under any defects liability period or up to 10 years after the completion of your build.
While these types of guarantees are the best form of protection for customers they often come with a restriction or limit on the claimable amount. These subtleties highlight the importance of getting advice on both the guarantee and the build contract before your build begins.
Other situations
When your builder’s business fails and they are not a Registered Master Builder, or you are unable to rely on a guarantee from their national franchisor, there is no certainty your build will be completed. In this instance, before you engage a builder who cannot offer you guarantees, you should review the contract even more carefully.
If the builder goes into liquidation, you can engage a new builder to finish your home. There may be difficulties, however, if the progress payments are weighted in favour of the builder and the money you have paid does not accurately reflect the progress of your build. You could end up paying more than you budgeted to have the job complete with little ability to recover your losses from the builder in liquidation. If you end up in this position, consult with us immediately to navigate the cancellation of your contract and how best you can move forward.
Get advice before you start
In an industry feeling the lingering economic effects of Covid and operating in what now is a cost-of-living crisis, make sure you get the best advice and have the best protection in place before you before you sign a contract and begin your build.
Be sure to speak with us if you are thinking of building or have any concerns with your current building contract.Alternative methods to sell your property
Auction and tender guide for sellers
We are starting to see more upward movement in the property market which is positive news for property sellers.
A more buoyant market means that sellers and their real estate agents will be looking at alternative ways to secure a buyer. Rather than sticking to traditional sales methods – advertised price, deadline sale or by negotiation – sellers may want to consider a closed tender or auction process.
Closed tender
The closed tender process is similar to a deadline sale. Your real estate agent will prepare the tender document for prospective buyers. Buyers must submit their offer by the date and time you specify. Under a closed tender, neither you nor the agent can look at any of the tender offers before the closing date.
You can place conditions in the tender document before it is provided to prospective buyers, for example making the agreement conditional on you purchasing another property. Tenders may also contain buyer conditions. The top offer isn’t always the driving factor. For example, you may get a ‘cleaner’ offer (with no or few conditions) but at a lower price. Typically, you will have a short period of time after the closing date to consider all of the tenders received and decide which you want to accept.
A tender process gives a sense of urgency with a fixed date and, in contrast with auctions, buyers and sellers have more flexibility, for example, by adding conditions. It is, however, less transparent than an auction as prospective buyers have no idea of what price other bidders are offering.
Auction
A property auction is, of course, quite different from a tender process. Once a prospective buyer is interested in bidding for the property, the real estate agent will hand over all of the information on the property, and the buyer must complete any due diligence they may have on the possible purchase before the auction date.
On auction day, prospective buyers bid until there is a last-bidder-standing and the auction price has reached or passed the reserve (the minimum offer you will accept).If you have a successful buyer at the auction, then you have an unconditional agreement for the sale of your property.
It is important to note that if you want to bid on your own property at the auction (known as a ‘vendor’s bid’) there are strict rules around this, so talk to the auctioneer before the auction.
For first home buyers, it can be challenging to buy a property at auction because they will generally have lower equity and need to provide more information to a lender and may, for example, need a building report or valuation. They may also need to pay the deposit from their KiwiSaver funds.
Similarities between methods of sale
Whatever the method you choose to sell your property, there are some standard provisions in the Agreement for Sale and Purchase that a potential buyer will expect to see.
Unless the property is tenanted, the buyer is entitled to undertake a pre-settlement inspection prior to settlement and, if the property isn’t in the same condition as when the agreement or tender was signed, or when the auction is held, then the buyer can ask you to remedy any issues.
The standard vendor warranties are undertakings that you provide to the buyer about various things. These include:
- Whether you are aware of any potential claims relating to the property, such as breaching a resource consent, not complying with your obligations as a landlord, or disputes about shared driveways or boundary fences
- Whether you have provided your neighbours with consents for them to subdivide or build on their property. This will be of particular interest to a buyer if it is going to impact on the character of the home
- Checking whether the chattels included in the sale are all in working condition. During the pre-settlement inspection, a buyer may identify a problem chattel. If, however, this isn’t picked up at the pre-settlement inspection, a buyer could seek to enforce the warranty after settlement, and
- Confirmation that any work you have completed to the property that required a building consent or a resource consent has the appropriate consent and code of compliance certificates.
You can, and should, remove some or all of these warranties if appropriate. This can, however, be a flag for buyers to ask further questions. If you know of any issues with the home or a particular chattel, it is important to disclose these early to avoid having to compensate the buyer under any of these warranties.
Downsides
If your property does not sell at auction, you will still incur costs for the auction. You may also incur costs from your real estate agent or lawyer depending on the listing arrangements and amount of work involved.
Although there are positive signs the property market is recovering, it is still a tough market. If you are considering selling your property, it could be worthwhile exploring all selling options to market and sell your property.