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Hiding behind development companies remains legal
Above: Auckland City - one of many urban centres in New Zealand battling the ongoing problem of leaky homes.
Article by STEPHEN PRICE, partner in the construction division of at Minter Ellison Rudd Watts, and JANINE STEWART, a senior associate specialising in construction and property law at the firm. (Article compiled, March 2009)
If you believe everything you read in the papers, you might think that the courts are now holding directors of property development companies automatically liable for “leaky homes”.
You’d be wrong; but that’s not your fault. Comments by owners’ advocates published in leading and popular publications over the last month have implied that it is no longer safe to develop property through a company, and that more and more directors of development companies will face bankruptcy in leaky home disputes.
True, the courts have recently found two directors of development companies personally liable – but it’s simply not the case that the courts are suddenly taking a hard line against directors of property development companies and their personal assets.
It’s important to set the record straight not only to protect already-vulnerable ‘leaky home’ owners from having to cough up for the legal costs of directors who were wrongly pursued – but also to allay fears of directors before they declare themselves bankrupt, send their assets offshore or flee the country.
There has not been any groundbreaking development in the law about leaky homes. The courts have long held developers liable to ensure that houses are built properly, and that delegating the work to an independent contractor is no defence – often referred to as the developer’s ‘non-delegable duty’. The courts have also long held that directors (and indeed non-directors) of development companies can be held liable for their personal involvement in defective homes.
The recent media focus on developers is due to two recent ‘leaky homes’ High Court judgments – we’ll refer to them as the “Nielsen” and “Gailer” cases.
The first case held a Mr Nielsen, a development company director, liable – but not because he was a director. What got Mr Nielsen was his intimate involvement in, and control over, the development – including taking responsibility to ensure that the work was done properly – and his failure to perform that role properly.
In the second case the court held a Mr Gailer personally liable as a developer. The court saw the company’s role as that of a purely passive bare trustee of the legal ownership of the property. In contrast, Mr Gailer personally engaged contractors and suppliers and played an active role in controlling and progressing the development.
Both of these outcomes are entirely consistent with long-established law, and change nothing.
By contrast, the media did not pay much attention to a recent 2007 High Court judgment on the fate of a Mr Cooper, another development company director. Unlike Mr Nielsen, Mr Cooper was not intimately involved in the development. Unlike Mr Gailer, the court decided that Mr Cooper’s company was the true developer, not Mr Cooper. And so, unlike Mr Nielson and Mr Gailer, Mr Cooper was not held personally liable. Some might view this as Mr Cooper ‘hiding’ behind his company, but again, it is entirely consistent with established – and still current – law.
So, leaky home owners shouldn’t think that their avenue for recovery has suddenly broadened. Generally speaking, it is still the development company which owes ‘non-delegable’ developer duties, not the individual director - unless they don’t run the development properly through their company. Likewise, if directors make sure they are properly protected by the corporate structure behind their development and properly carry out their role, they shouldn’t need to buy one-way tickets to Mexico just yet.
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