An update on weathertightness issues

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1 An update on weathertightness issues Andrew McKenzie 16 October 2012

2 Section Contents Page Key Points 2 Duty of Care and Limitation 4 History and Council approach to residential claims 7 Supreme Court decision and non-residential claims 16 Summary 21 Contact Details and Disclaimer 23 2

3 Key Points Council has historically dealt effectively with residential weathertightness claims through adequate provisioning. Significant changes to Building Act and 10-year long stop provision implies residential weathertightness claims and provisions projected to decline. Until the recent Supreme Court ruling on the Spencer on Byron case, the duty of care by Council in consent process extended only to residential property owners now applies to non-residential property owners and includes other building defects. Issues relating to residential construction differ from those relating to non-residential construction. Unable at this point to quantify number of building defects, likely claims and a provision value for non-residential claims but will this be calculated for our December 2012 interim financial statements. There are a number of mitigating factors including the 10-year long stop provision so at this stage we do not expect the level of potential provisioning for non-residential claims to be as material as that experienced with residential claims. 3

4 Section Contents Page Key Points 2 Duty of Care and Limitation 4 History and Council approach to residential claims 7 Supreme Court decision and non-residential claims 16 Summary 21 Contact Details and Disclaimer 23 4

5 Duty of care Liability of a council for defective buildings is not absolute. Having duty of care simply means that legal claim is possible under common law of negligence. Whether claim will succeed, depends on proving council negligently inspected construction, issued code compliance certificate and loss suffered as result: Broadly, negligence assessed against standard of reasonable skill and care in the circumstances. If duty exists, and standard of care not met, then council may be liable for a share of loss. Other parties, such as architects, materials manufacturers and construction companies can be liable for a proportion of the loss (contribution as joint tortfeasors). The liability joint and several, so if council is the last man standing, council liable for all loss. 10 year limitation - s393 of Building Act 2004 applied a long stop liability period of 10 years to civil proceedings arising out of building work as did s91 of the Building Act 1991 Until last week duty of care applied to residential only, not commercial 5

6 Limitation Section 393 of Building Act 2004 and Section 91 of Building Act 1991 prevent claims brought more than 10 years after date of act or omission giving rise to claim. The 10 year long stop provides an absolute bar to claims being made outside of 10 years. Other impact of 10 year long stop provision is building owners, particularly with respect to high risk features such as face-fixed monolithic cladding, have proactively assessed buildings to identify weathertight issues before limitation period expires. In our view, unlikely there are large numbers of defective buildings not already the subject of claims. 6

7 Section Contents Page Key Points 2 Duty of Care and Limitation 4 History and Council approach to residential claims 7 Supreme Court decision and non-residential claims 16 Summary 21 Contact Details and Disclaimer 23 7

8 History Building Act 1991 and implications New construction techniques and materials introduced at same time that building code requirements modified. Instead of very prescriptive requirements which council officers could check-box for inspections, the building code adopted performance based approach for building compliance (e.g. specifying that must be weathertight, as opposed to specifying exactly how must be weathertight). For commercial buildings, additional issues arise given complexity of developments and different types of construction materials for structure and cladding. Building inspectors at the time were increasingly reliant on producer statements to confirm that the buildings were code compliant. Unresolved issues to be determined in future court decisions are: The extent to which council reliance on producer statements as permitted by the Building Act 1991 could result in a breach of the standard of care. The proportion of liability which can be attributed to councils (as opposed to architects, construction companies, manufactures etc.) given the different dynamics of commercial construction from residential buildings. 8

9 History - top five residential building defects Lack of flashing detail to windows Flat topped parapets Cladding to ground level Penetrations No control joints 9

10 History onwards Hunn Report 2002 highlighted numerous systemic issues in building practices significant concern regarding durability of buildings being produced change in building inspection practices began. Some Auckland legacy councils had already introduced requirement for window flashings but post the Hunn report introduced a requirement for cavity battens, mechanical flashings and by December 2002, Auckland City Council had banned the use of stucco cladding without a cavity system. Quickly came requirements for specific detailing to mitigate risk and timber treatment for areas of high risk. Building Act came into force in March 2005: significant change related to the management of external moisture. use of treated timber and a cavity system when using stucco cladding became mandatory. s393 applied a long stop liability period of 10 years to civil proceedings arising out of building work. 10

11 Where are we today Auckland Council is largest building consenting authority in country and accredited under 2006 Accreditation Regulations. Registered to issue Building Consents and undertake Inspections as per Building Act In order to gain Accreditation, Building Consenting Authority must undergo bi-annual Audits of functions by IANZ, an independent international accreditation organisation. To meet requirements of Accreditation Regulations 2006, all policies, processes and procedures need to be documented in accordance with the accreditation regulations. Audits by IANZ focus not only on documentation, but also on consistent application in order to minimise risk associated with consenting activities. Competency of staff, in order to minimise risk in both consenting and inspection processes, all building control staff are categorised under national competency framework and can only process or inspect building work deemed to be within assessed competencies. Auckland Council building controls and previously Auckland City leads New Zealand in minimisation of risk associated with high risk building work. Over past ten years have implemented numerous initiatives based on learning s both internationally and locally through its specialist cladding, durability, inspections and pre code compliance processes. 11

12 Residential claim trends 12

13 Methodology for residential provisions Provision made for 3 type of claims - active, (which are in process of being resolved and for which there is a firm cost estimate), reported (which are known about but the claim has yet to be progressed) and unreported (those we project will arise in the future). For reported and unreported claims the costs (including professional fees) are stochastically modeled and estimated on the basis of: Past experience on those claims already settled or expected to settle shortly. Split by type of claim e.g. multi-unit and standalone and also whether expect claim to settle under the Government Financial Assistance Package. The model allows for: Total claim and settlement costs, and percentage allocated to Council, including 100%. Future cost inflation, discontinuance rates, discounting, delays in notification of claims and settlement delays and any recoveries from insurance. The projected number of future claims is based on an extensive analysis of claims known to date, total number of properties built over the period 1995 to 2008, and when the known peaks and troughs of the issue occurred. The model assumptions are updated annually based on recent experience. The Council hold an extensive database on all claims lodged to date. 13

14 Council balance sheet includes provisions for settlement of residential weathertightness related claims Group June 2011 $ millions Provision comprises active, reported and unreported claims. Active claims are those which have been lodged with the Council or the Weathertight Homes Resolution Services ( WHRS ) and are progressing through the resolution process. Reported claims are those that have been reported to the Council or WHRS and are not yet progressing through the resolution process. Unreported claims are those which the Council may be liable for in future years but are not yet reported or identified. June 2012 $ millions Opening balance Additional provisions and increases to existing provisions 20 - Amounts used (29) (62) Reversal of previously recognised provisions (21) - Unwind of discount rate Provision balance at 30 June Active claims $102 million $107 million Reported +unreported claims $294 million $310 million Insurance recoveries $ 21 million $ 38 million Total Balance $417 million $456 million Source: Annual Reports June 2011 & June

15 Current forecast of residential weathertightness claim provisions in Long Term Plan Provisions $ millions Note: Based on actuarial assumptions in August 2011 for Long Term Plan not for Annual Report purposes Source: Long Term Plan

16 Section Contents Page Key Points 2 Duty of Care and Limitation 4 History and Council approach to residential claims 7 Supreme Court decision and non-residential claims 16 Summary 21 Contact Details and Disclaimer 23 16

Supreme Court decision Spencer on Bryon - a 22 storey tower with hotel reception and ancillary spaces on ground and first floors, managed apartments from level 2.

17 Supreme Court decision Spencer on Bryon - a 22 storey tower with hotel reception and ancillary spaces on ground and first floors, managed apartments from level 2. Levels 20 and 21 contain six penthouses. Construction from mid March Practical completion in 16 months. External cladding is mixture wall glazing and composite aluminium panel. Problems with building - proceedings filed in High Court in July Construction parties in litigation include developer, builder, architect and cladding company and/or insurers. Trial date October The Court of Appeal previously found Council did not owe a duty of care for mixed use building. Decision overturned by the Supreme Court last week. Supreme Court held territorial authorities owed duty of care under Building Act 1991 to protect owners of commercial building from economic loss. Previously duty only owed in respect to residential buildings. 17

18 Supreme Court decision - implications The substantive claim is in the High Court for October 2013 hearing. Council now a party along with architect, developer, builder and cladding company and/or insurer. Council s role, whether it breached duty and acted negligently, will be determined along with acts and omissions of the other parties. Wider implications is that the Council will face exposure to claims in respect of any building built within last ten years (and certified by Council) that do not comply with Building Code. Likely exposure to commercial claims can be assessed by a review of building consent types issued during the relevant periods. There are low failure rates with certain types of building defects (such as foundation issues). A review will be undertaken and an assessment for provision purposes will be made. No Insurance for new commercial weathertight defects claims. 18

19 Key differences between residential and non-residential claims Construction methods differ between residential and non-residential. Parties involved developers, architects and construction companies. Joint and several liability still applies but stronger group of involved parties. Council s role lessened as onsite certifiers, architects and designers (registered and insured) involved in non-residential projects. Timing 10 year long stop provision applicable for period October 2002 to changes in Building Act in March Applicable to strip malls, schools and high rise mixed use residential. No Financial Assistance Programme (FAP) expected for non-residential. Greater involvement by non residential property owners in historical maintenance and remediation. 19

20 Next steps for Auckland Council Will be first Council to assess non-residential provisions for unaudited interim financial statements for six month period ending December Will use independent actuarial assessment Melville Jessup Weaver. We expect review of provisions to be undertaken by Audit New Zealand. Other councils in New Zealand will make assessment for June 2013 financial statements. Our historical approach has been to debt fund any claims over a 30 year paydown period. 20

21 Section Contents Page Key Points 2 Duty of Care and Limitation 4 History and Council approach to residential claims 7 Supreme Court decision and non-residential claims 16 Summary 21 Contact Details and Disclaimer 23 21

22 In Summary We cannot predict at this point, the number of building defects or potential claims but will have a clearer estimate for December interim 2012 financial statements We do not expect non-residential claims for weathertightness to be as significant as residential claims given: 10 year limitation October 2002 implications. Small number of existing claims currently three non residential claims before Council (including Spencer on Byron). Changes to Council certification approach from Building Act changes. Residential claims history shows significant drop post Greater number and financial strength of parties involved to share the liability. 22

23 Section Contents Page Key Points 2 Duty of Care and Limitation 4 History and Council approach to residential claims 7 Supreme Court decision and non-residential claims 16 Summary 21 Contact Details and Disclaimer 23 23

24 Contact Details Chief Finance Officer Andrew McKenzie Tel: andrew.mckenzie@aucklandcouncil.govt.nz Treasurer Mark Butcher Tel: mark.butcher@aucklandcouncil.govt.nz Manager Claims Policy, Training and Resolution Sally Grey Tel: sally.grey@aucklandcouncil.govt.nz 1 Greys Avenue Private Bag Auckland, 1142 New Zealand 24

25 Important Disclaimer This presentation has been prepared by Auckland Council for general information purposes only. By attending the presentation, or reading the presentation materials, you acknowledge and agree to the contents of this disclaimer. Auckland Council makes no representation as to the accuracy, completeness or currency of any of the information in this presentation. Data is indicative and approximate only, and all information is subject to change. Some information may be taken from publicly available sources and has not been verified by Auckland Council. This presentation is intended as a snapshot view of Auckland Council only, and Auckland Council has no obligation, and does not undertake, to update, expand or correct anything in this presentation. This presentation may contain forward-looking statements based on current information, estimates and forecasts. Those statements are subject to risks, uncertainties, and assumptions which are hard to predict or anticipate, and therefore actual outcomes and performance may differ materially from the statements. Any opinions expressed in this presentation reflect the judgement of Auckland Council as the date hereof, and do not bind Auckland Council. Nothing in this presentation is an offer to sell, or solicitation of an offer to purchase, any securities. This presentation must not be relied upon by any person for making any investment decision. It does not take into account the investment objectives or financial situation of any particular investor. Any person considering investing in Auckland Council securities must refer to any relevant offer documents and disclosures provided expressly in connection with those securities and should take their own independent financial and legal advice on their proposed investment. This presentation is proprietary to Auckland Council and may not be copied, distributed, disclosed or used without Auckland Council's express written consent. 25

IN THE WEATHERTIGHT HOMES TRIBUNAL TRI [2010] NZWHT AUCKLAND 6. NEIL MCLACHLAN First Respondent

IN THE WEATHERTIGHT HOMES TRIBUNAL TRI-2009-100-000018 [2010] NZWHT AUCKLAND 6 BETWEEN AND AND NOEL DEAN AND DYMPNA DUNWORTH Claimants NEIL MCLACHLAN First Respondent DVK ROOFING AND WATERPROOFING CO LIMITED