What happens if the developer liquidates and something is wrong with my New Build?

When a developer shuts down its company after a build is complete, people often ask what can they do if something goes wrong with their build. Here’s what you need to know.

When developers build a property they often start a new company, e.g. 123 Smith Street Development Limited.

Once they’ve finished the build, they often shut it down (put it in liquidation).

But what happens if something goes wrong with your property? How do you get that developer to put it right?

In this article, you’ll learn why developers liquidate companies and how to get your property fixed if something goes wrong.

Key points:

• There is a difference between the developer and the builder of your property
• It’s the builder, not the developer, who has the responsibility to fix your property if there are issues
• If the developer liquidates their company, you can still go to the builder
• If the builder has gone into liquidation, you can still sue the directors of the building company

Why do developers shut their companies down?

Often when developers build a project they start a new company.

For example, if Mike Greer Homes starts a new development, they might start a new company, e.g. Mike Greer Homes – 123 Smith Street Limited.

This might happen because there are multiple people putting money into the development.

Once the project at 123 Smith Street is completed, they will liquidate the company and shut it down. There’s no reason to keep it going any more.

That’s why some investors will say, “Well, what do I do if there’s something wrong with my property?”

Let’s re-cap what guarantees and warranties you get when you buy a New Build property. Then we’ll go through how to enforce the warranty to fix your property.

If something is wrong with my New Build property, what happens?

When a builder puts the property together, you get two automatic guarantees under the Building Act:

• A 12-month defect repair period (defect cover)

• A 10-year guarantee on structure of the building (implied warranty)

These are automatic and apply whether they are in your contract or not.

You might wonder what is included in these two warranties. Here are the main differences –

Defect cover vs implied warranty – what’s the difference?

The clock starts ticking on your 12-month defect cover and implied warranty when your property is finished. Let’s go through a refresher on the main differences.

#1 – Defects cover

If you find any defects with your New Build property within the first 12 months, your builder has to fix them.

This comes within the Building Act and is valid from the day of completion.

You should confirm what the completion date is (in writing) with your developer to avoid any confusion later.

This means as long as you let your builder know (in writing) about the defect within 12 months, they have a legal obligation to put it right in a reasonable timeframe.

If the builder disagrees and says it’s not a defect – it’s their responsibility to prove it.

That leads investors to ask: “When is a defect a defect? What counts?”

According to the Ministry of Business, Innovation and Employment (MBIE), a defect is when it’s:

• non-compliant with the Building Code

• different from consented drawings and was not agreed (variations)

• doesn’t meet what you agreed to in your contract, or if

• An appliance (e.g. oven, dishwasher) breaks prematurely.

On top of this, there is a whole 60+ page guide from the government that shows what does and doesn’t count as a defect.

However, it’s important to note that a builder doesn’t have to fix a defect if it was caused by:

• natural disasters (floods and earthquakes)

• accidents

• you are not doing standard maintenance

• you are not following a contractor’s advice.

The defect period is different from the implied warranty.

#2 – Implied warranty

An implied warranty is good for 10 years after your build is complete.

All residential building work is covered by implied warranties.

This covers issues that are structurally wrong with your property or if it stops being weathertight.

Now you know the warranties, you’ve got to ask how to enforce them. And first, you need to ask who is giving the guarantee.

Developer vs builder – who’s giving me the guarantee?

Whenever you get a guarantee from buying a New Build, you should consider who is giving the warranty.

When it comes to the defect cover and the implied warranty (discussed above), these warranties don’t come from the developer.

They come from the builder.

It often surprises investors to learn that the developer and the builder are usually not the same people.

The developer is the person with the brains and the money to put the project together.

They find the land, get the money to build the property, hire someone to design the properties, and then sell the properties to purchasers.

So, they often hire a building company to hammer the pieces of wood together and build the house.

The building company provides the warranties (defect cover and implied warranty) under the Building Act.

These warranties go from the builder to the developer and are then assigned to you.

This is the same for any warranties on appliances in your home (e.g. heat pumps, dishwashers, washing machines etc.)

The developer can’t give you a warranty on the appliances. They didn’t put them together.

The warranty goes from the manufacturer to the developer, which is then assigned to you.

Who do I go to if something is wrong with my New Build?

If there is something wrong with your New Build property, you’ll often go to the developer to get them fixed.

But they’re not going to be the ones fixing the property. Instead, they’ll get the person who gave the guarantee to put the situation right. At this point, they’re just the middle man.

They’ll contact the builder and organise for them to put things right. 

If the developer has liquidated the company (and the middle man is no longer around), you can contact the builder directly and get them to fix it.

Ultimately, if something is wrong with the building, it’s the builder (not the developer) who is responsible for putting it right.

Here’s a case study to demonstrate what we mean.

Case study: Auckland apartment has issues; developer has shut down

An investor (not an Opes Partners investor) recently had trouble with her developer.

The developer went into liquidation only a few months after she paid for her property, an apartment in West Auckland.

At first everything seemed fine. There was no indication that anything was amiss at the pre-settlement inspection.

But after her tenants lived in the apartment for a few months, the cracks started to show (almost literally).

The window seals weren’t enough to keep out the heavy rain (weather-tightness issue).

And on top of this, the appliances weren’t working as they should.

These were issues that clearly come under the 12-month defect cover.

But when it came to reporting these defects, the investor was told the developer was liquidating (shutting down), so they wouldn’t be fixing any faults.

It seemed to the investor that they couldn’t hold the developer accountable.

What should the investor do?

You must get legal advice about your specific rights, but here’s what usually happens.

In terms of the leaky windows – the builder is responsible. This includes any work done by their subcontractors (e.g. electricians and plumbers).

Because the leaky windows are a fault with the building, they need to approach the builder to fix it.

In terms of the faulty appliances – that’s obviously not the builder’s fault. It’s up to the manufacturer to put it right.

When the development was handed over the developer should have given the investor warranty information about the appliances.

They can then use this information to go to the person who built the appliance to get them to put it right.

What happens if the building company goes into liquidation?

You get a 10-year implied warranty when you buy a New Build.

But 10 years is a long time. What happens if the building company has gone into liquidation and is no longer around?

One option is to sue the directors of the building company. They still have ‘director’s responsibilities’ under the Companies Act.

So, if there is something seriously wrong with your property, you may be able to get justice this way.

Though, you’ll need to speak to your lawyer about what’s possible in your situation.

Depending on what’s wrong with your property, you may also be able to go after the local council or the manufacturers of the building materials.

They may bear some responsibility for any defects within your home. That could be if the council's inspections weren’t done correctly, or if the building materials failed early.

This is real ‘worst-case scenario’ stuff, and you could approach it in multiple ways. It’s best to talk to your lawyer about your options.

How do I stop all this from happening?

When you buy a New Build it’s normal for there to be minor defects. That’s the same as if you are purchasing an existing property.

That’s why defect cover and implied warranties exist.

It’s essential that you know what these warranties are and who to talk to when you find a defect – even if the developer is no longer in business.

But to avoid all the legal hassle of chasing a developer – the best thing is to work with a reputable developer with a solid track record.

This is one of the reasons Opes is so rigorous with its due diligence on all the 97 developers we work with.