Building a house is an enormous and complex undertaking. Yet thousands of would-be homeowners are being left woefully exposed by builders’ substandard guarantees.
The process of building their family home in the pleasant East Auckland suburb of Glendowie turned into a horror story as they became caught up in the slow demise of Cranston Homes, owned by Blair Cranston, a former president of the self-regulating industry body Registered Master Builders.
Giddy and Lanza interrupt each other as the story comes tumbling out. “Sorry, we’re all over the place with this,” Giddy apologises. “We’ve essentially had two years of sleep deprivation.”
Building a house should be among the most exciting undertakings of your life. Not for you the dilapidated do-up with mouldy bathroom, draughty joinery and patterned carpet so old it should be in Te Papa. You want to move into a shiny new home designed to your specifications and fitted out with all the mod cons.
One upside of the housing crisis is that, for an increasing number of Kiwis, this dream is the reality. Commentators may argue about how far our new-build numbers fall short of what’s needed, but nearly 29,000 new houses, townhouses, flats and apartments were consented in the year to June. Mushrooming subdivisions in Silverdale, Porirua and Selwyn attest to the fact that many New Zealanders are choosing building as a means of climbing the property ladder.
But for many hopeful homeowners, the dream has turned out to be an emotional and financial nightmare. One west Auckland woman has been left with an unfinished home after two and a half years of tussling with her insolvent builder and fending off blackmail attempts by out-of-pocket suppliers.
One tradie even obliquely threatened her and her children. The woman did not want to be named, because she is still battling her builder’s industry association to claim on the peace-of-mind guarantee she thought she had bought.
There’s nothing new about substandard workmanship or fly-by-night operators who disappear before problems show up, but the fragmented residential-construction sector has more in common with the Wild West than many realise.
Anyone taking on the challenge of building a new home could be forgiven for thinking a warranty will protect them from the cowboys, but as with so many other aspects of the sector, the provision of builders’ warranties is completely unregulated, and many of those that are available leave consumers woefully exposed.
Tales of homeowners left high and dry by an incompetent or cash-strapped builder who then struggle to get relief under their so-called guarantee are common. In one recent case, an Auckland homeowner had to pursue a claim on his Master Build Guarantee through the courts, even though his builder had gone bust.
The provisions of warranties are generally weighted heavily in favour of the builder, and the exclusions and loopholes are big enough to drive a ute through. A significant criticism is that they lack independence – the Master Build Guarantee, the most popular product on the market, is provided by a wholly owned subsidiary of industry body the Registered Master Builders. Builders are effectively insuring themselves, which raises the question of what incentive they have to pay out on claims when to do so will hit them directly in the pocket. It also means the products have no external insurance backing, with no surety they will be able to meet their commitments in the face of multiple claims.
Often warranties will cover the work of the builder only, not the whole construction process. Loss due to defective design, specifications or materials will be excluded.
Guarantees offered by builders’ limited liability companies are practically laughable. The average building company lasts only a few years; if your house turns out to have defects and the builder is no more, that guarantee is worthless.
Other countries, notably the UK and Canada, have a mandatory system of guarantees, but the system here is entirely voluntary and, according to some estimates, as many as half of all new homes are constructed with no guarantee.
In the absence of a specific guarantee product, the Building Act provides a fallback position, and the law does create implied warranties for all building work on residential houses, including a 12-month defect-repair period. But the problem is enforcement: consumers are left having to take those at fault to court, an expensive, time-consuming and stressful process, with no guaranteed outcome.
Consumer advocacy group the Home Owners and Buyers Association of New Zealand (Hobanz) has had plenty of “arm wrestles” on behalf of members who’ve found themselves on the losing end of an inadequate building guarantee, its president, John Gray, says. A particular problem it has encountered is when master builders fail to pass on the guarantee documentation or fee to their industry organisation, so when the consumer goes to claim, they find they have no cover.
“We have long held the view that most of the insurances up until recently that have been available in the marketplace have been controlled by players in the market,” Gray says. “We say there should be a mandatory, independent, insurance-backed warranty and it should be for 15 years minimum.”
House of horrors
Shaun Giddy and Marina Lanza, who both work in banking, signed with Cranston Homes in May 2015 to construct their four-bedroom house, and paid a $70,000 deposit. But it became evident early on there were problems. “Tradespeople [were] behaving like people who hadn’t been paid,” Giddy says. “I’m a chartered accountant; I know the signs.”
Then came delays and excuses and requests for extra money. Cranston was shuffling funds around to meet its commitments, Giddy believes. “Eventually we got irate. It’s the usual story, he who shouts the loudest gets results.”
By September, four months after work started, the framing was up but there was no sign of a roof. In December, with no explanation, Cranston tried to switch to an inferior window supplier. Giddy and Lanza decided they had had enough. They laid a complaint with Registered Master Builders against Blair Cranston, and in the process discovered they did not have a Master Build Guarantee because the company had not filed the paperwork or paid the fee.
“That summer, we had nothing happen on the house for about three months,” Giddy says. “Zero.”
The couple gave evidence at a complaints hearing. Cranston was suspended from Master Builders and eventually expelled in December 2016. But even though Blair Cranston was once its president, the association told Giddy and Lanza there was little it could do to help them with the build. The pair were left wrangling with Cranston, almost on a daily basis, over every payment.
During the complaints process, Master Builders offered to issue a guarantee to the couple. “That was all that really came out of the hearing for us, because the rest basically left us in a much worse position,” Lanza says.
Giddy and Lanza had been told they had to continue to settle bills through Cranston Homes, because paying suppliers directly would void the guarantee. So they used their professional skills to enforce a convoluted, time-consuming system of payments to make sure the money was reaching the tradies working on their site.
It didn’t always work, and a number of suppliers resorted to blackmail. One electrician threatened to remove the mains cables unless they gave him an extra payment. The couple managed to persuade the original window company to return and paid a $23,000 deposit, but despite this, the firm initially refused to supply the joinery as leverage over Cranston for other unpaid jobs because they knew Giddy and Lanza would go “ballistic”.
“Which is exactly what happened,” Giddy says. “It’s an example of the guarantee actually causing [us] more problems.”
What angers Giddy the most is the thought of what would have happened if he had not had the know-how to do battle. He estimates they are $50,000 over budget – “and that’s an absolute miracle” – but without their professional background “we would have been shafted, absolutely shafted”. They know of other Cranston Homes victims in a much worse position.
Through long, late nights and thanks to sheer bloody-mindedness, the couple got their home to the point where they could move in, but there’s still plenty to complete and fix.
They have been able to claim for non-completion on their 11th-hour Master Build guarantee, but not before the organisation tried to insist on a confidentiality clause and a termination of the agreement, meaning they would have had no ongoing cover for defects.
Cranston Homes finally went into liquidation in May, and the fallout continues. The week the Listener spoke to the couple, they had received a bill from the liquidators for $108,000. Their lawyer is onto it.
Lanza, originally from Sicily, knows a thing or two about dysfunctional administrations. “The whole thing is absolutely a joke,” she says. “We have to pay the barrister, we have to pay for this, we have to pay for that. It’s incredible. What is the point of this Master Build Guarantee?”
She believes the industry association used their complaint to rid itself of Cranston. Her husband’s view is that the Master Build Guarantee is used in conjunction with the Master Builders’ standard contract to give the builder leverage over the customer.
His recommendation to anyone building a house is to spend money on hiring a specialist property lawyer to scour the project documentation for ambiguities. But he laments a system that leaves the consumer in this position.
“The answer is always to spend a fortune on lawyers, and there’s no guarantee.”
The Government is considering whether to introduce a system of mandatory builders’ guarantees, and a public discussion document is due out shortly. But there is an element of self-interest in its move. Landmark weathertightness claims, such as the Nautilus case, in which Auckland Council was ordered to pay $25 million towards repairs of the leaky Orewa apartment building, prompted a proposal to cap councils’ liability in such situations. The argument is that if councils’ responsibility is limited, consumers need some other kind of back-up protection such as mandated warranties. But there’s a lot of water to flow down leaky walls before that matter is decided.
When Duncan Colebrook, a British insurance broker with 40 years’ experience, moved to New Zealand in 2011, he was shocked at what he found. When he went house-hunting, he “stumbled across this whole disaster of leaky buildings and plaster homes and so on”. He was amazed that New Zealand has no system of mandatory builders’ warranties, which have been required in the UK for decades, and saw a gap in the market for an insurance-backed building guarantee that covered homeowners for all eventualities. The Stamford Insurance 10-year Building Warranty was born, backed by Lloyd’s of London and designed with the help of Hobanz.
“I went and found underwriters in London through my own contacts who do this kind of business in the UK, Canada and other territories,” Colebrook says. “It’s not like I invented it; I adapted [the product] for New Zealand from established practices and underwriters.”
In the UK, you’re not allowed to have the kind of exclusions some providers have in guarantees here, he says. “We’re providing the customer with a comprehensive policy, and it doesn’t matter whether it’s the architect that screwed up or the product manufacturer who sent out a faulty batch of materials or the builder who failed to install something properly.”
The industry here is far too lightly regulated, and there is no justification for the providers of cover being owned by the builders they are covering, he believes. Without insurance backing, there is no telling how the products would perform in the face of major claims, Colebrook says. “If you make this an insurance product by law, there’s already a lot of legislation around how insurers have to behave towards policyholders.”
Registered Master Builders chief executive David Kelly is not a fan of a compulsory warranty scheme. He believes it would drive up costs, among other unintended consequences.
He rejects the accusation that his organisation’s scheme has an inherent conflict of interest, saying it offers a package of services to buyers.
“The fact that we own the guarantee company means we go the extra mile to make sure we look after our customers, because if we don’t, our brand gets damaged,” he says.
There have been claims that, technically, it could have turned down, but it instead decided to do what’s fair, he says. “Compare it with, say, an insurance company: they don’t take the same approach at all, in my view.”
Asked whether the scheme could sustain major claims, he points out that the association has been around for 25 years and dealt easily with the high-profile collapse of Stonewood Homes last year. Kelly says Stonewood left behind 110 homes under construction and another 150 with claims for remedial work, and Master Build Services was able to settle claims on them all.
The scheme meets the Reserve Bank’s solvency requirements and has an independent actuary, who reports to the board on its financial strength, he says. “I’m very comfortable with where we’re at.”
He denies that builders commonly fail to pass on the paperwork to set up the guarantee, and says the product does not cover aspects such as poor design because its purpose is “unashamedly” to focus on the workmanship of its builder members.
Kelly will not discuss the expulsion of Cranston from the association. Nor will he talk about other examples of members who have found themselves in trouble, such as Auckland builder Adam Partridge, whose company, Shore Homes, collapsed in December 2016, just three years after his previous enterprise had failed. Kelly will only say Registered Master Builders has stringent criteria for membership, including considering a builder’s solvency, workmanship and track record.
He does admit, however, that there was debate at the association’s last annual meeting about whether it needs to tighten up on how long a member should be excluded after a business failure.
He defends the requirement that a homeowner must continue to pay the building company even if it’s in obvious financial difficulty.
“If they go directly and start paying the subcontractor, then they’ve broken the contract … Then you’re on the back foot, and you might find you end up paying twice. It’s actually to protect the homeowner. The important thing is that if people have taken out a guarantee, we will stand behind them. If things really turn to custard they will get their home built, but [the guarantee] can’t magically resolve all of those situations.”
Master Builders began using the independent disputes resolution service FairWay Resolution 18 months ago, and Kelly says that since then, it has had good success rates in settling disputes.
The country’s other main building trade organisation is New Zealand Certified Builders (NZCB). It offers the 10-year Halo Residential Guarantee that is also backed by Lloyd’s of London. The cover is compulsory for all members whose residential building work is worth more than $30,000, and aligns with Government regulations introduced in 2015 requiring a contract for all jobs that are more than this amount.
NZCB used to offer Homefirst Guarantees, backed by CBL Insurance, on a discretionary basis, but moved to the Halo scheme and made it compulsory 18 months ago after a formal review, chairman Brent Chatterton says.
“We basically decided to go with a better product … The backing was a lot more substantial than we’d previously had. It became more of an insurance than a guarantee, in some ways, that the homeowner could make a claim on and we’d also protect the NZCB brand.” Since then, Homefirst has lifted its game substantially.
NZCB is proud of its point of difference in providing compulsory warranties, Chatterton says. He concedes, however, that a mandatory national system would be good for the industry.
Jim Rickard, director of building industry insurance agent BuiltIn, which provides the Homefirst Guarantee, says there have been recent improvements to the product, such as an increase in its cover for defects, loss of deposit and non-completion. “It’s evolution, because there are no legislative requirements as there are in most jurisdictions around the world.”
Rickard welcomes proposals to make builders’ guarantees compulsory. “I think it’s long overdue, frankly, that there are at least minimum requirements to protect the homeowner.
“If it looks like a duck and quacks like a duck, insurance should be underwritten by an insurance company.”
What's in a name?
When Lynn Earl signed with Signature Homes to build two houses on Auckland’s North Shore, she had no idea she was actually dealing with Lasque Construction.
On close inspection, the contract reveals that the builder of the townhouses next to her old family home in Glenfield was the Signature franchisee Lasque, but that was never the impression Earl had. “The house where we went to sign everything was Signature, all the cars were Signature, the letter says ‘Welcome to Signature Homes’,” she says.
She only became aware of Lasque when she tried to take Signature Homes to the Disputes Tribunal. “The adjudicator just flapped her hands and said, ‘You’ve named the wrong party.””
Earl has barely a good word to say about the process of building two new homes, one for herself and her husband and the other for her daughter. She recites a litany of poor workmanship: a steel support beam was left out of the garage roof in Lynn’s house, leaving the lounge above unstable, and when the builders returned to fix it, they fitted the new beam so close to the garage-door opening mechanism that the door no longer closes properly; workmen damaged the waterproofing on the deck of her daughter’s house and water leaked into the bedroom below; sealants on the roofs of both homes failed, leading to leaks in upstairs bedrooms and bathrooms; the plasterboard in the cupboard under the stairs of Lynn’s house had been nailed into the water pipes, and as the nails rusted, the walls and carpet gradually became soaked.
“It just went on and on,” Earl says. “I don’t know how I kept my sanity.”
Problems continued to emerge for several years after the homes were completed in 2007. Earl had a Master Build Guarantee, but when she contacted the organisation, she was told she was better to deal with Signature directly. But Signature said many of the problems were not structural and therefore not covered, as the group only offered a two-year guarantee for defects.
The last straw was in 2014, when the clips holding the guttering in place on both homes failed. Earl contacted Signature about the problem 28 times between September 2014 and March 2016, and received only a couple of replies.
By the time she realised it was Lasque Construction she needed to target and the Disputes Tribunal hearing was rescheduled, Lasque had gone into liquidation. There was no one for the Earls to make a claim against.
Earl hand-delivered an eight-page letter and pictures of the defects at her properties to Signature Homes founder Gavin Hunt. “I asked him, ‘Are you proud to say this is your company?’” She did not receive a reply.
Hunt is a regular on the nation’s television screens, fronting advertisements for the housing franchise and its sponsorship of popular soap opera Coronation Street. He is adamant all the group’s obligations to Lasque Construction clients were met.
“We’ve spent a fortune working on old Lasque clients’ homes. If we’ve got a responsibility, we usually deal with it. There are usually two sides to these stories,” he says.
In 2008, shortly after the Earl homes were built, Signature launched its own Home Completion Guarantee product and left Master Builders.
Signature claims its guarantee is the best of its type in New Zealand. It says it is financially independent of the Signature Homes franchise builders, and offers unlimited cover for loss of deposit, non-completion of the home, structural and non-structural defects and weathertightness.
Signature’s guarantee is provided by Residential Indemnity Ltd, a company owned, through a string of other entities, by Hunt and his business partner Lance Wiltshire.
Signature says the maximum cover available is the cost of completing a home to the original specifications, as long as all of its claims at that time do not exceed the limit of its performance bond (a type of guarantee provided by banks).
Residential Indemnity is backed by a total $1 million performance bond, or guarantee, issued by ANZ. That’s about the value of one average Auckland residential property.
Hunt denies that if Residential Indemnity received claims of more than $1 million it would not be able to pay out, saying the scheme is also supported by cash reserves. ANZ declined to comment on the bond, referring inquiries to Signature Homes.
Turn of the tide
Government moves or not, the market for builders’ warranties is gradually evolving. The Listener knows of a number of building firms that are reviewing the cover they offer to their customers, because of uneasiness over lack of underwriting muscle and the level of protection the homeowner actually gets for the money.
Eighteen months ago, the largest home-building group in the country, GJ Gardner, made the switch from the Master Build Guarantee, among others, to the Halo guarantee. The group prefers Halo because of its Lloyd’s backing and because it offers better features, GJ Gardner operations manager Dan Oliver says.
“The level of underwriting of some of these products was a concern. Some of the schemes are essentially just fidelity funds [a fund members of a profession pay into] that accrue, or they’re performance bonds that are of limited value.”
The cover some products offer is paltry, he says. For example, on a $1 million land-and-build package, the homeowner may have paid a 10% deposit plus a $50,000 deposit on the build contract. Halo’s loss-of-deposit cover is 20% of the build contract price or $500,000, he says. Compare that with the Master Build 10-Year Premium Guarantee, which offers 5% of the contract price or $40,000, or its Standard Guarantee, which provides 5% or just $20,000.
The Government has already made some improvements in consumer protections. In 2015, new regulations came into force requiring that any construction job worth more than $30,000 must come with a contract and a full disclosure of the builder’s qualifications, licensing status and the insurance or guarantees they provide.
Still, the current environment places a heavy “buyer beware” burden on the consumer. Mark Graham, publisher of Building Guide magazine, says homeowners typically don’t read guarantee documents and simply put their trust in brands such as Master Builders.
There is a need for much greater consumer education about the issue, he says. A survey on Building Guide’s website found a third of people building or renovating a house hadn’t been given the prescribed information by their builder. Most were unaware of the 2015 regulations, and almost none had seen the Ministry of Business, Innovation and Employment’s booklet outlining the requirements.
“People are more interested in what kind of tiles they’re going to have on their bathroom wall than they are in making sure that they’ve got a decent builder … and they’re spending half a million dollars, a million dollars, on the biggest investment of their lives,” Graham says.
Maria Slade is the author of Buyer Beware: A New Zealand Home Buyer’s Guide, published by Penguin Random House.
This article was first published in the October 28, 2017 issue of the New Zealand Listener.