KEY POINTS:
I have just discovered my investment property is a "leaky building". I now wish to transfer this property to a LAQC (Loss Attributing Qualifying Company). Will doing this have an affect on any leaky building claim I am able to make?
It is important to understand what an owner is suing for in a leaky building claim. The owner of the property at the time the defects are discovered (or become reasonably discoverable) suffers loss and can sue for that loss. What the owner sues for is economic loss.
Economic loss is suffered as a result of the owner having paid full market value for the property when, unknown to the owner, the property is defective and therefore worth less than that full market value. The owner's loss occurs when the market value of the property is depreciated as a result of the discovery of the construction defects and/or resultant damage. The loss is the amount by which the property has diminished in value. Some examples of common situations are:
Example 1: "A" buys a property at market value for $300,000 but doesn't know the property is suffering from moisture ingress as a result of construction defects. If "A" resells the property at full value before the construction defects and damage are discovered, "A" has suffered no loss attributable to the defects and has no claim.
Example 2: "A" buys a property at market value for $300,000 and subsequently discovers construction defects and resultant damage reducing the property to a value of $200,000. "A" suffers economic loss of $100,000. But if "A" could reasonably repair the property for less than $100,000, the loss would be the cost to repair.
Example 3: "A" decides to resell the property with full disclosure of defects to "B" for $250,000. Assuming the market value at the time of sale without defects was $300,000, the loss to "A" will be $50,000.
Example 4: "A" buys a property at market value for $300,000 and subsequently discovers construction defects and damage resulting in a loss of $100,000. But for tax reasons, "A" decides to sell the property to his LAQC called "A Ltd", for $300,000.
"A" is both a director and shareholder of "A Ltd". The property is sold at full market value despite the defects so "A" has suffered no loss and has no claim. Knowledge of the defects by "A" will be imputed to "A Ltd" via the knowledge of "A" as director. Arguably, "A Ltd" has bought the property at full market value with knowledge of the defects and therefore has no entitlement to pursue a leaky building claim.
Some property owners incorrectly believe the right to recover loss flows with the property. They don't realise the effect the transfer of the property will have on their leaky building claim, especially if the property is being transferred to a related entity (LAQC or Trust). Generally, for tax reasons, when a property is transferred to a LAQC the owner will sell it at full market value. But such a transfer could potentially extinguish a leaky building claim. The original owner will not have suffered any economic loss, and the new owner (because it is a related entity) will have bought with knowledge of the defects.
It is therefore important that a careful analysis of the possible effect of a property transfer on a leaky building claim is undertaken before the property is transferred (whether to a LAQC, Trust or a third party). There are options available to avoid extinguishing a leaky building claim such as the same scenario as Example 4 except that "A" sells the property with its defects at full market value and assigns the cause of action to "A Ltd".
There are strict requirements that must be met in order for a cause of action to be legally assigned. The timing of an agreement to assign the cause of action can affect the quantum of a leaky building claim.
If you own a leaky building , it is important to seek legal advice before you consider selling or transferring your property.
