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When does a homeowner become a property developer? Alistair McGrigor describes how the co-founder of Skype learned a tough lesson – and it all hung on a picture

Niklas Zennstrom, the co-founder of Skype, is one of the protagonists in an unfortunate recent case regarding a shoddily built house which should have been a dream home.

After Zennstrom bought the home in 2009, it emerged that the recently completed building was structurally unsound: it lacked any piled foundations which it should have had, some columns were not centred on the relevant padstones, and certain supporting beams were poorly installed.

Zennstrom had to have the house demolished and a new one built.  He was understandably keen to find a party to compensate him for the losses he had incurred.
Compensation conundrum Zennstrom’s difficulty was that the architect who designed the works appears not to have had insurance, and the building contractor appears not to have had any assets. Zennstrom therefore sought to obtain compensation from the sellers of the property, on the basis that they had all along planned to sell the property for a profit rather than live in it.

This argument relied on the Defective Premises Act 1972 (DPA) , which clarifies that someone taking on work for or in connection with the provision of a dwelling is under an obligation to see that the work is done in a workmanlike or professional manner with proper materials, so that the dwelling will be fit for habitation when completed.  This structurally unsound house was clearly not fit for habitation.

However, the sellers could only be liable under the DPA if it could be shown that the house they had built was only intended to be sold by them and not lived in as their dwelling.  If the sellers intended to live in the property then it could not be said that they were carrying out the works as part of a business, which is what is needed to make a property developer liable under the DPA.

The judge in the case clarified that for the sellers to be liable under the DPA as property developers, they would therefore need to have been intending to sell the property at the time when they arranged for their builder to take on the work.  Ultimately, this is a question of fact, and each case will be different.

In this case, the judge was of the view that the sellers did not intend to sell the property at the time when they commissioned the builder, or indeed when they had carried out the work.  The sellers did move back into the property for about 12 months between the time when the work was mostly finished, and the date of the sale of the property to Zennstrom, and there were numerous ways in which their actions seemed to suggest they intended this property as their dream home.

Felt like home

Various personal elements about the way the sellers regarded the house helped the judge towards this view – for example, after they moved back into the property, the sellers celebrated their civil partnership, and instead of gifts asked their friends to contribute towards a painting specifically commissioned for a particular size wall in the property.

The judge did make the important note that it is not necessary for a person ‘in business’ as a property developer to have previously developed other properties in the past.  So the fact that the sellers were not previously involved in major developments of property was not a factor either way.

It was decided in this case that the owners did not intend to sell the property when they began work, but came to that view only after it had been completed, due to a change of employment circumstances.  As a result, they were not acting in the course of a business when they developed the property.

Alistair McGrigor is with Macfarlanes Solicitors



For owners to win redress under the 1972 Act, a dwelling must be unfit to live in - Defective Premises Act 1972

Architects need to be aware of their possible liabilities under the Defective Premises Act 1972.  By taking on work for the design of a new dwelling (or the creation of several new dwellings from the conversion of an existing single building, for example) an architect will be liable to the person commissioning the works – or to a future owner of the works – if the design is not carried out in a professional manner so that the dwelling will be fit for habitation when completed.
This is not limited to the first owner or first purchaser, but will apply to all parties who in the future acquire an interest in the dwelling.  The existence of mere defects does not create liability, the dwelling must actually be unfit for habitation for an architect to be liable.
Another key risk for architects to be aware of is that the test is whether the architect has acted in a ‘professional manner’.  
That may not involve negligence on the part of an architect, and therefore the professional indemnity insurers may not cover an architect’s liability for the claims under the DPA, unless there is also negligence on the part of the architect.