From 15th January 2026 an exemption to the Building Act means single-storey, stand-alone dwellings less than 70sqm can be built without requiring a building consent. There are quite a few conditions to meet before the exemption will apply, so it’s critical builders understand what they can and can’t do under the exemption. Failure comply with these conditions could leave you exposed to liability.
What liability could building under the exemption expose LBPs to?
Most obviously, if an LBP gives advice to a homeowner about whether the granny flat exemption applies, and this turns out to be wrong, they could be held liable for costs or losses incurred by the homeowner. This could include additional fees they have to pay, costs to relocate or remediate issues with the dwelling, or in a worst case scenario, demolition of the building.
If you’re helping the homeowner through the exemption process, such as with their application for a Project Information Memorandum (PIM) from their local Council, there are many aspects to consider, so it’s critical that you have a robust process and contractual terms and conditions. In the PIM, a Council must indicate whether the building work is likely, unlikely or unclear in meeting the exemptions contained in clause 1 of Schedule 1A. They must also include a statement about natural hazards. MBIE’s Granny Flat Exemption Guidance makes it clear that if a homeowner decides to proceed in spite of their Council’s adverse statement, they are responsible for any non-compliance. However, that doesn’t mean that they won’t still point the finger any professional who was assisting them!
Builders could also be exposed to fines under the Building Act, such as failing to apply for a building consent when one is required for the work. One example to consider is the natural hazard exposure of the property. If there’s a risk of flooding or subsidence then “adequate provision” for this must be allowed for and specific protection measures included in the design. Failure to do so could expose the builder to liability if the granny flat is built under the exemption but should have gone through the building consent process.
While building granny flats is now largely permitted under the Resource Management Act also, there are still conditions. Failure to comply with these could result in prosecution. Some local council district or unitary plans may also still apply, such as rules about subdividing land, earthworks and specific infrastructure requirements.
If things turn to custard, the homeowner may also make a complaint to the LBP Board. The LBP may face disciplinary action, including paying costs, a fine and the possibility of a license suspension.
Any work done must still comply with the Building Code and without inspections the LBP is reliant on their own skills and experience to ensure that it complies. While the current homeowners may be happy to cut a few corners to keep the price down, if the property is sold the new owners may not be quite so forgiving.
None of the above will be covered by a builder’s public liability insurance, which is limited to cover for accidental property damage and won’t respond to errors in professional advice or design. Nor will it be covered by contract works insurance.
Fines imposed under the Building Act can be insured by statutory liability insurance. But breaches of the Resource Management Act cannot (although the cost of defending a prosecution will still be covered). To be covered by a statutory liability policy the breach must have been unintentional. Some insurers also include cover for defending complaints to the LBP Board (and the fines) under their statutory liability cover. There are still some standalone LBP policies available which do this too.
I’m involved in the advice, planning and design, as well as building it.
When you’re providing professional services such as design, advice and project management then professional indemnity insurance is needed. These policies can have limited scope, often just specific to design, engineering and surveying rather than also covering construction aspects such as project management and construction management. However, design & construct professional indemnity is available and would typically be the best option for builders involved in the whole process.
It’s still important to ensure that anyone providing these services has the appropriate qualifications to do so, such as an LBP Design license for the design portions. Under the Building Act a designer includes anyone who gives advice about building work, compliance with the Building Code and whether or not work requires a consent. This could include a builder who takes on the role of designer and drafts some plans for a client detailing work that will not require a building consent. In the case of an exempt granny flat however, an LBP Design license holder must be involved.
Both legally and contractually, even if you are subcontracting out some aspects of these professional services, you may still be responsible for them if they go wrong, so covering your liability for their errors is also prudent.
I’m just building it, I’m not involved in any of the design or planning.
Of course, this makes life easier, in theory. Your obligations in this case are to ensure that the granny flat is built to code, that all documentation (such as Records of Work) is completed and provided to the homeowner and Council and that you comply with your obligations under the Building Act, such as providing a written contract, memorandum and disclosure.
However, as we all know (we certainly have seen many clients experience this) just because it wasn’t your problem doesn’t mean you aren’t going to be dragged into the mess. This makes it all the more important that your paperwork is up to scratch, that you document everything and that you have the right insurance in place in case something does go wrong.
Consider using a contract management services, such as that available to members of the Building Hub, to ensure that all the i’s are dotted and t’s crossed.
It is possible that an LBP contracted to “just build” a granny flat under the exemption may become aware that the construction doesn’t meet the exemption conditions and does in fact require a consent. What is the LBP’s obligation in that situation? To raise it with the homeowner and/or designer? Or to “just do what I am told”? Unfortunately, putting your head in the sand is not going to help you when things blow up later. This is almost certainly a breach of the LBP Code of Ethics, as well as your duty of care to your clients.
As above, if you’re involved in building granny flats under the exemption, even if that’s only on the construction side, some design & construct professional indemnity cover is definitely worth considering.
A word about contract works insurance
Regardless of the approach to building it, contract works insurance will be needed during construction. This covers the cost of accidental damage or loss such as theft of materials, vandalism, fire, storm, flood or natural disaster.
As a new, standalone building it may be taken out by the builder (according to the terms of their contract), which is the common practice with full builds. However, since it is on the property of an existing home, the homeowner’s insurer may also be approached to cover it. Who arranges it should be agreed in advance between the two parties, and since it will cover both the homeowner and the builder the policy documentation should be shared with both before work starts.
Some house policies include an automatic benefit for “new building work”. However, a new self-contained dwelling would typically well exceed the limits below which this extension applies, so a separate contract works insurance policy would almost always be required.
Once practically complete the building will need to be covered by a house insurance policy.
What about for homeowners?
Homeowners must remember to add the dwelling to their existing cover, or take out new cover depending on their insurer’s policy. This includes noting its purpose, such as whether it is being used as a rental.
Homeowners must also be aware of the exemption conditions and ensure their granny flat build complies. Even once the build is completed, if it should have been built under a building consent this could cause issues when they come to sell the property. There may be additional costs for it to be certified and to remediate any problems. Worst case scenario, it may have to be demolished.
House insurers have indicated that at this stage they will not require any additional paperwork when granny flats built without a consent need to be added to a policy. They will treat the dwelling like any other, for now. However, they have highlighted that if it has not been built to code this could certainly cause issues at claim time, particularly if the claim arises from the non-compliant work. The same will more than likely apply to any natural hazard damage that had not been adequately managed as part of the build.
Another consideration with some insurers is whether the new minor dwelling can be covered under the existing insurance of the main home (to be exempt granny flats must be built on the same property as an existing main home). If the granny flat is intended to be occupied by members of the same family then adding it to the policy for the main home makes sense. However, some insurers have indicated that if it is intended to be rented out commercially this would require a separate policy.
In a Nutshell
Like any other business opportunity, taking advantage of the granny flat exemption also comes with risk. The rewards need to be balanced by mitigating the risks. Builders getting involved in this new market must know all the requirements and have a robust process for managing them. Both the current and future risks should be considered and allowed for, including having the appropriate insurance cover.
