Court of Appeal decision: what happens when builders go bankrupt and leave homes unfinished?

In a recent case, the New Zealand Court of Appeal in Francis v Gross made an important decision about what happens when buyers of unfinished homes – called “pods” or “tiny homes” – are left out of pocket after the company building them goes bankrupt. The case involved a company called Podular Housing Systems Limited, which went into liquidation, leaving buyers unsure about their rights to get back the money they had already paid for homes that were still being built.

The Case: What Was the Problem?

When Podular Housing Systems went bankrupt, many buyers had already paid multiple instalments for a pod but hadn’t received a finished product. Podular assembled these pods in their own yard and transported them to the purchasers’ site after completion of the build; an increasingly popular prefabricated house model in today’s market. The key question the Court had to answer was whether these buyers could claim a special right to the unfinished pods – something called an “equitable lien” – to protect the money they had paid. An equitable lien would have meant that buyers could have claimed possession of the unfinished pod to recover their payments.

But the Court of Appeal decided not to give buyers this special right. This overturned an earlier ruling from the High Court.

What does this mean for buyers?

Because the Court didn’t recognise the equitable lien, the buyers who had paid various amounts for the unfinished pods were left in a tough position. They were treated as “unsecured creditors” – meaning they were at the back of the line when it came to claiming any of Podular’s remaining assets. Other creditors such as employees with unpaid wages, Inland Revenue, and formally recognised secured creditors would get paid first. So, these buyers could end up losing the money they had already paid for their homes.

A possible solution: protecting yourself with a “PMSI”

While the Court didn’t offer buyers an easy solution, the case did highlight an important lesson: buyers can protect themselves by making sure they negotiate strong contracts before paying for a modular home.

One buyer in the case had a specific agreement that gave that purchaser a “Purchase Money Security Interest” (PMSI). This is a type of legal protection that gives a buyer a stronger claim over the property they’ve paid for, even if the builder goes bankrupt. Thanks to this PMSI, the buyer was able to take possession of their unfinished pod.

Key takeaways for buyers: proactive steps for security

The Court of Appeal’s ruling emphasises that buyers must take proactive steps to protect their interests. In an environment where insolvency can jeopardise financial interests, thorough contractual provisions are essential to prevent disputes and ensure clarity in rights and obligations.

Our Corporate and Commercial team can help you include these protections in your contracts to safeguard your investment in unfinished properties.