By Adam Whiteman, Commercial Collection Attorney
The implied warranty of habitability is a creature of the law. It was literally an innovation of judges created to protect homeowners/buyers from unscrupulous builders. Initially, it was intended to apply directly between the builder and the homeowner who hired that builder. However, courts expanded this right to allow subsequent purchasers of the home to sue the builder for construction defects even though the new homeowner was not the one who directly contracted with the builder. Courts then determined that this implied warranty could be waived by the original homeowner and that this waiver would apply to the new homeowner. However, if the implied warranty is not waived, then builders leave themselves at risk from being sued by persons they never contracted with, and new homeowners may find they have rights that they never anticipated.
Implied Warranty of Habitability
In Petersen v. Hubschman Const. Co., Inc., 76 III.2d 31, 389 N.E.2d 1154 (III. 1979), the plaintiff sough to rescind a contract to purchase a newly constructed home from a builder on the ground that the structure was rife with defects. Among other claims, the plaintiffs alleged the breach of an implied warranty of habitability. The Illinois Supreme Court explained as follows about the history of the implied warranty of habitability:
The implied warranty of habitability in cases involving the sale of new homes by a builder-vendor is a judicial innovation of rather recent origin used to avoid the harshness of Caveat emptor and the doctrine of merger and to afford a degree of relief to vendees of new homes who subsequently discover latent defects in the structure. This represents a distinct departure from accepted principles of real estate law that were based on reasons founded in antiquity. The vendee took the property at his risk. If he failed to discover defects, Caveat emptor prevented him from maintaining an action against the vendor. The principle of merger produced the same result. All agreements between a
vendee and the vendor were said to have merged in the deed, and if reservations were not contained in that instrument the doctrine of merger would prevent relief to the aggrieved vendee after receipt of the deed.
Peterson, 389 N.E.2d at 1 157. The Peterson court then explained:
The nature of the construction methods is such that a vendee has little or no opportunity to inspect. The vendee is making a major investment, in many instances the largest single investment of his life. He is usually not knowledgeable in construction practices and, to a substantial degree, must rely upon the integrity and the skill of the builder-vendor, who is in the business of building and selling houses.
Peterson, 389 N.E.2d at 1 158. The court then held that:
[I]mpIied in the contract for sale from the builder-vendor to the vendees is a warranty that the house, when completed and conveyed to the vendees, would be reasonably suited for its intended use. This implied warranty, of course, extends only to latent defects which interfere with this legitimate expectation. Peterson, 389 N.E.2d at 1 1 59.
Thus, according to Peterson, the duty to convey a home free of latent defects affecting its intended use is a duty that is implied in the contract for sale form the builder-vendor to the original homeowner.
Extension of Implied Warranty Beyond Original Purchaser
In J 982, the Illinois Supreme Court determined that the implied warranty of habitability which runs from a contractor or developer to a homeowner shall also run to subsequent owners of said home. Redarowicz v. Ohlendorf, 441 N.E.2d 324, 92 III.2d 171 (1982). This may have taken contractors by surprise because now the law would require them to honor an implied warranty for a homeowner with whom the contractor never had a contract.
In Pedarowicz, a builder sold a home to an owner who in turn sold that home to a second owner. The chimney and an adjoining brick wall then began to pull away from the rest of the home. The second owner sued the builder asserting, in part, a breach of the implied warranty of habitability.
Our holding today in extending the implied warranty of habitability from builder-vendors to subsequent purchasers is limited to latent defects which manifest themselves within a reasonable time after the purchase of the house. The subsequent purchaser should not be denied the protection of the warranty of habitability because he happened to purchase the home about one year after the original buyer. We are an increasingly mobile people; a builder-vendor should know that a house he builds might be resold within a relatively short period of time and should not expect that the warranty will be limited by the number of days that the original owner chooses to hold onto the property. The purpose of the warranty is to protect purchasers’ expectations by holding builder-vendors accountable; we do not believe it is logical to arbitrarily limit that protection to the first purchaser of a new house.
Pedarowicz, 441 N.E.2d at 331.
Thus, the Redarowicz case illustrates that the implied warranty of habitability can extend to subsequent owners of a property even though there is no privity of contract as between that subsequent owner and the contractor that performed the work. There is no currently stated judicial limit on how many subsequent owners benefit from the implied warranty.
Implied Warranty May Be Waived
In Fattah v. Bim, 52 N.E.3d 332, 402 III. Dec. 41 1 (III. 2016), the Illinois Supreme Court held that “the implied warranty of habitability may not be extended to a second purchaser of a house when a valid, bargained-for waiver of the warranty
has been executed between the builder-vendor and the first purchaser.” Fattah, 52 N.E.3d at 339.
Citing Peterson, the Fattah court stressed that “that the implied warranty of habitability is based in the contract of sale and arises “by virtue of the execution of the agreement between the vendor and the vendee.” Fattah, 52 N.E.3d at 335-336. According to the court, the warranty is “an implied covenant by the builder-vendor that the house which he contracts to build and to convey to the vendee is reasonably suited for its intended use.” Id at 336.
The Fattah court explained that:
Finally, it is important to again note that, under Illinois law, a second purchaser of a house may receive the benefit of an implied warranty of habitability that arises out of a sales contract between the first purchaser and the builder- vendor—a contract to which the second purchaser was not a party—because he is merely stepping into the shoes of the first purchaser. Along with that benefit, however, necessarily comes the flip side of the coin: if there is valid, bargained-for waiver by the first purchaser, the implied warranty cannot fairly be extended to the second purchaser. Fattah, 52 N.E.3d at 339.
Discussion
The cases above show that the courts view the implied warranty of habitability as a form of contract. It is not a tort which seeks to compensate for unexpected injuries. Rather, it is more in line with a theory that seeks to provide the buyer with the benefit of its bargain.
In Peterson, the court noted that the warranty is “…implied in the contract for sale…. ” In Fattah, the court explained that it “arises out of sales contract.” The Pedarowicz court explains, “Purchasers of dwellings that proved to be defective looked for a breach of contract based upon the failure of the builder to do the job in a workmanlike manner.” Pedarowicz, 441 N.E. at 328.
Privity of contract is not required, however, and subsequent purchasers are viewed like third party beneficiaries of the original contract.
Notice that the court in Redarowicz indicates that the implied warranty referenced above applies to those “latent defects which manifest themselves within a reasonable time after the purchase of the house.” The question of what is a “reasonable time” is as yet unresolved. In Pedarowicz, the court noted that the second purchaser had made the purchase about one year after the original buyer. See also Park v. Sohn, 89 III.2d 453(1982) (implied warranty of habitability recognized even though the builder had lived in the home for approximately two years before the sale of the home that he constructed and buyer did not discover the defects for over a year after the sale).
This raises the question of how long of a time can pass before a claim for an implied warranty will be barred. As a question of contract law, the statute of limitations could possibly be ten years. Since we are talking about “latent defects”which are not known, there could be a claim that the discovery rule extends the warranty even longer if it appears that efforts were made to hide the defect.
From the contractor’s perspective, efforts should be made to draft a document that is signed by the buyer of new construction or an addition whereby all warranties implied under the law are expressly waived. This would include the implied warranty of merchantability, the implied warranty of habitability, and the implied warranty of fitness for a particular purpose, along with a catchall phrase waiving any other warranties implied under the law. In return, the contractor should offer an express limited warranty which specifically identifies what it covers and the duration it will last.
The contractor should hold on to this signed waiver for a very long time. As explained above, subsequent purchasers may come after the contractor for latent defects. The contractor needs documentation showing that the implied warranty for those latent defects was waived by the original purchaser of the contracting services. The argument would be that original purchasers can only sell what they actually possess and so they cannot transfer an implied warranty they themselves do not possess.
In Fattah, the second owner of the property purchased the property “as is,” and the seller made no warranties as to the condition of the property. Thus, the second purchase in Fattah was put on notice that the home came with no warranties. But what happens in a case where the second purchaser had no notice that implied warranties had been waived? This is a fact scenario the courts have yet to address.
One possible solution would be for the contractor to obtain permission from the original purchaser to record the warranty and waiver so that subsequent purchasers have notice of it. However, overly aggressive posturing by the contractor in this regard might not be the best course for inspiring confidence in the construction services being offered.
Another possible solution would be for the contractor to insert a clause in the construction contract which places a duty on the original owner to notify any subsequent owners of the existence of the waiver and terms that require the original owner to indemnify the contractor for any and all damages and costs of defense arising out of a failure to comply with this duty. Again, however, this duty is only enforceable if the contract itself has been preserved as proof. If the contractor is building a home for the owner and conveying the property, perhaps the waiver of implied warranties could be placed on the deed which is being recorded.
From the home buyer’s perspective, it is important to review the terms of any waivers carefully. When selling, original owners should inform their purchasers about any warranty waivers in place. Failure to do so might subject them to claims from a subsequent purchaser of possible fraud or misrepresentation if there was a knowing failure to inform a buyer that the home being sold was not covered by warranties that are otherwise normally applied under the law. If you are a subsequent purchaser of a home that proves to have defects, be aware that you might have a claim against the original builder even though you did not contract with the original builder.
Adam Whiteman maintains a law practice in Chicago Illinois which concentrates on real estate law, commercial collections, and civil litigation and transactions. He can be reached at [email protected].