We have all heard the phrase “Buyer Beware”. A recent Illinois Appellate Court decision turns the table on residential homebuilders and those of you who build houses now “need to be aware.” Illinois has long recognized the Implied Warranty of Habitability in residential construction. The purpose of the implied warranty is to protect home buyers from latent defects and place the responsibility for the costs of repair on the builder-vendor who created the latent defect.
Over the years the implied warranty of habitability has been expanded to apply to subsequent purchasers if there is a short intervening ownership between that of the first purchaser. The warranty has also been held to apply not only to builders but developers and in some cases to subcontractors if the original builder is no longer in business. The implied warranty of habitability not only applies to new construction but also remodeling. While Illinois Courts have expanded the warranty from what was first announced, the implied warranty can be disclaimed if there is a knowing disclaimer that is conspicuous, fully discloses its consequences and clearly sets forth that the disclaimer is the agreement of the parties.
The Illinois Appellate Court, First District, recently extended the implied warranty of habitability to a subsequent purchaser who bought the house three years after it was first built; the defect didn’t arise until a year after the second sale which means four years after construction; the subsequent purchaser bought the house as is and what’s even more disturbing is that in the initial sale there was a disclaimer of the implied warranty that met all the criteria for a valid waiver.
The Appellate Court ruled that since the implied warranty of habitability does not depend upon privity of contract and since the second purchaser did not have notice that the implied warranty had been waived, the subsequent purchaser could bring a claim against the builder for breach of the implied warranty. In my opinion this decision makes residential home builders virtually guarantors of the house. The only salvation in the Court’s decision is that it held the subsequent purchaser still has to prove that there are in fact latent defects in the house; those defects interfere with the reasonably intended use of the house; and that the latent defects arose within a reasonable time after the house was purchased. The case was sent back to the trial court for determination of these issues. It remains to be seen if a reasonable time means from initial construction or after the second purchaser buys the residence.
Almost all residential builders include a disclaimer of the implied warranty of habitability in their contracts. However, this decision means that is no longer protection against the claim of a second purchaser. How can a builder protect itself? I suggest if you are building on your own lot you have the waiver of the implied warranty on a separate document and record it. If you’re building on your customer’s property include in the contract a provision that gives you the right to record the disclaimer of the implied warranty of habitability. If this is done at least an argument can be made that the subsequent purchaser had constructive notice that the implied warranty was waived. If you would like assistance in preparing such a document contact me.