March 29, 2016

I know there is not much residential development occurring these days. However, this segment of the construction industry will come back (HOPEFULLY). There have been some recent developments with the legal concept of the Implied Warranty of Habitability that those of you who do residential work or are developers need to know since it can affect your exposure to liability.

Two decisions have been rendered by the Illinois Appellate Court First District arising out of one condominium development that expand the Implied Warranty of Habitability and affect a disclaimer of the warranty.

Every sale contract for the construction and conveyance of a single family residence including condominiums includes the implied warranty of habitability. This warranty is well known to builders-vendors or in other words contractors who build and sell houses. The core principle of the implied warranty of habitability is to protect purchasers of residences and hold builders accountable for latent defects in the residences they construct. However, what if your not the seller of the residence but a general contractor who builds for the developer of a project? In the first Appellate Court decision that arose out of this condominium development this issue was addressed.

After the project was completed, the developer of an eight unit condominium went out of business. The developer didn’t do the construction work but hired a general contractor. Serious defects arose and the homeowners association sued the general contractor and several of the subcontractors. The general contractor brought a motion to dismiss and argued that there was no liability since the general was not the seller of the residences and the implied warranty of habitability did not apply since the general was not the builder-vendor. The Trial Court agreed and dismissed the case. The Appellate Court reversed and ruled that although prior cases referred to builder-vendors it would defeat the policy goal of the implied warranty of habitability to hold builders accountable for latent defects to limit the warranty’s application to builders who are also vendors. What this decision means is that if you are a general contractor and enter a contract with a developer for construction of a residential project you and your subcontractors are going to be subject to liability under the implied warranty of habitability. This is so even though you have no connection with the buyers contracts.

The implied warranty of habitability can be disclaimed in the contract of sale. If the disclaimer language is specific, conspicuous and fully discloses the consequences of its inclusion and truly reflects the agreement between the parties, it will be upheld. In this condominium project the developer’s contracts with the purchasers had language disclaiming the implied warranty of habitability. When the case was returned to the trial court, the general contractor and one of the subs made another motion to dismiss, this time based on the disclaimer in the sale contracts. The general contractor argued that since the implied warranty was waived as to the developer it was also waived as to the general and its subcontractors. The Trial Court agreed and dismissed the case again. The condominium association appealed again and the Appellate Court reversed again. The Appellate Court referred to a prior Illinois Supreme Court decision that held the burden to establish a knowing waiver of the implied warranty is on the builder and that disclaimer language will be strictly construed against the builder. Remember as noted above, the language of a disclaimer has to be not only conspicuous and fully disclose the consequences of its inclusion it also has to be specific. The Appellate Court held that while the disclaimer clearly mentioned the developer it said nothing about the general contractor or its subcontractors. In determining the disclaimer was not applicable the Appellate Court noted there was nothing in the sale contracts to indicate that the individual unit owners agreed to disclaim the warranty as to the general contractor or its subs or that they were aware of the possible consequences of disclaiming the warranty as to them.

These two Appellate Court decisions have definite consequences for those of you engaged in residential construction. If you’re a general contractor working for a developer you had better make sure the developer’s disclaimer of the implied warranty of habitability includes you and your subcontractors. If you’re a sub you should also check the developer’s disclaimer language. If you’re not included then you need to make sure your contract with the developer or your contract with the general has indemnity language to protect you if a lawsuit on the implied warranty of habitability is filed. If you don’t protect yourself you may find yourself on the wrong end of an implied warranty of habitability claim that could be avoided. If you need assistance drafting appropriate language to protect yourself give me a call.