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Builder Beware: Court Offers Protection to Homebuyers

For the better part of the past 50 years, the American dream has been to own a home.  And, while this view has slightly changed with the Country's current financial landscape, nearly three million single-family used homes are sold in the United States every year.  This dream can be costly to achieve; the purchase of a home, whether new or used, is likely to be the most significant acquisition a consumer will ever make.  While there is a reasonable and fair amount of risk in any home purchase, all too often buyers are side-swiped by serious defects, not discernable to the buyer at the time of purchase.  Traditionally, the absence of any sort of agreement or contract between the homebuilder and subsequent buyers prevented recovery for latent defects that were the fault of the homebuilder; only the original buyer could recover from the builder. 

Pennsylvania original-homebuyers have traditionally been able to rely on what's known as the Warranty of Habitability to protect them against latent defects in new-construction homes.  Essentially, the protection functions by creating an assumption that a new home was constructed to a certain level of quality, which the buyer can rely upon.  If the new construction does not meet a certain level of quality, the buyer can sue the homebuilder for damages.  Since this Warranty was an implied part of the agreement between the homebuilder and original buyer, subsequent buyers could not rely upon it. 

However, a recent ruling by the Pennsylvania Superior Court has changed this limitation.  The case, Conway v. Cutler Group, arose out of a situation where a subsequent homebuyer discovered significant and serious water damage directly related to a defect in the original home construction.  The subsequent buyer brought suit against the builder based on a breach of the Warranty of Habitability.  The trial court dismissed the suit for the previously mentioned inability of a subsequent buyer to rely on this Warranty; however, on appeal the Superior Court allowed the subsequent homebuyers claim to proceed. 

In coming to its decision, the Superior Court emphasized that a homebuyer "justifiably relies on the skill of the builder that the house will be a suitable living unit" and that a subsequent homebuyer also relies upon the builder's skill that the home will be habitable.  The Superior Court noted that before purchasing the home, the subsequent homebuyer is in no better position than the initial homebuyer to discover hidden structural defects and should be afforded the same assurances as the original homebuyer that the builder properly constructed the home.  The Superior Court stressed the fact that since many defects take years to materialize, the policy considerations behind the law should not be ignored simply because of a transfer in homeownership.           

The Court's opinion has legal logic to it, but it constitutes a significant change in the law, and has clear winners and losers.  Interestingly, from a policy perspective, the ruling should drive down the cost of purchasing a home by way of insuring against the risk of defects for subsequent homebuyers.  However, this effect will be limited by the extent to which subsequent homebuyers are aware of the previous policy and its current change. 

Homebuilders, on the other hand, are now exposed to a larger risk pool for a longer period of time.  One legal source cited concern over the fact that insurance products will not cover losses like the one raised in the Conway lawsuit because of "your work" exclusions that exclude coverage for work performed by subcontractors.  This could effectively drive up the cost of business for homebuilders because they will need to find ways to offset the increased risk of claims by subsequent homebuyers, previously thought to be nonexistent.

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