By: Wade Johnson
Date: September 2019
Issue: What is the liability of an owner-builder to subsequent purchasers for construction defects.
A scenario that has presented itself has been when the seller of residential real estate acted in the capacity of “owner-builder” of his home and now the buyer brings a construction defect case. Is the seller liable for construction defect claims? It depends. Tort claims for construction defects arise in three separate areas: (1) Breach of Implied Warranty; (2) Fraud; and (3) Negligence.
- Breach of Implied Warranty
The law imposes specific warranty obligations for companies in the business of building new homes for sale. Those obligations/liabilities can last up to 10 years from the date of substantial completion of the improvements. Among these is the implied warranty that the improvements have been designed and constructed in a reasonably workmanlike manner. The general rule pertaining to new construction was set out in the case of Pollard v. Saxe & Yolles Dev. Co., (1974) 12 Cal.3d 374. Referred to as the “Pollard Rule”, it was premised on the idea that purchasers of new construction usually rely upon the expertise of the builder, being without such expertise themselves and being unable to examine the finished product without disturbing it. Thus, under the “Pollard Rule” builders and sellers of “new construction” were subject to the implied warranty that such structures have been designed and built in a reasonably workmanlike manner. However, this general rule pertaining to new construction does not apply when the seller acted as owner-builder of his personal residence and is not in the business of building new homes for sale. This was clarified in Siders v. Schloo, (1987) 188 Cal.App.3d 1217, where the court identified a public policy to treat owner-builders of a personal residence differently from commercial developers of homes for sale. When applying that case, owner-builders will not be liable for breach of implied warranty. However, that does not mean that they escape liability for construction defects.
- Fraud
Unlike commercial property, California law does not allow a seller of a 1-4 unit residential property to simply sell the property “as-is” without any disclosure. Instead, California Civil Code 1102 requires all sellers of 1-4 unit residential property to complete and deliver to the buyer a Real Estate Transfer Disclosure Statement (“TDS”) on which the seller must disclose various facts concerning the condition of the property and known defects. If the seller knew of a defect and failed to disclose the defect to the buyer, the seller may be held liable for failure to disclose defects. Such claims are based upon fraud. To prove fraud, the buyer must prove that the seller knew about the defect, intentionally lied about it to the unsuspecting buyer (or failed to disclose it) and that the buyer suffered loss because of it. Defects are not limited simply to something that is broken. Page 2 of the TDS also requires the Seller to disclose if work was done without required building permits or not done according to building codes. Obtaining a building permit and having the work inspected by the government inspector, implies that the work was more likely to be constructed properly. Failure to disclose truthfully on these two issues when the defects should be known to the owner-builder could be sufficient to prove fraud.
- Negligence
But what if there are defective conditions that the Seller had built into the property they simply do not know about? There is no implied warranty and there is no fraud if they didn’t know, but can the seller still have liability? Most claims against owner-builders come down to negligence where the buyer claims that the seller owed a duty to the buyer to have acted “reasonably”. By this, the buyer generally means that the seller should have built it correctly, not defectively. In other words, they are implying warranty where it does not exist. To have “negligence”, the buyer must prove that the seller breached a duty that was owed to the buyer and that this breach caused the buyer’s damages.
The appellate cases are clear that an owner-builder does not owe a duty in negligence to a subsequent buyer for construction defects. Why? Because the owner-builder is building the home for themself, not a third party buyer. In these cases, the seller has generally lived in the home before the property was sold. Other than the duty to be truthful in completing the TDS or to truthfully answer any questions from the buyer or the agents (failure is fraud), the seller has no duty to the buyer for unknown defective conditions. One unpublished case, Bui v. 4901 Centennial Partners, LLC, (2014) WL 485915, determined that, unless the seller committed actual fraud, when the property is sold “as is” or in its “present or existing condition” the seller is relieved from liability for defects in that condition.
As these few cases have demonstrated, courts seem reluctant to hold sellers responsible for construction defect claims when they acted as owner-builder. This is in line with the general public policy of holding commercial real estate developers and builders to a higher standard to protect the public based on their superior knowledge and expertise, which is usually lacking in the average homeowner acting as owner-builder.
Despite this policy, owner-builders still often find themselves being sued by unhappy buyers for defective conditions related to the construction of the home. We have defended several sellers where buyers claim warranty, fraud, and negligence for subsequently discovered construction defects. Most such cases will eventually settle but not before all parties will have incurred substantial legal and court costs. Luckily, absent evidence of fraud, the seller’s homeowner insurance may fund their defense.
