Anastas Shkurti | Robbins DiMonte
Anyone who purchases a newly built or improved home should be aware of a recent Illinois Appellate Court decision on a dispute over more than $1 million in alleged damages between a condominium association in downtown Chicago with 260 units against the general contractor and the plumbing subcontractor who performed the work.
In 1400 Museum Park Condominium Assn by Its Board of Managers v. Kenny Construction Co., 2021 IL App (1st) 192167, the Appellate Court found that the individual unit purchasers were not in privity of contract with the general contractor and with the subcontractor. A result, the Association could not pursue a claim for breach of implied warranty of habitability against either of them. The implied warranty of habitability is a judicial doctrine designed to protect purchasers of new homes upon discovery of latent defects in their homes caused during the construction. Privity is a legal term of art and means a relation between two parties that is recognized by law. In this case, like in many other significant projects, the developer served as the middle party who, on one hand, developed the real estate and sold each unit to the individual buyers, and on the other, hired the general contractor and the subcontractor to do the work. After all units were sold, the developer became insolvent and dissolved. Based on the facts of the case, the unit owners could not establish a privity of contract with the GC and as a result, the Association could not hold the GC liable for the cost to repair their plumbing defects and to litigate the case.
The 1400 Museum Park opinion marks another significant step on the path to limit consumer protections based on the implied warranty of habitability. This process took shape with the Illinois Supreme Court decision in Sienna Court Condominium Assn v. Champion Aluminum Corp., 2018 IL 122022, 129 N.E.3d 1112, 432 Ill. Dec. 569. RD Attorney Riccardo A. Di Monte discussed in detail the Sienna Court decision and its ramifications in our Spring 2019 Newsletter issue. In Sienna Court¸ a 111-unit association spent significant amounts to repair damage caused by water infiltration. In that case, both the developer and the general contractor had become insolvent, and the association sued the subcontractor directly. The association did so based on the breach of implied warranty of habitability because the unit owners did not have a contract with the subcontractor.
The legal reasoning behind both opinions in the Sienna Court and 1400 Museum Park decision is that the loss recoverable under the implied warranty of habitability is for disappointed commercial expectation (or, pure economic loss). Hence, a claim for breach of implied warranty of habitability is a “creature of contract, not tort”. One needs to be in privity of contract with another before invoking the implied warranty of habitability. Therefore, the buyer of a newly built home may not pursue such a claim against any party involved in the building process unless the buyer has a contractual relationship with that party.
The reasoning behind Sienna Court and 1400 Museum Park seems to shift the burden on the individual buyers to raise to equal footing with the professional developers, general contractors, and subcontractors during the contract negotiation phase. As legal options become more limited, each prospective buyer should focus early on establishing contractual privity with all parties that will build the home. Contractual claims against builders, general contractors, and subcontractors are valuable because they may present a direct path to their commercial general liability insurance carrier. On the other hand, tort claims, such as negligence, are not covered by such insurance policies.
Prospective buyers and owners of new homes have several tools at their disposal. Being proactive early in the process has significant benefits. Each owner should consult with a real estate or construction attorney early in the process about how to leverage and convert buying power into contractual privity. One such method is to for the owner to request to be named as an “additional insured” on the insurance policies of anyone who participates in the building process. Another method is to request assignment and transfer of all applicable warranties from the developer, the general contractor, and the subcontractor. Also, the frustrated homeowners and condominium associations could and should still pursue judgments against insolvent builders and developers. By stepping into the shoes of the defunct builder/seller, the owners and the associations could have post-judgment remedies against general contractors and subcontractors.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.