A 2012 expansion of Pennsylvania law seems likely to have a profound impact upon liability exposure that builders and their insurers may face if the Supreme Court of Pennsylvania affirms the 2012 decision of the Pennsylvania Superior Court in Conway v. The Cutler Group. Conversely, this change may benefit real estate professionals and their clients as they now have a means to obtain redress for failures in workmanship. Unfortunately, this change most likely will result in increased litigation and expense.
For almost 40 years, subsequent purchasers of residential property had no recourse against a builder for material latent construction defects determined to be arising out of new construction. During that time, per Pennsylvania’s Implied Warranty of Habitability (“IWH”), only the original home purchaser could succeed in an action against the builder for such defects. In a recent opinion, the Pennsylvania Superior Court materially altered that limitation. In sum, the scope of the IWH has now been extended to include subsequent purchasers and no longer is the warranty limited to the original purchaser only. Clearly the extension will open builders to potential liability that had previously not existed.
First recognized by the Pennsylvania Supreme Court in 1972, the IWH was created to protect purchasers of new homes by focusing upon the relationship between a builder and a new home purchaser. The IWH warrants that a home is constructed in a “reasonably workmanlike manner and that it is fit for the purpose intended – habitation.” The IWH effectively eliminates specific latent construction defects from the doctrine of caveat emptor (buyer beware). Also, the IWH places potential liability for latent defects upon the construction professionals. The Pennsylvania courts have found breaches of the IWH in a several different scenarios, including but not limited to: (1) defective heating systems ; (2) leaking windows ; and (3) leaky basement.
In Conway v. The Cutler Group, the Conways purchased their home from the original home three years after its completion in 2003, and subsequently experienced water infiltration into their home several years later. After determining that the water infiltration was the result of construction defects, the Conways filed suit against the builder (The Cutler Group) for breach of the home’s IWH.
In a case of first impression addressing whether the scope of Pennsylvania’s IWH extends to protect subsequent purchasers of residential home construction, the Pennsylvania Superior Court extended the IWH to subsequent purchasers such as the Conways. The Court’s holding effectively provides the Conways with the same implied warranty rights against The Cutler Group as held by the original purchasers in 2003.
In ruling that Pennsylvania’s IWH applies to subsequent purchasers, the Superior Court relied heavily upon a 1990 matter in which the Court noted that the IWH is based upon “public policy considerations.” Moreover, the Court noted that the IWH is created by operation of law and does not require privity of contract. Now, under Pennsylvania law, a plaintiff invoking a breach of the IWH may be a subsequent purchaser. However, a builder developer can lawfully disclaim liability for the IWH if the contract (i.e., the Agreement of Sale) between the builder and the original purchaser asserts a legally cognizable disclaimer. Such a disclaimer may avoid potential future litigation against the builder by either the original purchaser or a subsequent purchaser.
Furthermore, in finding that the IWH extends to subsequent purchasers, the Conway Court relied on the fact that not only a new home purchaser, but also a subsequent home purchaser, relies on the skill of the builder to construct a suitable home. Indeed, it is true that not only purchasers of new construction, but also subsequent purchasers, consider the reputation and profile of a home’s original builder. As such, regardless of how many times title to the home changes hands, the Conway Court found that the same rationale supporting the IWH applies equally to original and subsequent purchasers (i.e., that the home is free from hidden structural defects).
Further, the Conway Court found that it would be inequitable to “re-shift” the risk of a potential latent defect from the builder back to a subsequent purchaser, particularly when latent defects may not appear for numerous years, and the original owner(s) had no knowledge whatsoever of the dormant latent defect during their occupancy.
It should be cautioned that this court decision does not provide unlimited liability against the home builder, that is, the IWH is not a strict liability type standard. Specifically, any purchaser in the chain of title attempting to show a breach of the IWH still has the burden to demonstrate that the alleged defect is latent, attributable to the builder’s design or construction and materially affects the home’s habitability. Moreover, Pennsylvania’s twelve (12) year Statute of Repose applies regardless of whether a claim for a breach of the IWH is brought by the original purchaser or a subsequent purchaser. Accordingly, we suggest that builders of new construction may indeed extend a twelve (12) year IWH absent the previously referred disclaimer.
While the Conway ruling may be good news for subsequent home purchasers, the issue may not be fully resolved. On January 22, 2014, the Supreme Court of Pennsylvania heard argument regarding The Cutler Group’s appeal from the Superior Court’s 2012 holding. To date, the Supreme Court of Pennsylvania has yet to issue their decision.
The Conway decision as it stands now is clearly a benefit to subsequent purchasers who experience problems with their home due to latent construction defects. However, the Supreme Court of Pennsylvania has yet to rule upon the issue. Real estate professionals, home purchasers, builders and their respective insurers should follow Segal McCambridge Singer & Mahoney’s Warranty Blog as the SMSM Warranty Practice Group will follow the Pennsylvania Supreme Court’s review of the decision and will provide additional updates and clarification concerning the scope of Pennsylvania’s IWH.