Consider, you go to a new car dealer, buy a vehicle and when you leave the lot it loses all four wheels and goes on fire. Gone. Incinerated. Most likely, you will hold the local dealer where you purchased the car for damages, but you may also seek amends from the automobile manufacturer as well.

An August 19, 2008 unanimous decision by the Supreme Court of Arizona may open homebuilders to similar claims made by real estate buyers. The Court's opinion will allow consumers to sue homebuilders statewide for breach of the implied warranty of workmanship and habitability even if the work was not purchased directly, or conducted by, the developer as the vendor.

"Innocent buyers of defectively constructed homes should not be denied redress on the implied warranty simply because of the form of the business deal chosen by the builder and vendor," wrote Justice Andrew Hurwitz and agreed to by all four of his peers on the Court: Ruth V. McGregor, Chief Justice, Rebecca White Berch, Vice Chief Justice, Michael D. Ryan, Justice, and W. Scott Bales, Justice.

The Supreme Court overturned rulings made in a 2007 Court of Appeals case involving The Lofts at Fillmore Condominium Association (the Association) and Reliance Commercial Construction. In the Court of Appeals, the Association argued that Reliance Commerce Construction should be held liable for alleged defects in the conversion of a commercial building into residences despite the buyers only having a relationship with The Lofts at Fillmore LLC (the Developers) of the condos.

The State Supreme Court disagreed with the Court of Appeals' findings stating that no legal precedent or rules or regulations adopted by the State legislature gave the Association the ability to sue the builder without having a direct business relationship. "In today's marketplace, as this case illustrates, there has been some shift from the traditional builder-vendor model to arrangements under which a construction entity builds the homes and a sales entity markets them to the public. In some cases, the builder may be related to the vendor; in other cases, the vendor and the builder may be unrelated. But whatever the commercial utility of such contractual arrangements, they should not affect the homebuyer's ability to enforce the implied warranty against the builder," Justice Hurwitz wrote. "Reliance argues that failure to require privity in implied warranty actions will expose residential homebuilders to expanded liability and disrupt an important sector of the Arizona economy. But homebuilders who do not sell directly to the public already are liable for defective construction. As noted above, builders have long been directly liable to those with whom they contract for breach of the implied warranty of good workmanship. Therefore, a developer-vendor sued for defective construction will typically seek indemnity from the builder; such a defendant may also choose to assign his claim against the builder to the plaintiff."

The Court concluded its opinion by stating that "We recognize that if the developer-vendor is financially unable to satisfy a judgment for breach of the implied warranty, the builder may be left with the entire monetary responsibility, notwithstanding any allocation agreements. But under such circumstances, the costs of remedying defective construction most appropriately fall on the builder, rather than on innocent end users."

Only time will tell if further action will be taken. Suffice it to say that builders across the country should examine this case and make themselves aware of the possible ramifications.

Published: August 27, 2008

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.