In two recent builder-friendly decisions, the First District and Supreme Court of Illinois have ruled that the standard conspicuous waiver of the implied warranty of habitability found in most builders’ sales agreements: 1) is effective even where not verbally “called-out” to or initialed by the buyer; and 2) binds both the buyer of a new home and all subsequent purchasers of the home.
For nearly 40 years, every sale contract from a builder-vendor to the first purchaser of a new house or condo in Illinois has contained an implied warranty that the house will be free from latent defects that unreasonably interfere with its intended use. Petersen v. Hubschman Construction Co., 76 Ill. 2d 31 (1979). The purchaser may waive this implied warranty of habitability if certain conditions are met. As a result, most home and condo builder-vendors use standard sales contracts that waive the implied warranty and replace it with a one-year express limited warranty.
Not surprisingly, these waivers have frequently been attacked by purchasers seeking the protection of the implied warranty. The resulting court decisions have created some uncertainty regarding both the legal requirements that must be met for a waiver to be effective and, if effective, the level of protection a waiver affords a builder-vendor. Two recent First District and Supreme Court of Illinois rulings, described below, have eliminated this uncertainty and validated the tried-and-true practice of using waivers of implied warranties of habitability.
Board of Managers of Park Point v. Park Point at Wheeling, LLC, 2015 IL App (1st) 123452 (December 31, 2015)
The First District has recently clarified the requirements for an effective waiver of an implied warranty of habitability originally laid out in Petersen. In Illinois, the waivers of the implied warranty of habitability that are ubiquitous in contracts to sell new homes and condominiums are effective if they are a conspicuous part of the contract, refer to the warranty by name, and use plain language that fully discloses the consequences of their inclusion. Petersen, 76 Ill. 2d at 43, 389 N.E.2d at 1159.
In the years following the Supreme Court’s ruling in Petersen, several Illinois appellate court decisions have at least arguably required that builder-vendors both verbally “call-out” the waiver provision to the buyer and have the buyer initial next to the waiver. See, e.g., Board of Managers of Chestnut Hills Condominium Ass'n v. Pasquinelli, Inc., 354 Ill. App. 3d 749, 822 (2004). As a result, based on Chestnut Hills, many builder-vendors have required home buyers to initial the waivers of implied warranty of habitability found in their sales agreements.
In Board of Managers of Park Point v. Park Point at Wheeling, LLC, the First District Appellate Court clarified the requirements regarding waivers holding: 1) a builder-vendor is not required to verbally call the warranty waiver to each buyer’s attention; or 2) obtain each buyer’s initials next to it. Thus, the court specifically held that the Chestnut Hills court “was not attempting to enhance the Petersen criteria” with an initials requirement.
The Park Point decision is significant in that, at least in the First District, builder-vendors relying on a waiver to cut off claims under the implied warranty of habitability need not incur the time, expense and potential difficulty of proving certain facts. For example, a builder-vendor need not prove that it verbally called out waivers to each and every purchaser in a condominium building. Nor does it have to prove that buyers actually initialed next to the waiver language. Obviously, this makes it much easier and less costly for a builder-vendor to enforce a waiver in the event that a buyer (or group of buyers) attempts to assert a claim under the implied warranty of habitability.
Fatah v. Bim, 2016 IL 119365 (May 19, 2016)
Three years after Peterson, the Supreme Court of Illinois held that where there was no waiver of the implied warranty of habitability by the first purchaser of a house and that the warranty is extended to a second purchaser of the house. Redarowicz v. Ohlendorf, 92 Ill. 2d 171 (1982). In Fatah v. Bim, the Supreme Court finally addressed a key question left unanswered by Redarowicz; whether an implied warranty of habitability waived by the first purchaser is, nonetheless, extended to a second purchaser.
This open question became particularly important when, in 2015, the First District Appellate Court held that the second purchaser of a home could assert claims under the implied warranty of habitability even where the original purchaser had validly waived the implied warranty in its purchase agreement with the builder-vendor. It reached this conclusion by holding that under Redarowicz, the implied warranty automatically extended to the second purchaser and that so long as the second purchaser did not execute a waiver of the implied warranty, it was alive and enforceable.
In Fatah, the Supreme Court reversed this decision and held that the implied warranty of habitability may not be extended to a second purchaser of a house when a valid, bargained-for waiver of the warranty has been executed between the builder-vendor and the first purchaser. The court found that it would be unreasonable for a builder to have to perform under an express warranty that replaced the implied warranty that was waived and, then, subsequently be forced to perform under the implied warranty asserted by a second purchaser.
Significantly, the Supreme Court recognized that affirming the appellate court would have the effect of eliminating the standard industry practice of the last 40 years, which is for builder-vendors to replace the implied warranty of habitability with an express warranty. Accordingly, the court’s decision can be seen as re-affirming its support for this now standard practice that it originally authorized Petersen.
James Oakley is a partner in Thompson Coburn's business litigation group whose practice focuses on construction and development.