Changing Landscape in Residential Construction Defect Cases

Jennifer M. Horn | The Legal Intelligencer | August 22, 2017

It is no secret that building envelope construction defects are prominent throughout our region. This issue affects thousands of properties and multiple builders. These defects are truly latent, with no visual cues or outward manifestation of water infiltration. Homeowners often discover the defect when they see scaffolding at their neighbor’s home and wonder if their home is similarly impacted. When invasive tests are finally performed, they often reveal a costly problem that in most cases requires removal and replacement of the entire building envelope, microbial growth remediation, window and door replacement as well as interior work. Real estate transactional practitioners and construction attorneys are left to navigate scopes of repair and sort through the shifting causes of action on behalf of the builders, subcontractors and the homeowners who are impacted.

Practitioners should be mindful of recent changes in the law affecting subsequent purchasers and spoliation. For those who purchased property from someone other than the builder (a subsequent purchaser), the landscape has improved, forcing contractors and builders to reassess the number and types of potential claims leveled against them. From the spoliation perspective, all parties must be especially mindful of new pitfalls relating to mere photographic evidence. Lastly, when considering whether to have an invasive moisture test performed, the Seller’s Disclosure Law must be considered, along with timing concerns.

For builders and subcontractors, Conway v. Cutler, a case that eliminated the cause of action for breach of implied warranty of habitability for subsequent purchaser homeowners, served to curtail the number of available potential claims. Under Conway, subsequent purchaser families who had otherwise timely and viable claims, faced serious challenges and were discouraged from pursuing recovery because they lacked privity with the builder.

A Seat at the Table for Subsequent Purchasers

However, this landscape changed in August 2016 when the Superior Court in Adams v. Hellings Builders, held that fraud and claims under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) may be successfully asserted by third parties (including subsequent purchaser homeowners) against contractors who made misrepresentations to the original purchasers. According to Hellings, the absence of technical privity is not a bar to recovery when reliance is specifically foreseeable and damage proximately results. In this regard, courts have specifically determined that the existence of a third-party purchaser of property is foreseeable. The Hellings court held that when fraud creates or conceals a latent building envelope defect, transfer of the defective chattel or realty to a third party does not absolve the builder from liability for damages caused by the fraud. Instead, the focus turns to whether reliance on alleged misrepresentations such as, general advertisements, branded marketing materials, statements on a website, or statements in the original agreement of sale, were specifically foreseeable.

With the decision in Hellings, technical privity is specifically not required to assert a cause of action for fraud or a violation of the UTPCPL. Subsequent purchaser homeowners have a renewed pathway for claims and many regional contractors are reassessing the number of potential claims. Previously denied claims may now be viable in light of this change in the law. Practitioners should revisit timing concerns for all subsequent purchaser clients. For contractors and builders, Hellings is sure to increase the number and type of claims at issue.

Spoliation: Use caution when remediating

The doctrine of spoliation features prominently in many of these matters because the parties frequently mitigate their damages through repair and remediation. The recent case of Kinder v. Heritage Lower Salford, although nonprecedential, provides a cautionary and important roadmap for all construction practitioners and parties. In Kinder, the homeowners remediated their defective stucco during the litigation, taking photographs of the work, but not notifying the defendants of the repairs. No experts observed the remediation work and the plaintiffs’ own expert was unable to prepare a report based on the photographic evidence gathered in this case. In granting a motion in limine, the court barred evidence at trial and determined that the Plaintiffs were at fault for destroying the evidence at issue. As a result, the defendants were unable to conduct a physical inspection or otherwise identify the cause/source of the subject water infiltration and present a defense. Consequently, the Kinders’ claim was barred.

Practitioners should be cognizant of the fast pace of remediation and give reasonable notice to all parties and experts. Physical evidence of the underlying construction defect and damaged property should always be preserved to insulate against spoliation claims, which, as Kinder advises, can be fatal.

Building Envelope Defects and the Changing Real Estate Landscape

Building envelope defects have had a tremendous impact on the real estate market and the pace and manner of sales. It has become widely known that building envelope defects are not limited to stucco homes. Homes with brick, cultured stone and fiber cement siding can also have building envelope defects. This is where construction law intersects with the real estate practice and, importantly, Sellers’ Disclosure Law. Homeowners weigh the benefits and risks of having an invasive moisture penetration test performed on their home. The results of these tests must be disclosed with any sale. Such a test is necessary evidence to reveal the defect. However, if a potential claim is untimely, homeowners may not want to know whether they have a building envelope defect. Pitfalls await as more and more real estate agents are recommending that their buyers perform invasive moisture tests along with routine home inspections prior to purchasing a home. Real estate agents, homebuyers and sellers should be aware that claims against sellers for failure to disclose building envelope defects are on the rise.

The issues surrounding building envelope defects are multilayered and very complex. We find that homebuyers and builders receive a lot of bad information from multiple sources. In our office, we often hear from homeowners who believe they are “out of time” because their home is over 12 years old. However, often because of the facts of their specific case, this is not true. Builders believing they are immune to claims from subsequent purchaser homeowners must also reevaluate in light of Hellings, which directly refutes this position. Practitioners advising homebuilders and homeowners should be cautious as the legal landscape continues to shift.

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