Builder Is Liable for Condominium Construction Defects

 

Pratt completed the building in March 2005, and individual owners occupied the units. The developer was involuntarily dissolved in November 2005. Afterwards, the unit owners discovered water leaks around windows, doors, ceilings and vents in their units and common areas of the building. The leaks damaged not only the physical structure of the building, but also the owners’ personal property. Water seeped into the walls, causing mold to grow throughout the building and caused owners to experience medical problems. Eventually, the association obtained a property inspector, who determined that the leaks were due to a faulty roof and other construction defects.

The association sued Pratt in December 2008, asserting negligence, breach of implied warranties of good workmanship and habitability and breach of contract under a third-party beneficiary theory. It sought damages for repairs to the building itself, common areas and individual units, as well as inspection and assessment costs for engineers and other construction experts.

Pratt filed a motion to dismiss all four counts, arguing that it could not be held liable under an implied warranty of habitability theory because the warranty only applied to “builder-vendors,” i.e., those builders who both construct a structure and are also involved in the sale of the structure. Pratt further argued that it could not be held negligent because the association sought only economic damages, and the Moorman doctrine, as articulated in Moorman Manufacturing Co. v. National Tank Co., 91 Ill.2d 69; 435 N.E.2d 443 (1982), precluded recovery of such economic damages under a tort theory. The trial court granted Pratt’s motion to dismiss on all four counts, and the association appealed.

In its appeal, the association argued that the trial court erred in dismissing the implied warranty of habitability and negligence counts of its complaint against Pratt. It maintained that the warranty applied to builders, not just to builder-vendors. Further, it argued that the sudden or dangerous occurrence exception to the Moorman doctrine applied to its negligence allegations.

The appeals court first examined whether the trial court erred by dismissing the implied warranty of habitability. It noted that the warranty, as a “creature of public policy,” was designed to protect purchasers of new homes upon discovery of latent construction defects. Historically, the rule of caveat emptor governed sales of real property, and buyers could only rely on contract law to hold builders accountable for defects in construction. The warranty of implied habitability was first applied in 1957 and has been steadily expanded since then in order to serve the underlying public policy of protecting new homeowners.

Pratt argued in its motion to dismiss that the warranty could not apply because Pratt was just a builder and not involved in the sale of the residences; therefore, the association had a cause of action only against the developer who sold the condominium units. The court found Pratt’s argument unpersuasive. The court’s review of a long line of cases concerning the warranty confirmed that the primary objective of the warranty of habitability has always been to hold builders themselves accountable for latent defects because they are in the best position to ensure that the residences are habitable and free of defects. The court quoted the Illinois Supreme Court, which stated, “[T]he basic rule governing the application of the implied warranty of habitability has been as unwavering as the aforementioned policy considerations . . . the warranty is applicable against a lessor or builder of a residential unit where latent defects thereabout interfere with the inhabitant’s reasonable expectation that the unit will be suitable for habitation.”

The court’s review of Supreme Court cases and consideration of public policy confirmed that the warranty applied to builders of residential homes, regardless of whether they were involved in the sale of the homes. The court determined that Pratt’s status as a builder, rather than a builder-vendor, did not preclude an action for breach of the implied warranty, and the trial court erred by dismissing the association’s complaint.

Next the court addressed the association’s allegation that the trial court improperly dismissed its negligence claim. In Moorman, the Supreme Court held that, “a plaintiff cannot recover for solely economic loss under the tort theories of strict liability, negligence and innocent misrepresentation.” Economic damages are “damages for inadequate value, costs of repair and replacement of defective product or consequent loss of profits—without  any claim of personal injury or damage to other property.” Because the association sought damages for repair of the building and the individual units as well as associated costs, the court had to consider the Moorman doctrine.

There are three exceptions to the doctrine:  (1) where a plaintiff sustains damage resulting from a sudden or dangerous occurrence; (2) where a plaintiff’s damages are proximately caused by a defendant’s intentional false misrepresentation and (3) where a plaintiff’s damages are proximately caused by negligent misrepresentation by a defendant guiding others in business transactions.

The association argued that thunderstorms that occurred in 2008 were a sudden and dangerous occurrence, and, consequently, the trial court improperly applied the Moorman doctrine barring its negligence claim. It further argued that the second exception was relevant because leaks in the building damaged personal property and caused residents to experience health problems.

The appeals court did not accept the association’s arguments, however, concluding that if the leaks were present before the storms and had already caused damage, the damage could not have been caused by the storms. Because the damage was not caused by the storms, it could not have been the result of a sudden or dangerous occurrence.

Alternatively, the association argued that the mold outbreak satisfied the exception because it constituted a sudden and dangerous occurrence and resulted in personal injury. The appeals court acknowledged that other courts had found that a mold outbreak could qualify as a sudden or dangerous occurrence when it manifested in a calamitous manner, forcing occupants to flee a home or risk personal injury. However, here there was no allegation in the record that residents were forced out of their homes due to the mold. Moreover, the association did not allege any injuries in its pleadings. As a result, the court held that the trial court properly dismissed the negligence count of the association’s complaint.

The court affirmed the trial court’s dismissal of the negligence count, but reversed its dismissal of the implied warranty of habitability count, remanding the case for further proceedings on that issue.