Implications of the Arizona Supreme Court Ruling in The Lofts at Fillmore Condominium Association v. Reliance Commercial Construction, Inc.
October 2008

The Arizona Supreme Court recently ruled in The Lofts at Fillmore Condominium Association v. Reliance Commercial Construction, Inc. that a builder of a new home, whether or not they are also the vendor of the new home, impliedly warrants “that construction has been done in a workmanlike manner and that the home is habitable” and, further, that a direct contractual relationship between a builder and homebuyer is unnecessary for a homebuyer to bring an implied warranty claim against the builder. The Court made clear that its ruling does not apply to non-residential construction. Also, the Court assumed, as the parties in the case had, that condominium conversion constituted new home construction. The applicability of this case to matters involving condominium conversion therefore is still an open question if it were able to be argued that the conversion did not rise to the level of new home construction.

A claim for implied warranty of proper workmanship and habitability turns on the notion that a “contractor impliedly warrants that the construction he undertakes which ultimately becomes realty will be performed in a good and workmanlike manner.” The policy rationale for implied warranties for new homes is that the construction process is complex, homebuyers are not in a position by skill or training to discover defects and have no opportunity to observe how the home has withstood the passage of time. Ultimately, the court wants to protect purchasers by holding builders accountable for any work they perform.

Prior to the recent Lofts ruling, Arizona law held that only a homebuyer that contracted directly with a builder could bring an implied warranty claim. The only exception to this contractual privity requirement was in the case of vendor-builders. The result was that even where a home had been sold multiple times, any homebuyer could bring a claim against the builder, but only if that builder was also the vendor of the home. Thus, even where vendors and builders were affiliated with one another, defect liability could be limited by keeping the two entities separate. Whether or not the result of sham sales or as a means of reducing liability, handling the construction and sale of homes in this way would prevent the homebuyer from bringing claims under an implied warranty theory as neither entity was a “builder-vendor.” However, the Lofts court held that liability should remain with the builder, irrespective of whether the same entity that builds the home also sells the home, expanding the privity exception to any residential builder. Now, a builder of a home faces potential liability for implied warranty claims by a homebuyer at any time within the period of the statute of repose.

The Court pointed out that even under existing Arizona law builders are directly liable to developer-vendors with whom they contract for implied warranty claims. In the past, when a developer-vendor was named as a defendant in a construction defect suit, the developer-vendor normally would seek indemnity from the builder or assign its claim to the homebuyer. However, builders now face direct liability for claims from any homebuyer as well as the developer-vendor. After the Lofts decision, it will be critical for residential builders to limit their liability for defect claims through construction contracts with developer-vendors. As the Court noted, nothing in the Lofts decision prevents a builder from allocating responsibility for damages between itself and the developer-vendor.

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