Illinois Court Limits the Enforcement of a Waiver of the Implied Warranty of Habitability Against a Claim by a Subsequent Purchaser
Buyers and sellers of residential real property in Illinois need to be aware of a new appellate decision in Illinois that makes it harder for builders and developers to protect themselves from the extension of the Implied Warranty of Habitability to subsequent purchasers. This reduced protection applies even when builders and developers effectively disclaim the implied warranty to their original purchasers and the original purchaser sells the property “as is” to the subsequent purchaser.
The Implied Warranty of Habitability is a warranty that is implied into every contract for sale from a builder to a buyer, to the effect that the house, when completed and transferred to the buyer, will be reasonably suited for its intended use. The implied warranty only applies to latent defects that interfere with a buyer’s legitimate expectations and that manifest themselves within a reasonable amount of time after the house was purchased.
The concept of an implied warranty was first endorsed by the Illinois Supreme Court in 1979. In 1980, the implied warranty was extended to the purchasers of condominiums and then, in 1982, extended to subsequent purchasers. (“The compelling public policies underlying the implied warranty of habitability should not be frustrated because of the short intervening ownership of the first purchaser; in these circumstances the implied warranty of habitability survives a change of hands in the ownership.” Redarowicz v. Ohlendorf, 92 Ill.2d 171 (1982)) In 1983, it was again extended to allow buyers to apply the concept to subcontractors of the builder.
Builders and developers, in an effort to limit their exposure to claims, have developed contract clauses that seek to limit their exposure to implied warranties, including the Implied Warranty of Habitability. Courts have enforced such waivers as long as the waiver meets a stringent burden. The disclaimer or waiver must: (1) be conspicuous and set apart from the rest of the contract language in some way such that it is the waiver that is brought to the purchasers’ attention; (2) explain the consequences of the waiver to the purchaser; and (3) indicate that the purchasers knowingly waived their rights to pursue an action for any alleged breach of the implied warranty of habitability. If the builder or developer could show that its buyer executed such a waiver, then the court would find there is an effective waiver.
The First District Illinois Appellate Court has now clarified the application of this three-part test in Fatah v. Bim, 2015 IL App (1st) 140171. As far as the appellate court was concerned, the facts of the case are not terribly complicated. In 2007, a builder sold a newly constructed house to a buyer using a contract that contained such a waiver. Three years later, the buyer sold the house to a subsequent purchaser, who purchased the property “as is.” Nine months after the subsequent purchaser bought the house, a raised back patio supported by a retaining wall collapsed (there was no other damage other than the collapse of the back patio).
The subsequent purchaser sued the builder claiming a breach of the Implied Warranty of Habitability. After trial, the court found that the patio contained latent defects, but determined that the subsequent purchaser could not recover because the original buyer had expressly disclaimed the Implied Warranty of Habitability. Not only did the disclaimer provide that it “shall survive the closing of the sale of Purchaser of the Residence and shall be binding upon and inure to the benefit of Seller, Purchaser and their respective successors, assigns,” but the subsequent purchaser bought the house “as is.” The court emphasized that no builder or developer could predict who would buy homes from original purchasers and that subsequent buyers could protect themselves by obtaining representations in purchase contracts regarding whether original purchasers waived the Implied Warranty. The subsequent purchaser appealed.
On appeal, the subsequent purchaser argued that he was not bound by the original buyer’s waiver because he had no knowledge of it. In a recent opinion, the First District Appellate Court agreed with the subsequent purchaser. The Court found that the evidence at trial was undisputed, and that the subsequent purchaser had no knowledge of the waiver and was not a party to the waiver agreement between the builder and the original buyer. The Court stated that the builder presented no evidence that the subsequent purchaser was the original buyer’s successor and/or assign to the original real estate sales contract such that he would be bound by the waiver agreement to which he was not a party. The Court also held that the “as is” provision did not effectively disclaim the Implied Warranty or bind the subsequent purchaser to the original purchaser’s waiver.
As a result, the Court reversed the trial court’s decision and remanded the matter for further proceedings on the remaining two elements of the subsequent purchaser’s claim for a breach of the Implied Warranty of Habitability (whether the latent defects interfered with the reasonably intended use of the house, and whether the latent defects manifested themselves within a reasonable time after the house was purchased).
The Court did not provide any safe harbors for how builders and developers may protect themselves from claims for breach of the implied warranties by subsequent purchasers. We encourage clients to revisit their sale and purchase agreements with this new appellate ruling in mind. While the waiver of the Implied Warranty of Habitability can be an effective deterrent against claims from an initial purchaser, based on the ruling of this court, it may be necessary to provide creative solutions in order to make the waiver effective with respect to subsequent owners.