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Developers/Declarants are Liable for Implied Warranties to Association for Construction Defects

Facts

Plaintiff, Brooktree Village Homeowners Association, Inc. (“Association”), filed suit “on behalf of itself and on behalf of its members” in May 2017 against the second developer, Brooktree Village, LLC (“Developer”).  Developer had acquired the remaining undeveloped portions of the development, other than the common areas.  “A construction company affiliated with Developer, Rivers Development, Inc. (“Builder”), completed construction of the development.  Developer sold all the newly constructed townhomes to individual homeowners.”  The Association sought damages for the cost of repairs.  The claims asserted by the Association were breach of implied warranty, negligence, and negligence per se.

The construction defects alleged were: 1) improper site grading and drainage; and 2) concrete flatwork settling and cracking, heaving and movement of concrete basement slabs.  The Association sought the cost of repairs as damages, including in the common areas which the Developer never owned.

At the conclusion of an eight-day trial, “the jury awarded $1,850,000 in damages against Developer and Builder on Association’s implied warranty and negligence claims.”  The Developer appealed.

Issue

Whether the Association had the right to assert implied warranty claims against a Developer even though the Association had not acquired the common areas from Developer, Developer never owned the common areas, and a majority of Association’s members had not purchased their townhomes from Developer?

Appeals Court

Developer and Builder claimed the trial court erred by allowing the Association to pursue implied warranty claims when … (1) Builder did not sell any of the townhomes at the development, (2) neither Developer nor Builder ever owned the common areas, and (3) fewer than half of Association’s members purchased townhomes from Developer.  The appeals court went through the legal requirements for an implied warranty claim finding that it “arises from the contractual relation between an entity that constructs and sells a newly constructed building and the purchaser … Proof of a defect due to improper construction, design, or preparation is sufficient to establish liability in the builder-vendor under an implied warranty theory.”

The court went on to find that “only persons in privity of contract with a builder or seller have implied warranties, the class of purchasers entitled to the protection of an implied warranty is limited to first purchasers.  Subsequent purchasers are not in privity with the builder or seller and, for this reason, cannot assert implied warranty claims.”  This would have seemed to have excluded the Association from filing claims, however, the court then went on to find that “the twenty-three direct purchasers bought their townhomes, which Builder constructed, directly from Developer.  Moreover, both Developer and Builder are parties to the direct purchasers’ purchase agreements.  The direct purchasers are thus in privity with, and obtained implied warranties of workmanship and habitability from, Developer and Builder.  Although Developer argued that at most it should then be liable for a percentage of the damages, the court held that “it would be unreasonable to discount the damages awardable for the construction defects in the common areas by the percentage of townhomes not owned by direct purchasers.  Such an apportionment would mean that Association could only recover damages for remediation of twenty-three fifty-seconds (approximately forty-four percent) of the construction defects in the common areas.  Repair of less than half of the construction defects in the common areas would not provide the direct purchasers … with a meaningful remedy and would allow Developer and Builder to shirk their responsibility for remediating all the construction defects in the common areas for which they are responsible.  For these reasons, a remedy resulting in repair of only a fraction of the defects in the common areas would be inadequate.…Thus, we hold that … [the] Association may recover from a successor developer or builder the entire cost of remediating construction defects in common areas where (1) the defects are attributable to the successor developer or builder; (2) two or more of the association’s members purchased their homes directly from the successor developer or builder; and (3) those members have rights to use the common areas — even if the successor developer or builder never owned the common areas.”

LESSONS:
  1. Successor Developers and builders of defective buildings and units within an association put themselves at risk for the repair of all defective construction issues.
  2. Successor Developers who accept the benefits of being a Developer also inherit the risks and liabilities left by the initial developer.

Brooktree Village Homeowners Association, Inc. v. Brooktree Village, LLC, No. 19CA1635 (Colo. Ct. App. Nov. 19, 2020)

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