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The Illinois Supreme Court first adopted the doctrine that newly constructed homes come with an implied warranty of habitability in 1979 in Petersen v. Hubschman Construction Co.  Three years later, the Court held that the implied warranty could pass to the second owner of the house where the first owner hadn’t made a valid and enforceable waiver of it.  That left a question open: could the second owner claim a breach of the implied warranty when the first owner had made a valid and enforceable waiver of it?  In the closing days of its May term, a unanimous Illinois Supreme Court handed the Illinois home construction industry a big win, holding in Fattah v. Bim that a first owner’s valid and enforceable waiver of the implied warranty is fully enforceable against the second owner.  Our detailed summary of the facts and underlying court decisions in Fattah is here.

Fattah began in 2007 when the defendants’ construction company built a house.  In the real estate sales contract, the first owner agreed to “knowingly, voluntarily, fully and forever” waive the implied warranty of habitability in exchange for a one year express warranty from the contractor.  Three years after the house was built, the original owner sold it to the plaintiff.  That sales contract provided that the plaintiff was buying the house “as is,” and stated that the plaintiff had been advised to seek legal advice as to the risks involved in such a purchase.

In February 2011, part of the retaining wall around the rear patio of the house gave way, and a portion of the patio collapsed.  The plaintiff sued the defendants, alleging a claim under the implied warranty of habitability.  The circuit court found for defendant following a bench trial, holding that the first owner’s waiver of the implied warranty was fully enforceable against the plaintiff, but the Appellate Court reversed.

In an opinion by Justice Burke, the Supreme Court unanimously reversed the Appellate Court.  The Court particularly noted that other courts have most frequently held that the implied warranty of habitability can extend to the second owner when doing so doesn’t alter the builder’s expectations as to its potential liabilities.  But here, the second owner wasn’t trying to recover under a claim that the first owner could have made (if he had still owned the house).  All the parties agreed that the first owner’s waiver was enforceable.  As a result, the plaintiff was attempting to significantly alter the defendant’s potential liabilities.

The Court emphasized that doing so would sweep away the financial certainty the builder thought he had acquired by substituting a one-year warranty for the implied warranty.  Since the builder has no way of knowing when the house might be sold, he must assume that potential liabilities could spring back to life at any moment.  If the Court agreed with the plaintiff, it concluded that builders would simply stop entering into agreements to waive the implied warranty.  Besides, the rule advocated by the plaintiff was subject to abuse, the Court noted.  What if a husband and wife purchased a house in the wife’s name, and the wife entered into an enforceable waiver of the implied warranty of habitability.  The wife would then be able to transfer the house to her husband’s name the next day and revive the warranty.  A second buyer is in a much stronger position according to the Court than a first buyer is to negotiate for a warranty, to inquire whether the implied warranty was waived, or to get a reduction in the price to reflect the risk of latent defects.  The Court held that under Illinois law, most second buyers could take advantage of the implied warranty of habitability because they were treated as stepping into the shoes of the first buyer.  But with that benefit came the flipside of any limitations on the first buyer’s potential recovery – here, the complete waiver of the implied warranty.

Image courtesy of Flickr by Laurent Henschen (no changes).