Implied Warranty Claims–Not Just a Seller’s Risk: Builders Beware!

One of the thorns in the side of every construction defect defense litigator is the implied warranty claim.  The “implied warranty” is a promise that Colorado law is “implied” into every contract for a sale of a new home that the home was built in a workmanlike manner and is suitable for habitation. Defense attorneys dislike the implied warranty claim because it is akin to a strict liability standard.  All that is required to provide the claim is that an aspect of construction is found to be defective — i.e., inconsistent with the building code or manufacturer’s installation instructions — regardless of whether the work was performed to the standard of care. The implied warranty claim is therefore easier to prove than a negligence claim, where a claimant must prove that a construction professional’s work fell below a standard of reasonable care. Additionally, it is not a defense to an implied warranty claim that the homeowners or the HOA are, themselves, partially liable for the defects where damage is due in part to insufficient or deferred maintenance, as it is for negligence claims. The only redeeming aspect to the implied warranty claim was that, until recently, it was believed that it could only be asserted by a first purchaser against the seller of an improvement, because the implied warranty arises out of the sale contract.

Recently, the Colorado Court of Appeals opinion in Brooktree Village Homeowners Association v. Brooktree Village, LLC, 19CA1635, decided on November 19, 2020, extended the reach of the implied warranty — though just how far remains to be seen.  Specifically, a division of the Court of Appeals held that an HOA can assert implied warranty claims on behalf of its members for defects in common areas, even where there is no direct contractual relationship between the parties to base the warranty upon.

The facts of the Brooktree case are somewhat unique.  The original developer constructed the grading and 2 of 14 planned buildings at the development before filing for bankruptcy.  After the original developer filed for bankruptcy, the common areas were conveyed to the HOA.  Several years later, Brooktree Village, LLC, the developer defendant in the Brooktree case, acquired the undeveloped areas other than the common areas, and completed the development using a builder that was a related entity. The primary construction defect allegations in the case involved site grading and drainage in the common areas and the HOA sought damages of the cost to repair the common areas. Though the facts of the case are unique, the reasoning and holding of the Brooktree opinion could, nonetheless, significantly broaden the scope of implied warranty claims.

First, the Brooktree court held that the HOA could assert implied warranty claims against the builder, even though the developer, not the builder, was the entity that sold the homes to the owners.  The decision was based, in part, upon the fact that the builder had signed the purchase agreements, had provided express warranties to the purchases, and had created the developer entity primarily to market and sell the homes. The decision could therefore be interpreted to apply only in similar factual circumstances in which the developer and builder are related entities and both sign the purchase agreements.  There is language in the Brooktree opinion that could support a broader interpretation that would apply to nearly any builder of a home. The opinion states that, even if the builder had not been a party to the purchase agreements, it constructed the townhomes and knew they would be sold to individual owners and should not be permitted to “shirk its responsibilities under implied warranties” to the homeowners.  We anticipate this language will be used in the future by plaintiff’s attorneys to support arguments that homeowners can assert implied warranty claims against builders, regardless of whether the builder was also the seller of a home.

The second holding of the Brooktree is that the HOA can assert an implied warranty claim against the builder and second developer arising from defects in the common areas, even though neither the builder nor second developer ever owned the common areas or conveyed the common areas to the HOA.  As above, the fact that there was no contract between the HOA and the builder and developer for conveyance of the common areas for the warranty to be “implied” into did not deter the Court of Appeals from finding a way to allow the HOA to pursue the claim. Rather, the Brooktreecourt found that, because the sales of the individual homes included rights to use the common areas, and the builder completed the construction of the common areas after they were conveyed to the HOA, construction defects within the common areas fell within the implied warranty to the purchasers.  This holding, as did the first, indicates a willingness on the part of the Colorado Court to bend the rules—or simply create new ones—to permit homeowners to hold developers and builders to a strict liability standard regardless of the contractual relationship between the parties.

Additionally, the court held that, because some of the homes were owned by purchasers that purchased their units directly from the second developer, the HOA could assert implied warranty claims for defects in the common areas and seek the entire amount of repair costs from the builder and second developer — as opposed to a proportion of damages representing the portion of direct purchasers — because the repair of only a portion of the common areas would not provide a meaningful remedy to the direct purchasers.

Just how broadly the implied warranty claim will now apply remains to be seen.  However, we anticipate we will see the implied warranty claim asserted in more circumstances and against more parties, particularly builders, in the future.