Article - Content Copyright Rinke Noonan

BUILDING HOMES JUST GOT A WHOLE LOT MORE RISKY AFTER THE SUPREME COURT CHANGES THE RULES

The Supreme Court has issued a major decision on home builder liability that made a substantial change in the law. On April 1, 2004, the Supreme Court announced its decision in the case of Vlahos v. R&I Construction of Bloomington, Inc. The decision greatly expanded the time in which a builder can be sued, and held that a builder now must warrant the structural integrity of a home, not just on the day it was built, but also against any outside factors, like mold, for 10 years after construction is completed.

In the Vlahos case, R&I built a large, luxury home in 1991. The first owner, Rovicks, moved into the home and lived there until 1999. During most of that time Rovicks experienced water and moisture problems in the home.

In 1999 Vlahos signed a Purchase Agreement for the home. Closing was subject to a home inspection. The home inspection revealed roof, wall and ceiling damage caused by water seepage, leakage, corrosion and mold. Some windows also needed to be replaced. Vlahos got a $20,000.00 credit from Rovicks against the purchase price to take care of the water problems.

Vlahos closed in January 2000 and undertook a major remodeling of the home. Vlahos then discovered substantial decay of floor trusses, ceiling trusses, and other load bearing supports due to water and mold.

Vlahos immediately notified R&I and gave R&I the chance to repair the home. R&I refused to repair the home because construction had been completed for over 9 years, and R&I believed any claims were barred by two year from discovery Statute of Limitations. R&I also claimed that the load bearing portion of the home was properly built when the home was constructed.

Vlahos eventually spent over a million dollars to repair the home (it was a very expensive home), and sued.

The Supreme Court first determined that the claim was not barred by the two-year Statute of Limitations. Up until this point, just about everyone in the construction industry believed that the Statute of Limitations, or time in which a builder can be sued, was two years from the first date an owner saw the damage, such as water. This would mean that the claims were barred two years after Rovicks, the first owner, saw water damage.

The Supreme Court has now decided that the Statute of Limitations begins to run when the builder refuses, or is no longer able to correct the problem. If a homeowner never calls a builder back to repair the home, the two-year never starts (or it only starts once the builder is asked to fix the home).

Every time a builder returns to a home to correct a problem, the two-year Statute of Limitations in which the builder can be sued for that problem starts all over. Builders now have no incentive to return to anyone’s home to correct anything.

Minnesota Statutes Section 327A provides a Home Warranty for all new construction, and states that the home will be free from major structural defects for 10 years. Most people in the industry believed that if the home were properly constructed, that outside influences over the 10 year period would not violate the warranty. Outside influences include water infiltration, which could create mold and rotting.

The Supreme Court has now said that the10 year Structural Warranty includes a Warranty that the home will be free from water damage and outside influences that could harm the load bearing portions of the home. This greatly expands the Warranty. Just because a builder properly constructed the home does not mean that the builder has met the Warranty. Instead, for 10 years the builder must guarantee that load bearing portions of the home will not fail due to outside influences, often beyond the builder’s control.

What does all this mean for home builders? First, this decision, taken with the rise in mold litigation, and builder’s inability to get insurance to protect themselves from mold claims means that you have almost no defense in homeowner litigation, and your own money is at risk if you are sued. You will end up paying your own attorney fees, possibly the homeowner’s costs, and paying to fix the home. This can happen, as in the R&I case, nine years or more after the home is completed.

What are builders to do? First, we are recommending to all of our builders that they start new corporations. As soon as practical, stop doing business in any existing construction corporation because that corporation has all of the liability for homes built during the past many years. If your business was never incorporated, you have bigger problems. One solution might be to incorporate so that future homes do not risk your personal assets.

Second, all assets need to be moved out of your construction company, except for the homes you are currently building. Do not hold land, major equipment, cash or any other assets in a residential construction company.

Protecting your livelihood, your company and your assets just became a whole lot more difficult. It is beyond the scope of this article to explain all of the difficulties you might encounter, or possible solutions. Our advice is that every builder needs to get to a lawyer who understands the construction industry, and has a good understanding of corporate, limited liability company, and tax law. Continuing to do business as you have always done means that some day you very well will lose everything.

David J. Meyers is licensed to practice law in the Minnesota and Wisconsin State and Federal Courts. He is former President of BAM and currently on the CMBA Board of Directors