Liability Arising Out of the Sale of Residential New Construction

You close or hit the bricks...Get out there - you got the prospects
coming in. You think they came in to get out of the rain? A guy
don't walk on the lot lest he wants to buy. They're sitting out there
waiting to give you their money. Are you gonna take it? Are you
man enough to take it?

-Glengarry Glen Ross

"Close!" No other area of law can be better defined by one word.

Whether reading The Art of the Deal, watching Glengarry Glen Ross or reviewing an agreement of sale prior to purchasing a first new home, an attorney begins then only to glimpse the gravity for all involved in the transfer of real estate. Only at the "closing" can the transaction be legally consummated and the proceeds disbursed: to the realtor, seller, lender, mortgage broker, and title agency. So final and serious is the residential closing that many states (other then Pennsylvania) require the presence of counsel.

Add to this volatility a highly sophisticated builder whose construction loan requires its monthly high-interest feeding and whose dozens (if not hundreds) of contractors require their weekly (cash) pay, and the incentive to close can be enormous.

Who can blame the builder recommended realtor who neglects to disclose a conflict of interest, a realtor recommended home inspector who overlooks a grading issue or the builder who fails to disclose a known defect (all to often irreparable detriment of the newly leverage homeowner)?

It is precisely this relationship between the knowing sophisticates and the vulnerable consumer that the law contemplates.

  • I. Real Estate Sellers Disclosure Law ("RESDL"): 68 Pa.C.S. § 7301, et. seq.

Upon knowledge and belief, A RESDL compliant seller must disclose all
known material defects in written form ("Seller's Disclosure"). In new construction, RESDL does not apply when: (1) buyer has received at least a one (1) year written warranty ("builder's warranty"); (2) the dwelling has been inspected for compliance with the applicable building code; and (3) a certificate of occupancy/code compliance has been issued.

A seller must not only be honest, but also cannot be intentionally misleading or deceptive arguably even if literally accurate (i.e., a representation akin to the legendary sun-glassed deponent who answers "yes" to the question "were you wearing glasses" could form the basis for RESDL liability, even if ordinarily shielded due that testimony's literal accuracy). Whether willful or negligent, a violator will be liable for actual if not punitive damages.

  • II. Unfair Trade Practices and Consumer Protection Law ("UTPCPL"): 73 P.S. §201

Under UTPCPL (or Consumer Fraud Act in New Jersey), the requisite unfair or deceptive
acts or practices ("UDAP") generally involves conduct "which creates a likelihood of confusion or...misunderstanding." Where RESDL involves pre-closing misconduct (and a violation of RESDL should be argued as a per se violation of UTCPCL), UTPCPL encompasses broader representations other then those in the Seller's Disclosure. For example, a builder could be shielded from liability under RESDL merely by giving a warranty. However, a then intent not to perform (i.e., walking away from the job despite unfulfilled "punch-lists") would create liability under UTPCPL. While RESDL primarily surrounds the builder-seller and consumer-buyer, violations of UTPCPL should be averred against all involved-which may or may not include the builder (i.e., a realtor who misrepresents the ability to build a fence when the homeowners association by-laws and declarations are clearly preclusive).

Unlike traditional common law causes of action and RESDL which have two (2) year statutes of limitations, UTPCPL has a six (6) year limitations period, provides for actual and treble damages as well as attorneys fees and costs, and nominal damages even if no harm is alleged. By its express language, UTPCPL can also spawn criminal liability.

  • III. Fraud

To prove fraud, plaintiff must demonstrate by clear and convincing evidence an
intentional knowing or reckless material misrepresentation which justifiable reliance causally resulted in injury. Traditionally, the misrepresentation is defended as parol to an agreement of sale which contains an Integration (i.e., this agreement contains all of the representations of the parties...) and Release (exculpation) clauses and thus, inadmissible.

Paradoxically, parol evidence is often introduced to show acquiescence to these clauses was induced by fraud, which if proven then allows parol evidence to lay a foundation for a fraud cause of action. In other words, in order to civilly prosecute common law fraud arising out of a traditional agreement of sale between a residential builder and consumer buyer, the buyer must both prove the agreement of sale and the ultimate injury both arose by fraud. Similar to UTCPL, all parties to the fraud can be held liable.

  • IV. Professional Negligence

Prior to Bilt Rite Contractors, Inc v. The Architectural Studio, professional negligence arising out of new construction centered around the builder-seller, but also occasionally included the realtor and home inspector. Commonly, a latent structural defect creates traditional tort-negligence liability for the builder of that structure. However, the Realtor may also be held professionally liable, typically for a conflict of interest in the realtor's non-disclosure of dual agency (representing the seller and buyer) resulting in the buyer over-paying.

The home inspector's liability for failing to alert the buyer of the builder's defects is restrictively governed by the Home Inspection Law. 68 Pa.C.S.A. §7501. Prior to filing suit, the plaintiff's attorney should be forewarned that: (1) generally, home inspectors can only be held liable for failure to warn of material non-latent defects; (2) home inspection contracts often contain consumer unfriendly arbitration clause (more so then in agreements of sale as the arbitration is often required to be held before like home inspectors within the defendant-home inspector's geographic community) and restrictions on damages (often limited to two (2) or three (3) times the relatively minimal amount paid for the inspection), which clauses should be argued as fraudulently induced contracts of adhesion; and (3) the statute of limitations is one (1) year after the date the report is delivered, which should be argued as extended by the discovery rule. While an easy target, the home inspector defendant can unnecessarily complicate an otherwise clear liability action against the builder or its agents.

In Bilt Rite, the Pennsylvania Supreme Court held that a general contractor was not barred by the economic loss doctrine (limiting recovery to contract damages for parties in privity) in a suit against an architect for tortious negligent misrepresentations surrounding the design of a new school's septic system. By extension, Bilt Rite allows the new residential homebuyer tort remedies arising from the negligence of those in the business of supplying professional information to the often non-viable (uninsured, bankrupt or vanished) builder. Now, the leveraged homebuyer has another avenue of relief for devastating or prohibitively expensive structural or foundation defects.

Caution: prior to litigating professional malpractice, counsel should review certificate of merit (or affidavit of merit in New Jersey) requirements as those requirements will be strictly construed. Pa.R.C.P. 1042.

While "coffee is for closers" may be the catch-phrase in Glengarry, counsel should not let the pressure to close on residential new construction or anxiety of unsophisticated consumer clients to overwhelm and cause often technical, boring contracts between the realtor, home inspector, and builder to be brushed aside as mere "standard forms". Insert yourself in every aspect of the transaction-It is good practice, business, client relations and sense. Only then when immediately after the closing the basement starts to leak, walls start to crumble and a prison opens next door can counsel be confident that the "Cadillac Eldorado" purchased with the pre-paid, non-refundable fee will remain safe from a malpractice judgment.