Suing for Defective Residences

By James W. Springer

What options are available to someone who buys a defective home? Who might be liable under what theories? Here's an overview of the various Illinois statutes and common law causes of action disappointed home buyers might use.

Illinois home buyers and sellers take note: Five common law and three statutory causes of action can give rise to liability for sale of a defective residence. Plaintiffs who bring these suits typically plead two or more theories on the same set of facts.

This variety of legal doctrines puts a premium on early and thorough investigation of the facts and careful pleading. Each cause of action has distinct rules governing who can be a plaintiff and defendant and what elements, defenses, remedies, and limitations periods apply. Each also has its strengths and weaknesses from a plaintiff's perspective.

This article is an introduction to and overview of the various options.

Breach of the implied warranty of habitability

Illinois recognizes an implied warranty of habitability for "sale of a new residence by a builder-vendor" for "latent defects,"1 defined as "defects that were not apparent to the purchaser on viewing the property."2 Thus the buyer's responsibility is only to view, not to inspect.

Plaintiffs and defendants. Prospective plaintiffs include the initial purchaser,3 a subsequent purchaser who discovers latent defects within a "reasonable time,"4 and a homeowner's association in a planned unit development.5Potential defendants include the builder/seller of a new residence,6 a builder who was not the seller,7someone who erected a pre-fabricated home,8 and an at-fault subcontractor if the builder-vendor is insolvent.9

Mere status as a developer does not make someone liable,10 but a developer who sells the residence and chooses the builder can be held liable.11 However, someone who merely has an ownership interest in the property is not liable.12 A completely new residence13 and a "significant addition" to an existing structure14both come within the warranty.

Latent defects. There is a "reasonable time" for latent defects in new construction to become manifest.15 For example, two years after completion of construction is a reasonable time,16 but 11 years is not.17

Extent of warranty. The warranty extends not only to materials and workmanship on the residence proper, but also to defective septic systems,18 unsuitable soil conditions that prevent installation of a septic system,19unsuitable location of the house that causes it to flood or to crack,20 and unsuitable fill that causes it to crack.21 A vacant lot with a defect that prevents building of a residence may or may not be covered depending on whether the defendant did something improper that contributed to the unsuitability, such as providing inadequate fill.22

Remedies. The plaintiff's remedies are money damages equal to the cost of remediation or repair,23 unless repair costs would be disproportionate, in which case damages equal the amount by which the defects have reduced the value of the property.24 Rescission is also available.25 The statute of limitations/statute of repose is the four-year/10-year period established at 735 ILCS 5/13-214.26

Disclaimers. Disclaiming the warranty is not against public policy per se, but disclaimer language will be strictly construed against the defendant.27 A generic express warranty or disclaimer of all implied warranties is usually not effective.28 Even if the contract expressly disclaims the implied warranty of habitability, the disclaimer must be brought to the buyer's attention.29 Moreover, a disclaimer protects only the person identified in the contract as benefitting from it.30

Breach of express warranty

Merger doctrine. Express warranties are limited by the merger doctrine: the contract for sale of real estate ultimately merges into the deed, after which the contract no longer provides rights and remedies.31 However, merger does not apply to promises, representations, or warranties that are collateral to the promise to convey good title, are independent of that promise, or are promises that delivery of the deed does not fulfill.32 These include warranties that the improvements, including the fixtures, shall be of a certain quality, such as good working order or operating order,33 or that the construction shall be "neat and workmanlike."34

Diligence not required. The express warranty theory does not require the plaintiff to be reasonably diligent in examining or inspecting the residence before the purchase.35 By implication, even if the plaintiff-purchaser knew of the breach before he closed, he could still bring suit.

Remedies. Damages are ordinarily cost to cure.36 The statute of limitations and repose is probably the four-year/10-year statute for improvements to realty.37

Negligence

Fundamentals. To sue under a tort negligence theory, the plaintiff must allege the usual elements, namely the existence of a duty, the defendant's breach of that duty, and damages suffered by the plaintiff as a result.38 Where there is a contractual remedy, the plaintiff cannot recover "economic losses" in tort, that is, damages for inadequate value, cost of replacement, cost to repair, and so forth.39

Negligent misrepresentation. A disappointed homeowner may be able to recover under the theory of negligent misrepresentation40 if "the defendant fails to exercise that care and competence in obtaining and communicating the information which its recipient is justified in expecting."41 Such representations can include the lot size and history of flooding,42 statements that the property's water problems had been cured,43 and statements that the property was located in a particularly desirable school district.44

Negligent performance of a voluntary undertaking. A great variety of individuals and entities can be sued under this separate theory if the facts support it.45 The defendant need not be a builder or a seller, nor is it necessary that the residence be new.

Remedies. The measure of damages is the difference between the price paid by the plaintiff and the true value of the residence at the time of purchase.46 The contract is voidable at the plaintiff's option, which suggests that rescission is available.47

The statute of limitations is probably the 4 year/10 year limitations/repose period contained in 735 ILCS 5/13-214,48 although no case known to me rules directly on this issue.

Common law fraud

The elements of an action for common law fraud are 1) a false statement by a defendant to induce reliance by the plaintiff, 2) reliance by the plaintiff, and 3) damage to the plaintiff as a result of that reliance.49 The falsity element is met by statements that the defendant made i) knowing or believing them to be false, ii) with reckless disregard for whether they were true, or iii) in culpable ignorance about their truth or falsity.50

The most obvious example is a direct untrue statement by the defendant to the plaintiff about the condition of the residence, which may be contained in the disclosure report discussed below.51 Circumstantial evidence can be used to prove the defendant's knowledge of the defects.52

Incomplete and indirect statements, nonstatements. An incomplete representation - e.g., failing to disclose the full extent of a problem or omitting important qualifying information - can also be false.53 Fraud can also take the form of indirect misrepresentation, i.e., making a false statement to a third-party with the intent that it be conveyed to the plaintiff.54

Fraudulent concealment does not require the proof of an actual statement, either oral or written.55 Actions otherwise innocent, such as repairing water damage, can be fraudulent if they do in fact conceal the defect.56Failure to disclose material facts that affect the value of the property and that the buyer does not know of may also be fraudulent.57

Prospective defendants. The seller, the broker, and the builder may all be proper defendants.58

Remedies. The measure of damages is the difference between the sale price and the true value of the residence at the time of sale,59 although one reported case mentions the cost to repair as an alternative.60Rescission is also available.61 The statute of limitations is the five-year catchall, subject to the discovery rule, and fraudulent concealment will toll the running of the limitations.62

No disclaimer allowed. It is not possible to disclaim a right of action for fraud. There is no right to commit an intentional tort.63

Common law breaches of duties of trust by broker

Duty. Under Illinois common law, a real estate broker is an agent for the seller and consequently has fiduciary duties of good faith, loyalty, trust, skill, ability, and industry, as well as full disclosure.64 However, the broker also has a duty to exercise good faith in negotiating with the buyer, with whom he occupies a position of trust.65

Remedies. The remedy for breach of fiduciary duty by a broker to his principal is the loss of his fee and of any profit he made through improper dealing.66 Where the broker violates his duty to the purchaser, the purchaser has an action for damages.67 The statute of limitations is the five-year catchall contained at 735 ILCS 5/13-205.68

It is unclear as to what extent the duties just recited have survived the enactment of the Real Estate License Act of 2000,69 discussed in Part VII below.

Violations of the Residential Real Property Disclosure Act

Disclosure requirements. Sellers of residential property are required to fill out and sign a disclosure report of 23 items, which must be checked yes or no, 22 of which concern the seller's knowledge of specific defects.70 The Act does not require disclosure of any other defects.71

If the seller fails to provide the disclosure report, the buyer can terminate the contract, retaining this right up to the time of closing.72 Failure to provide a disclosure report or providing an incomplete report gives the purchaser an action for damages for any matters not disclosed. The requirement of disclosure cannot be waived.73

Remedies. If the seller knowingly provides false information, the buyer can sue for damages and attorney's fees, but the statute of limitations is very short - only one year - and proof must be by clear and convincing evidence.74 Even if the buyer is aware of the defect, the seller is still liable.75

The statute excludes from its coverage newly constructed residences that have not been occupied.76

The short limitations period makes this cause of action of limited value, but, as noted above, omissions or misstatements in the disclosure report can serve as the basis of an action for common law fraud.

The Real Estate License Act of 2000

The Real Estate License Act of 200077 appears to be a comprehensive regulation of real estate brokerage, but its various provisions are not easily reconciled. Article 15 establishes duties of licensed brokers ("licensees").78 Article 15 "applies to the exclusion of the common law concepts of principal and agent" and fiduciary duty.79 The act is not likely to be widely used by disappointed buyers, since one of its purposes is apparently to reduce the breadth of fiduciary duties a broker owed to his client under the common law.

Duties. To his clients, a licensee owes the duty to disclose all material facts of which he has knowledge, to promote the client's best interests, and to exercise reasonable skill and care.80 Toward a "customer," i.e. a nonclient with whom he is dealing, the licensee owes a duty to treat that person honestly and to not negligently or knowingly provide false information.81 The Act establishes procedures and standards for dual agency, in which the licensee represents both buyer and seller.82

The statute explicitly states that it does not change a licensee's duties as to "negligent or fraudulent misrepresentation of material information."83 Otherwise, it appears to preempt much of the common law of agency, though it is unclear to what extent. Broad language in section 15-15 suggests that some aspects of the common law of agency have survived the statute.84

Remedies. A person injured by a violation of the Act can sue for damages, subject to a two year statute of limitations and a five year statute of repose.85

The Consumer Fraud Act

Elements. The Consumer Fraud and Deceptive Business Practices Act makes it unlawful to use any unfair methods of competition, including deception, with the intent that others rely on it.86 Its purpose is to eliminate commercial dishonesty, and it is to be liberally construed.87

Plaintiffs must plead and prove that the defendant intended them to rely on the omissions or false statements. They do not have to plead or prove that they did in fact rely on those statements or that reliance was reasonable.88

Advantages and limitations. This cause provides an advantage over suing for fraud or negligence, where lack of reasonable reliance defeats the plaintiff's cause of action.89 Other advantages: Privity of contract is not required,90 innocent misrepresentations can be actionable, and plaintiffs need not prove the defendant knew of the falsity of the statement or intended to deceive.91

The language of 815 ILCS 505/2 suggests an intent to impose liability for a broad variety of misconduct, including promises of future actions and warranties. Case law, however, is not consistent on this matter.92There is also uncertainty about the line between statements of fact and opinion. A confidently stated opinion may be actionable, while a statement described as an opinion and using terms such as "most probably" is not.93 Liability can result not only from an actual misrepresentation, but also from an omission of a "materially qualifying fact."94

Prospective defendants. The only proper defendants are commercial actors involved in the sale of real estate, including brokers,95 exterminators,96 appraisers,97 and builders.98 An individual seller not involved in the real estate business is not subject to the Act.99 Deceptive information communicated from the seller to a salesman or broker will not support a Consumer Fraud Act suit unless the salesman or broker knows that the statement is deceptive.100

Incorporation. The act incorporates, by its own language or by judicial construction, other federal and state acts regulating commercial practices, including the Illinois Uniform Deceptive Trade Practices Act,101 the Federal Trade Commission Act,102 and the Federal Real Estate Settlement Procedures Act.103

Remedies. Any person injured by a violation may sue for damages including "actual economic loss or any other relief which the court deems proper."104 The court may award injunctive relief and attorney's fees and costs,105 and may also award "sanctions" by denying relief to a party who has violated the Act.106 Rescission is also available.107

The statute of limitations is generally three years, but where the Illinois Attorney General or a state's attorney brings an action, a private cause based on the same occurrence is suspended until one year after the attorney general's or state's attorney's action is concluded.108

James W. Springer <jamesspringer@ksswf.com> is a shareholder with Kavanagh, Scully, Sudow, White & Frederick, P.C. in Peoria. He thanks James L. Hafele, Daniel P. Cusack, and Bruce Thiemann for their comments on a draft of this article.

 

 

  1. Peterson v. Hubschman Construction Co.76 Ill. 2d 31, 39-40 (1979).
  2. Park v. Sohn89 Ill. 2d 453, 464 (1982) (emphasis added).
  3. Peterson, 76 Ill. 2d at 31.
  4. Redarowicz v. Ohlendorf92 Ill. 2d 171, 185 (1982).
  5. Briarcliffe West Townhouse Owners Ass'n v. Wiseman Construction Co.118 Ill. App. 3d 163, 167 (2d Dist. 1983).
  6. Peterson, 76 Ill. 2d at 31.
  7. 1324 West Pratt Condominium Ass'n v. Platt Construction Group, Inc.404 Ill. App. 3d 611 (1st Dist. 1990).
  8. Hefler v. Wright121 Ill. App. 3d 739 (5th Dist. 1984).
  9. McClure v. Sennstrom267 Ill. App. 3d 277 (2d Dist. 1994).
  10. Lehmann v. Arnold137 Ill. App. 3d 412 (4th Dist. 1985).
  11. Tassan v. United Development Co.88 Ill. App. 3d 581 (1st Dist. 1980).
  12. Hoke v. Beck224 Ill. App. 3d 674, 677 (3d Dist. 1992).
  13. Peterson v. Hubschman Construction Co.76 Ill. 2d 31 (1979).
  14. Von Holdt v. Barba Construction, Inc.175 Ill. 2d 426, 431 (1997).
  15. Redarowicz v. Ohlendorf92 Ill. 2d 171, 185 (1982).
  16. Id.
  17. Von Holdt, 175 Ill. 2d at 434.
  18. Park v. Sohn89 Ill. 2d 453 (1982).
  19. Kramp v. Showcase Builders97 Ill. App. 3d 17 (2d Dist. 1981).
  20. Lehmann v. Arnold137 Ill. App. 3d 412 (4th Dist. 1985).
  21. Reichelt v. Urban Investment & Development Co.577 F. Supp. 971 (N.D. Ill. 1984).
  22. Overton v. Kingsbrooke Development, Inc.338 Ill. App. 3d 321 (5th Dist. 2003).
  23. See, e.g.Hanavan v. Dye4 Ill. App. 3d 576, 580 (3d Dist. 1992).
  24. See, e.g.Linhart v. Bridgeview Creek Development, Inc.391 Ill. App. 3d 630, 639 (1st Dist. 2009).
  25. Overton, 338 Ill. App. 3d at 329.
  26. See, e.g.Henderson Square Condominium Ass'n v. LAB Townhomes, LLC, 2014 IL App (1st) 130764, ¶ 91.
  27. Peterson v. Hubschman Construction Co.76 Ill. 2d 31, 43 (1979).
  28. See, e.g.Board of Managers of the Village Centre Condominium Ass'n, Inc. v. Wilmette Partners198 Ill. 2d 132, 140 (2001).
  29. Compare Breckenridge v. Cambridge Homes, Inc.246 Ill. App. 3d 810, 818 (2d Dist. 1993), with Board of Managers of Chestnut Hills Condominium Ass'n v. Pasquinelli, Inc.354 Ill. App. 3d 749, 758 (1st Dist. 2004).
  30. 1324 West Pratt Condominium Ass'n v. Platt Construction Group, Inc., 2012 IL App (1st) 111474, ¶32.
  31. Daniels v. Anderson162 Ill. 2d 47, 63 (1994).
  32. Id.
  33. See, e.g.Lanterman v. Edwards294 Ill. App. 3d 351, 353 (5th Dist. 1998).
  34. Brownell v. Quinn47 Ill. App. 2d 206, 207 (1st Dist. 1964).
  35. Lanterman, 294 Ill. App. 3d at 353.
  36. Id. at 354.
  37. Henderson Square Condominium Ass'n v. LAB Townhomes, LLC, 2014 IL App (1st) 130764, ¶ 91.
  38. Doe v. McKay183 Ill. 2d 272, 277 (1998).
  39. See, e.g.Moorman Manufacturing Co. v. National Tank Co.91 Ill. 2d 69 (1982).
  40. Rozny v. Marnul43 Ill. 2d 54 (1969).
  41. Duhl v. Nash Realty, Inc.102 Ill. App. 3d 483, 493 (1st Dist. 1982) (quoting Restatement of Torts, § 552).
  42. Zimmerman v. Northfield Real Estate, Inc.156 Ill. App. 3d 154 (1st Dist. 1986).
  43. Richmond v. Blair142 Ill. App. 3d 251 (1st Dist. 1985).
  44. Capiccioni v. Brennan Naperville, Inc.339 Ill. App. 3d 927 (2d Dist. 2003).
  45. Hirsch v. Optima Inc.397 Ill. App. 3d 102, 120 (1st Dist. 2009).
  46. Van Gessel v. Folds210 Ill. App. 3d 403, 407 (1st Dist. 1991).
  47. Lyons v. Christ Episcopal Church71 Ill. App. 3d 257, 260 (5th Dist. 1979).
  48. Henderson Square Condominium Ass'n v. LAB Townhomes, LLC, 2014 IL App (1st) 130764, ¶¶ 82, 91.
  49. Gerrill Corp. v. Jack L. Hargrove Builders, Inc.128 Ill. 2d 179, 193 (1989).
  50. Id.
  51. See, e.g.Bauer v. Giannis359 Ill. App. 3d 897, 906 (2d Dist. 2005).
  52. Zimmerman v. Northfield Real Estate, Inc.156 Ill. App. 3d 154, 161 (1st Dist. 1986).
  53. See, e.g.Munjal v. Baird & Warner138 Ill. App. 3d 172, 180 (2d Dist. 1985).
  54. Hirsch v. Optima Inc.397 Ill. App. 3d 102, 116 (1st Dist. 2009).
  55. Posner v. Davis76 Ill. App. 3d 638, 642 (1st Dist. 1979).
  56. Russow v. Bobola2 Ill. App. 3d 837 (2d Dist. 1972).
  57. See, e.g.Posner, 76 Ill. App. 3d at 643.
  58. See, e.g.Hirsch v. Optima Inc.397 Ill. App. 3d 102 (1st Dist. 2009).
  59. See, e.g.Munjal v. Baird & Warner138 Ill. App. 3d 172, 185 (2d Dist. 1985).
  60. Posner, 76 Ill. App. 3d at 644.
  61. See, e.g.Peddinjhaus v. Peddinjhaus295 Ill. App. 3d 943, 948 (1st Dist. 1998).
  62. 735 ILCS 5/13-205; 735 ILCS 5/13-215; see, e.g., Khan v. Deutsche Bank AG, 2012 IL 112219, ¶¶ 19-20.
  63. Zimmerman v. Northfield Real Estate, Inc.156 Ill. App. 3d 161, 164 (1st Dist. 1986).
  64. See, e.g.Sawyer Realty Group, Inc. v. Jarvis Corp.89 Ill. 2d 379, 385 (1982).
  65. Id.
  66. Letsos v. Century 21-New West Realty285 Ill. App. 3d 1056, 1069 (1st Dist. 1996).
  67. Sawyer Realty Group, Inc., 82 Ill. 2d at 390.
  68. Winters v. Munder, 2012 WL 6967611 (2d Dist.).
  69. 225 ILCS 454/1-1 et seq.
  70. 765 ILCS 77/35.
  71. Kalkman v. Nedved, 2013 IL App (3d) 120800.
  72. 765 ILCS 77/55; Muir v. Merano378 Ill. App. 3d 1103 (5th Dist. 2008).
  73. See, e.g.Messerly v. Bohmke, 2014 IL App (4th) 130397.
  74. 765 ILCS 77/55; 765 ILCS 77/60; see Butler v. Harris, 2014 IL App (5th) 130163, ¶ 29.
  75. See, e.g.Hogan v. Adams333 Ill. App. 3d 141, 147 (4th Dist. 2002).
  76. 765 ILCS 77/15(9).
  77. 225 ILCS 454/1-1 et seq.
  78. Id. § 454/15-5 et seq.
  79. Id. § 454/15-5.
  80. Id. §§ 454/15-15(a)(2)(C), (F), (a)(3).
  81. Id. § 454/15-25.
  82. Id. § 454/15-45.
  83. Id. § 454/15-15(e).
  84. Id. § 454/15-15.
  85. Id. § 454/15-70.
  86. 815 ILCS 505/1 et seq.
  87. Johnson v. Matrix Financial Services Corp.354 Ill. App. 3d 684, 690 (1st Dist. 2004).
  88. Malooley v. Alice251 Ill. App. 3d 51, 55 (3d Dist. 1993).
  89. Connor v. Merrill Lynch Realty, Inc.220 Ill. App. 3d 522, 532 (1st Dist. 1991).
  90. Warren v. LeMay142 Ill. App. 3d 550, 567 (5th Dist. 1986).
  91. See, e.g.id. at 566.
  92. Compare Grove v. Huffman262 Ill. App. 3d 531, 535 (4th Dist. 1994) and Duhl v. Nash Realty, Inc.102 Ill. App. 3d 483, 495 (1st Dist. 1982), with Kleczek v. Jorgensen328 Ill. App. 3d 1012, 1022 (4th Dist. 2002).
  93. See. e.g.Duhl, 102 Ill. App. 3d at 485.
  94. Kleczek, 328 Ill. App. 3d at 1021.
  95. See, e.g.Duhl, 102 Ill. App. 3d at 483.
  96. Warren, 142 Ill. App. 3d at 550.
  97. Duhl, 102 Ill. App. 3d at 483.
  98. Kleczek, 328 Ill. App. 3d at 1012.
  99. Strauss v. Cruz259 Ill. App. 3d 608 (3d Dist. 1994).
  100. 815 ILCS 505/10b(4); see, e.g.Strauss, 259 Ill. App. 3d at 608.
  101. 815 ILCS 505/2 (incorporating 815 ILCS 510/2).
  102. 815 ILCS 505/2 (incorporating 15 U.S.C. § 45).
  103. Johnson v. Matrix Financial Services Corp.354 Ill. App. 3d 684 (1st Dist. 2004); Weatherman v. Gary-Wheaton Bank of Fox Valley, N.A.186 Ill. 2d 472 (1999).
  104. 815 ILCS 505/10a(a). This section permits the awarding of punitive damages. Kleczek v. Jorgensen328 Ill. App. 3d 1012, 1024 (4th Dist. 2002).
  105. 815 ILCS 505/10a(c); see, e.g.Grove v. Huffman262 Ill. App. 3d 531, 538 (4th Dist. 1994).
  106. Malooley v. Alice251 Ill. App. 3d 51, 57 (3d Dist. 1993).
  107. Majcher v. Laurel Motors, Inc.287 Ill. App. 3d 719, 728 (2d Dist. 1997).
  108. 815 ILCS 505/10a(e).