Split Sidewalk? It's the Developer's (Or Lender's) Burden
August 26, 2013
Published in Law360
In its July 11, 2013 ruling on Maronda Homes v. Lakeside Reserve Homeowners Association, the Florida Supreme Court upheld the significant expansion of the law of implied warranties of fitness and merchantability, holding that such warranties apply to improvements that provide “essential services” to the habitability of a residence. In a consumer-protection oriented decision, the court sided with homeowners and against the property developer, noting that the “house is the fondest dream and largest investment, both emotionally and financially, for Florida families.”
The decision has significant liability implications not only for developers, but also bulk distressed property investors or foreclosing lenders, and underscores the need to understand and carefully consider all developer-related rights and obligations when acquiring distressed property.
During the pendency of this case, the Florida legislature reacted to the uncertainties surrounding conflicting interpretations of the implied warranties doctrine. The Legislature rejected the expansion of the law of implied warranties and clarified the limited scope of such warranties in Florida Statute §553.835. However, the Florida Supreme Court’s ruling finds Section 553.835 unconstitutional as applied to causes of action that accrued prior to the Statute’s effective date of July 1, 2012. This holding impacts those acquiring distressed residential property, either as investment or through foreclosure, since the Court’s decision clarifies that certain claims arising from defects to improvements which provide “essential services” to the home, even if located in common areas, may still be valid.
To put the issue in perspective, the earlier decision by the Fifth District Court of Appeal was the culmination of forty years of evolution to the implied warranty of habitability that is granted by the builder of a new home to the purchaser. This evolution began with no warranty at all, but with the increasing complexity of modern homes, courts subsequently determined that the homebuilder was in a better position to know of the materials and workmanship of the home than the purchaser, and therefore placed the burden of correcting latent defects that impair the habitability of the home on the builder, rather than the buyer. This burden can be transferred to a successor of the builder or developer and even to a lender foreclosing on the property.
Until 2010, however, the scope of this warranty was merely the structure itself, along with improvements “immediately supporting the residence,” including items such as water wells and septic tanks. Therefore, the common perception was that the warranty excluded improvements which were not located in the immediate vicinity of the home.
This understanding was upended by the 2010 decision, which has now been confirmed by the Florida Supreme Court. That decision read the phrase “immediately supporting the residence” to not only include those improvements which bear or hold up a structure or are attached to it, but which provide “essential services” which support the home, make it habitable, or are necessary for living accommodations. This “essential services” test would lead to the application of the warranty to certain subdivision improvements such as roads, drainage systems, retention ponds and underground stormwater or utility pipes based on the reasoning that even if such utilities and systems are located in the common areas of residential subdivisions, they directly impact the homes and provide services essential to the habitability of the residences. While other types of improvements may still be open for interpretation, the facts of this case highlight the importance of those essential services for residential communities, as the homeowners in Lakeview Reserve experienced collapsed storm drain runoffs, driveway flooding and obstruction, soil erosion and depressions between properties, and the buckling and splitting of pavement and asphalt, to name a few.
The result of the recent Florida Supreme Court ruling is that home builders and developers, as well as distressed real estate investors and foreclosing lenders, may be exposed to additional liability for latent defects in “essential services” improvements if the claim arose prior to July 1, 2012. As the applicable statute of limitations is four years, careful attention must still be paid to these issues when acquiring or foreclosing on residential developments until July 1, 2016, or possibly longer in certain circumstances. Of course, even then, the acquiring party may still be liable for any express representations it makes, apparent construction defects, and implied warranty claims arising from any part of the project it completes.