Breach of Contract in Real Estate and Construction Defect Cases

Breach of contract is a key element of real estate and construction defect litigation. This is because, in many circumstances, there is a contract involved that has been breached or violated that gives rise to a cause of action and an avenue for a remedy: that is to recover money damages for breach of contract. 

Construction Defects and Real Estate Purchase Agreements  

In the real estate context, contracts form the basis for agreements for the purchase or sale of real estate. Standard form real estate purchase contracts are a familiar element of every real estate transaction. When a home or building is purchased and construction defects are discovered later, as is typically the case, the buyer would have a breach of contract action against the seller for construction defects. While the construction and integrity of the construction of a home may not have been mentioned in the real estate purchase agreement, nonetheless in California sellers of new construction are responsible to subsequent purchasers for hidden or latent defects and are deemed to have made an implied warranty or promise that the home or building was built properly, in accordance with the building codes and industry standards, and therefore, under a breach of contract theory, the purchaser who contracted directly with the seller to purchase the property may pursue a cause of action against that seller for breach of contract and including an action for breach of implied warranty. If the seller issued an express written warranty on the home or building, or made any specific warranty language about the construction or any components of the structure, these additional warranties are likewise actionable under a breach of contract claim. 

Breach of Contract Rights Against a Seller-Builder

This is important because the rights a purchaser has against the seller or builder are different if the purchaser is a subsequent purchaser and does not have a contractual relationship with the seller. In this situation, the purchaser could still proceed against the seller or builder, but would do so under a negligence theory rather than a breach of contract. Under a negligence theory, the purchaser-owner would be limited to recovering for actual property damage or bodily harm, whereas under a contract based theory, the damages could include defects that had not caused property damage, in addition to any property damage or bodily harm.. This is based on the holding of the California Supreme Court in Aas vs. Superior Court (2004) 24 Cal.4th 627. In this landmark case, the California Supreme Court essentially aligned the damages a plaintiff could recover on a negligence cause of action with certain elements of insurance coverage for contractors, which was limited to property damage or bodily harm, and would not extend to defects that had caused no resultant property damage. This was in line with the contractor insurance landscape which was simply not designed as an errors and omissions policy for each and every defect, but geared toward providing coverage for property damage or bodily harm. 

Contract Remedies, Attorney Fees, Statute of Limitation and Arbitration

When there is a direct contract between the purchaser and the seller-builder, then the contract remedies apply, and the purchaser can typically sue to recover the complete cost of repair, including recovery for defects that have not caused property damage, as well as potentially loss of use during the period of repair, and when the contract specifically provides, as many standard real estate purchase agreements in California do, attorney fees. Direct contracts with builders or contractors may not contain these provisions, so it’s important to examine the contract language carefully to determine whether an attorney fees provision has been included. Most contractors do not include such provisions, and AIA standard form agreements typically do not contain attorney fee provisions. When the contract is silent on the subject of attorney fees, then the parties bear their own attorney fees, and it would not be an item of recovery, although court costs would be. 

The statute of limitations for breach of contract is 4 years. This would typically be calculated from the date of the breach, or from the date when the breach was discovered, or could have reasonably been discovered. Latent defects, hidden within the structure, do not manifest themselves until sometime later, and when they do, often are of a progressive where the initial indicators are minor and may not indicate a serious or systemic problem, and later as the condition progresses the defect and damage becomes more apparent and worsens. Action should be taken immediately to evaluate the claim and file suit in order to protect one’s rights. Otherwise, the claim and the full range of contract rights and damages available could be lost. 

Real estate contracts have arbitration provisions that may apply if signed and initialed by both parties. However, in construction defect litigation where multiple parties, such as contractors, subcontractors or others involved in the construction of the defective components, are joined in the litigation, arbitration is simply not appropriate, and will very likely not be required by the Courts because of the rights of parties to a court trial or jury trial who have not agreed to arbitrations, the rights of the purchaser to pursue these claim in court and before a jury against parties they have not agreed to arbitrate with, and the problems posed by potentially conflicting rulings and results of the matter is split between arbitration and trial. 

Contract based actions against sellers and builders in real estate sales involving construction defects are a powerful and valuable tool to maximize the recovery and protect the purchaser from the costs of repair and the potential diminution in value to the property if not repaired. The availability of a broader defect claims as well as attorney fees are definite advantages. 

Timothy Norton has 34 years experience handling and pursing contract-based claims for construction defects arising from real estate sales and purchaser agreements, with $190m in construction defect jury verdicts and $70m in punitive damage awarded.

For a consultation and evaluation call or write: (310) 706-4134 or timothy@constructiondefect.com. Or visit us on the web at: constructiondefect.com.

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