Buyers of New Construction Beware: The Breach of Implied Warranty of Habitability in Illinois Further Erodes

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Historically, the purchaser of a newly constructed home took the property at his or her own risk if they failed to discover a hidden or latent defect in the home’s design or construction prior to the closing of the sale. It used to be that after the sale closed an aggrieved buyer of new construction would not be able to pursue claims against the developer who performed the shoddy work. In 1979, the Illinois Supreme Court recognized the harshness of the doctrine of caveat emptor and out of the ashes of disappointed expectations rose the doctrine of breach of the implied warranty of habitability – a legal theory that protects a purchaser’s legitimate expectation that the home will be reasonably suited for its intended use. Quite recently, an Illinois Appellate Court took steps to further erode the already fading implied warranty of habitability when the buyer, who usually purchases the new construction from a developer, tries to sue the company that performed the shoddy work – the contractor – directly.

In 1400 Museum Park Condominium Association v. Kenny Construction Company, et al, an Illinois Appellate Court held that a buyer of new construction may not pursue a claim for breach of the implied warranty of habitability against the general contractor responsible for the shoddy construction. The court’s reasoning was based in part on the Illinois Supreme Court’s recent decision in Sienna Court Condominium Association v. Champion Aluminum Corporation, 2018 IL 122022 holding that a purchaser of a newly constructed condominium cannot pursue a claim for breach of the implied warranty of habitability against a subcontractor where the subcontractor had no contractual relationship with the purchaser. Because the implied warranty of habitability is a creature of contract law, the Supreme Court reasoned that in order for an implied warranty to exist, the buyer must have a contractual relationship with the subject of his or her ire – the subcontractor. Because there was no contractual privity between the buyer and the subcontractor, the Illinois Supreme Court held that regardless of the nature of the defect, no cause of action existed between the purchaser and the subcontractor.  While the unit owners and condo association in 1400 Museum Park Condominium Association could have pursued a direct action against the developer with whom they had a contract, as is often the case, once the developer sold all of the units, the developer had no assets and was insolvent and suing the developer would have been pointless. The purchasers, therefore, were left to sue the general contractor directly. Although the general contractor obviously had a contract with the now-defunct developer, that relationship was insufficient to permit the condo purchasers, with whom no contractual relationship existed, to directly sue the contractor that actually performed the work for breach of the implied warranty of habitability.

Construction law in Illinois is constantly evolving.  While general contractors and sub-contractors welcome these recent court decisions, for owners, the pendulum may be slowly swinging back to the days of caveat emptor. For more information regarding regarding these, or similar issues, please contact Howard L. Teplinsky at hteplinsky@lgattorneys.com or (312) 368-0100.

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Purchaser Collection of Pre-Closing Rent Deficiency

In the purchase and sale of real property which is leased to tenants, sellers and purchasers must pay particular attention to the allocation of rent collected both before and after the closing.  A typical purchase and sale agreement will include, among other things, language addressing the allocation of rent by the parties for the current period as well as the collection of delinquent rent after closing which is attributable to the seller’s period of ownership prior to closing.  In negotiating a contract, the parties will need to determine whether the purchaser is responsible for attempting to collect pre-closing delinquent rents and the rights of the seller to pursue tenants after closing for any such pre-closing delinquent rents.

Collection of pre-closing delinquent rent can be a complicated issue for purchasers and sellers to resolve.  On the one hand, the purchaser may be reluctant to allow the seller to undermine the financial condition of a tenant by pursuing lawsuits against a tenant that may be paying current rent to the new landlord.  On the other hand, a former owner does not have a full range of typical landlord remedies at its disposal to effectively induce tenants to pay delinquent rent as the former owner cannot assert an eviction action against a tenant and terminate the tenant’s right of occupancy.

The tension between purchasers and sellers with respect to pre-closing, delinquent rent is further complicated by a recently decided opinion issued by the Illinois Appellate Court in 1002 E. 87th Street LLC v. Midway Broadcasting Corporation (2018 IL.) App. 1st 171691, June 5, 2018).  In that case, the Court upheld a lower court ruling that Illinois law does not permit the purchaser of real estate to pursue claims against a tenant for pre-closing, unpaid rent under a lease assigned to the purchaser at closing.  The purchase and sale agreement between the purchaser and seller in that case contained standard provisions confirming that the “landlord” under the lease included any successors and assigns.  It also provided that all obligations and liabilities of the original landlord were binding on the purchaser, as successor landlord.  That would include any pre-closing landlord defaults that remained uncured.  Notwithstanding the successor landlord’s assumption of the lease, including, potential liability for pre-closing defaults of its predecessor, the Court ruled that the successor landlord did not have the right to recover pre-closing rent.  The Court specifically stated that the rule in Illinois is that rent in arrears is not assignable.

The lesson to be learned from the 1002 E. 87th Street case is that it is important to negotiate and set the expectations of the parties with respect to pre-closing delinquent rents at the time of contract.  Since a predecessor landlord may have little power other than initiating litigation (which is not desired by the successor landlord) against a tenant for delinquent rent and the successor landlord is unable to maintain an action for that delinquent rent, parties must give careful thought to the method of addressing the collection of pre-closing delinquent rent.  Fortunately, there are a number of different approaches that the parties may employ to coordinate and enhance the collection of pre-closing, delinquent rent.

For further information regarding the purchase and sale of commercial real estate as well as matters involving the rights of sellers, purchasers and tenants, please contact:

Jeffrey M. Galkin at:

jgalkin@lgattorneys.com or 312-368-0100.

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