Risk of Defects in New Construction

Homebuyers generally have an expectation that the new home they just bought is free from “defects.” Prior to 1974, much to the average homebuyer’s chagrin, North Carolina law did not protect this expectation. Instead, North Carolina’s jurisdiction applied the unforgiving contract law principle, caveat emptor, which literally means, “let the buyer beware.”

However, in 1974, the North Carolina Supreme Court stepped in to protect this reasonable expectation. In Hartley v. Ballou, the Court established that a homebuilder owes its customers an implied warranty of workmanlike performance.[1] While seemingly great news for homebuyers, what exactly constitutes a breach of this warranty?

The Court defined deficient workmanship as an effected “use” of the home. The North Carolina Court of Appeals narrowed this overly broad (and murky) definition in Lyon v. Ward:

“. . . we interpret Hartley to stand for the proposition that a builder-vendor impliedly warrants to the initial purchaser that a house and all its fixtures will provide the service or protection for which it was intended under normal use and conditions.”[2]

Through its decision in Hartley and Lyon, North Carolina courts have introduced into the real estate development market the opposing common law principle to caveat emptor, namely, caveat venditor – “let the seller beware.” Unfortunately, case law has left some degree of uncertainty with respect to liability flowing from specific “defects.” Consequently, courts still apply a broad approach to determine whether a builder has met its obligations.[3]

In 2010, North Carolina lawmakers shored-up homebuyers protection against construction defects through the Residential Property Disclosure Act, which now requires sellers to furnish a disclosure statement to buyers.[4] According to G.S. 47E-4, a seller must “disclose those items which are required to be disclosed relative to the characteristics and condition of the property and of which the (seller) has actual knowledge; or, state that the (seller) makes no representations as to the characteristics and condition of the real property.”[5] The second clause of the article is important.

By allowing sellers to state “no representation” on the disclosure form, lawmakers have not completed shifted from the principles of caveat emptor. Consequently, buyers still have a personal responsibility for construction defects for which they have actual knowledge, or which are or should be discovered or are visible to a reasonably prudent person upon inspection of the dwelling.[6]

In summary, through its decision in Hartley, and the passing of G.S. 47E, the jurisdiction of North Carolina has struck a balance between two opposing common law principles, caveat emptor and caveat venditor. The effect: when it comes to new real estate construction, buyers and builders beware!

Citations

[1] Lyon v. Ward, 28 N.C. App. 446, 450, 221 S.E.2d 727, 729 (1976)

[2] Lyon v. Ward, 28 N.C. App. 446, 450, 221 S.E.2d 727, 729 (1976)

[3]http://www.nolo.com/legal-encyclopedia/new-home-construction-defects-north-carolina-buyers-rights-against-the-builder.html

[4] http://www.ncleg.net/EnactedLegislation/Statutes/PDF/BySection/Chapter_47E/GS_47E-1.pdf

[5] http://www.ncleg.net/EnactedLegislation/Statutes/PDF/BySection/Chapter_47E/GS_47E-4.pdf

[6] Griffin v. Wheeler-Leonard & Co., Inc., 290 N.C. 185, 225 S.E.2d 557 (1976).