Section Review

Berish V. Bornstein: Expanding the Right of the Condominium and Home Owner to Sue for Defective Construction

Stephen SchultzStephen Schultz is a partner at Engel & Schultz, P.C. He represented the condominium owners before the SJC in the case of Berish v. Bornstein. Schultz is a former first assistant inspector general for the commonwealth and his practice includes construction litigation, employment law and complex civil litigation.

For 200 years, Massachusetts courts followed the doctrine of caveat emptor in cases involving the sale of real estate and structures built upon the real estate. Thirty years ago, in McMahon v. M&D Builders, Inc., 360 Mass. 54, 62 (1971), the Supreme Judicial Court noted the trend in other jurisdictions to impose on the builder-vendor of a dwelling house an implied warranty to the initial purchaser (a) that the house was built in a good and workmanlike manner, (b) that it is suitable for habitation, and (c) that it was built in compliance with applicable building laws, ordinances, regulations or codes. The court concluded, however, that the issue had not been raised properly in that case and did not need to be reached. Finally, 30 years later, in a period of a little over one month, the court issued rulings in three different cases abandoning the doctrine of caveat emptor, and significantly expanding the rights of purchasers of new homes and condominiums. See Berish v. Bornstein, 437 Mass. 252, 264-265 (2002); Albrecht v. Clifford, 436 Mass. 706, 708, 710 (2002); and Aldrich v. Add Inc., 437 Mass. 213, 222-223 (2002). This article notes the more significant elements of these rulings and some of the many unanswered questions that now must be addressed as to the scope of the rights that have now been granted to home and condominium owners.

The doctrine of caveat emptor was first stated in the 16th century, but began being applied regularly in early 19th century England consistent with prevalent laissez fair theories of economics. See Mcdonald v. Mianecki, 398 A.2d 1283 (N.J. 1979) and Hamilton, "The Ancient Maxim Caveat Emptor," 40 Yale L.J. 1133, 1187 (1931) for an extensive history of the doctrine of caveat emptor. In the 1800s, homes were built considerably differently than they are today. Typically, a homeowner would first buy land, then hire an architect, a contractor and pay for the house as each stage of construction was completed. There were unlikely to be latent defects of which the homeowner was unaware. After Word War II, developers began buying tracts of land, and the mass production of homes, and later condominiums, began. As a number of courts from other states had noted in the past 30 years, "[e]ven if a buyer is sufficiently knowledgeable to evaluate a home's condition, he rarely has access to make any inspection of the underlying structural work, as distinguished from the merely cosmetic features." See Cosmopolitan Homes Inc. v. Weller, 663 P.2d 1041, 1045 (Colo. 1983).

Since 1971, 40 states plus the District of Columbia have abandoned the doctrine of caveat emptor and have found that implied warranties of habitability, fitness of purpose or intended use, or good quality and workmanship existed in the sale of a new home. Only three states have outright rejected the claim that a builder/developer owes a purchaser an implied warranty of habitability. Massachusetts was one of only six states that had apparently not ruled on this issue.

In Albrecht v. Clifford, 436 Mass. 706, 708, 710 (2002), the court abandoned the doctrine of caveat emptor and adopted an implied warranty of habitability that attaches to the sale of new homes by builder-vendors in the commonwealth. While the court noted that the scope of this warranty must be left largely to case-by-case determination, it declared that "a home that is unsafe because it deviates from fundamental aspects of the applicable building codes, or is structurally unsound, or fails to keep out the elements because of defects of construction, would breach the implied warranty we adopt today." Id. at 711. Specifically, the court found that "[t]o establish a breach of the implied warranty of habitability a plaintiff will have to demonstrate that (1) he purchased a new house from the defendant-builder-vendor; (2) the house contained a latent defect; (3) the defect manifested itself only after its purchase; (4) the defect was caused by the builder's improper design, material, or workmanship; and (5) the defect created a substantial question of safety or made the house unfit for human habitation." Id. at 711-712.

In Berish v. Bornstein, 437 Mass. 252, 264-265 (2002), the court extended the implied warranty of habitability to an individual unit owner of a condominium as well as to a condominium association bringing a claim for breach of the implied warranty of habitability "when there are latent defects in the common areas that implicate the habitability of individual units." The court required the organization of unit owners "to demonstrate that (1) it is an organization of unit owners as defined by G. L. c. 183A, ß 1; (2) the common area of the condominium development contains a latent defect; (3) the latent defect manifested itself after construction of the common areas was substantially completed; (4) the defect was caused by the builder's improper design, material, or workmanship; and (5) the defect created a substantial question of safety as to one or more individual units, or made such units unfit for human habitation." Id.
It is not surprising that the court extended the implied warranty of habitability to condominium owners and, in particular, to claims involving the common areas of condominiums. The dependence of multiple unit owners on a developer closely resembles the dependence of multiple tenants on their landlord. In Boston Hous. Auth. v. Hemingway, 363 Mass. 184, 191-198 (1973), the court had inferred from a landlord's statutory duty to comply with the commonwealth's Sanitary Code a legislative intention that tenants should only pay rent for habitable premises. Moreover, the purchaser of a condominium unit frequently purchases the unit "on spec," under reservation, or based upon the sale of a model unit only; this prevents the purchaser from inspecting his unit prior to purchase. Finally, it is the condominium association that is empowered to conduct litigation as to any course of action involving the common areas of condominiums. M.G.L. c. 183A, ß10(b)(4); Cigal v. Leader Development Corporation, 408 Mass. 212, 217-218 (1990). However, the condominium association never contracts with the developer and has no opportunity to negotiate any express warranties relating to the common areas. A condominium unit owner may seek express warranties relating to the condition of his or her own unit or fixtures, but is not going to seek to negotiate separate terms from the other unit owners relating to the common areas.

In Berish v. Bornstein, 437 Mass. at 268, as well as in the case of Aldrich v. Add Inc., 437 Mass. 213, 222-223 (2002), the court further held that condominiums, and presumably home owners, can state a claim, despite the "economic loss" rule, by alleging property damage that occurred because of construction defects, including water damage to the units. Lower court judges in Aldrich and Berish had held that such claims were barred by the economic loss rule, following the logic of such cases as Sebago, Inc. v. Beazer East, Inc.,18 F. Supp. 2d 70, 93 (1998), in which federal District Court Judge Wolf had held (and incorrectly predicted that the Massachusetts Supreme Judicial Court would hold) that the "economic loss" rule, aimed at limiting parties to contractual remedies for simple economic loss, barred tort claims for damages to any part of a construction project, whether or not the damage occurred solely to the area defectively constructed. Thus, to the extent that a homeowner's claim may not raise questions of safety or habitability, a claim may still exist if the defective construction causes consequential damage to an area of the house or condominium other than that which was defectively constructed.

In Berish, the court, by declaring the existence of an implied warranty of habitability and declaring that the economic loss rule does not necessarily bar negligence claims involving construction projects, has left far more questions unresolved than resolved. First and foremost, only time will create sufficient case law to make clear what type of defects create "a substantial question of safety" or make a house or condominium "unfit for human habitation".

Moreover, in Albrecht, the court specifically declined to decide "whether a second or subsequent purchaser may state a claim for breach of this implied warranty against the builder within the applicable statute of limitations." 436 Mass. at 711, n. 9. Since Indiana in 1976 became the first court to extend the theory of implied warranty of habitability to subsequent purchasers of homes, Barnes v. Mac Brown & Co., 342 N.E.2d 619 (Ind. 1996), at least 15 states have extended the implied warranty of habitability to subsequent purchasers. Reasons for extending the warranty to subsequent purchasers include the following arguments: (1) the essence of implied warranty, which is to protect innocent buyers, is equally applicable to subsequent purchasers; (2) common experience teaches that latent defects in a house will not manifest themselves for a considerable period of time; (3) we are an increasingly mobile people and a builder-vendor should know that a house he builds might be resold within a relatively short period of time; and (4) the logic which compelled the abandonment of privity in the UCC for personal property is equally persuasive for real property. See Nichols v. R.R. Beaufort & Associates, Inc., 727 A.2d 174, 179, n. 4 (R.I. 1999) and Sean M. O'Brien, Caveat Venditor: A Case for Granting Subsequent Purchasers a Cause of Action Against Builder-Vendors for Latent Defects in the Home, 20 J. Corp. L. 525, 534 (1995). Moreover, denying an implied warranty to "supposed" subsequent purchasers makes little sense in claims involving common areas of a condominium, where the plaintiff is the condominium association, which is neither an original purchaser or subsequent purchaser. See Council of Unit Owners of Sea Colony East v. Freeman Associates, 1989 Del. Super. LEXIS 183, at *10-*11 (As each individual unit owner has an undivided ownership in the common area, as long as there is one original unit owner still living in the condominium, he is entitled to full recovery of damages to the common areas).

Moreover, in Berish, the court has left open at least two issues relating to claims revolving around defective construction of the common areas of condominiums. First, the court made clear that there is an implied warranty of habitability when there are latent defects in the common areas that implicate the habitability of individual units. It failed to answer whether there may also be an implied warranty of habitability or an implied warranty that the condominium was built in a good and workmanlike manner, when there are defects in the common areas that do not affect the habitability of individual units. For example, there appears to be little reason that a contractor should be held liable for a latent defect in the heating system, which affects the habitability of an individual unit, but not be held liable for a latent defect in the heating system, which affects the habitability of the unit owners when they are sitting in a common area. Similarly, there appears to be little reason to protect homeowner's safety while in their units but to ignore construction defects, such as latent defects in stairs, which affect the unit owner's safety while in the common areas.

Finally, the court in Berish did not address the question of whether the adverse domination doctrine would toll the statute of limitations for claims involving a condominium's common area until such time as the unit owners gained control over the condominium association from the developer. The court in Berish did find that a claim involving the common areas must be brought within the three-year statute of limitation and the six-year statute of repose set forth in G. L. c. 260, ß 2B, which begins to run at "the earlier of the dates of: (1) the opening of the improvement to use; or (2) substantial completion of the improvement and the taking of possession for occupancy by the owner." 437 Mass. at 266. However, in Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 524 (1997), the court applied the "adverse domination" rule to toll the statute of limitations "while a corporate plaintiff continues under the domination of the wrongdoers." The "adverse domination" doctrine should be equally applicable to a trust, such as a condominium association, as it is to a corporation. See Alleyne v. McCusker, 1983 U.S. Dist. Lexis 11070, * 11 (C.D. CA) (statute of limitations does not run as long as wrongdoers controlled the defendant trust).

The lower court in Berish in essence found that the condominiums built and sold by the defendant were shoddily constructed in flagrant disregard of numerous building code provisions.

Yet, because of its understanding of limitations on the legal rights of homeowners, the lower court after 13 years of litigation also determined that the plaintiffs were only entitled to recover $100,000 of the $300,000 in damages that it was found that they suffered as the result of this shoddy construction. Specifically, the plaintiffs were limited to recovering damages for defects that the defendant willfully declined to fix for reasons of personal financial gain, in breach of fiduciary duties owed to the plaintiff. After 15 years of litigation, including the appeal to the Supreme Judicial Court, the plaintiffs' odyssey through the court system is closer to an end, but plaintiffs still must prove on remand that they brought their action within the statute of limitations and that defendant's actions were either negligent and caused consequential property damage, or that the defects fall within the definition of the implied warranty of habitability as defined by the Massachusetts Supreme Judicial Court to date or as likely to be further defined in the future.

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