The implied warranty of habitability (“IWOH”) originally extended to “builder/vendors” in Illinois. However, as a new Illinois appellate court decision makes clear, the IWOH now extends to claims against general contractors who are not in privity of contract with the homeowner. In addition, the decision confirms that subcontractors have exposure to direct claims from homeowners under the IWOH if the general contractor is insolvent. 1324 W. Pratt Condominium Association v. Platt Construction Group, Inc., 2012 WL 2369561 (Ill. App. 1st Dist. June 21, 2012).

This decision demonstrates that general contractors and subcontractors in Illinois face significant risk of direct IWOH claims for latent construction defect claims. While the developer/seller is often protected from this liability through disclaimers in the sales contract (which are enforceable under Illinois law), the general contractor and its subcontractors often do not have this protection because they are not explicitly included in the disclaimers contained in the sales documents. This is what happened in Pratt Condominium.

The developer in Pratt Condominium hired Platt Construction Group, Inc. (“Platt”) as its general contractor. Platt subcontracted the masonry work to EZ Masonry, Inc. (“EZ Masonry”).

The developer’s sales contracts contained a one-year Homeowner’s Limited Warranty that included a disclaimer of the IWOH:

(c) WAIVER-DISCLAIMER. THE SELLER HEREBY DISCLAIMS AND THE PURCHASER HEREBY WAIVES THE IMPLIED WARRANTY OF HABITABILITY DESCRIBED UB PARAGRAPH 10(B) ABOVE AND THEY ACKNOWLEDGE, UNDERSTAND AND AGREE THAT IT IS NOT PART OF THE CONTRACT.

Effective [sic.] and Consequences of this Waiver-Disclaimer. Purchaser acknowledges and understands that if a dispute arises with Seller and the dispute results in a lawsuit, Purchaser will not be able to rely on the Implied Warranty of Habitability described above, as a basis for suing the Seller or as a basis of a defense if Seller sues the Purchaser.

Shortly after closing, owners discovered water leaks in units and common areas. The condominium association filed suit, but by that time the developer was insolvent. Pratt moved to dismiss the claims against it on the ground that IWOH applies only to “builder-vendors,” i.e. builders who construct residential buildings and sell units in the buildings. The trial court agreed and dismissed the IWOH claim, but the appellate court reversed, holding that the IWOH applies to builders of residential homes regardless of whether they are involved in the sale of the homes (the “Pratt I opinion”).

After remand, the association filed an amended pleading against the developer, Platt and EZ Masonry for breach of the IWOH. Platt moved to dismiss, arguing this time that the individual unit owners waived the IWOH in their real estate contracts. Platt argued that because the unit owners waived the warranty as to the developer, they also waived it as to Platt and EZ Masonry. The trial court agreed and dismissed the IWOH claims against Platt and EZ Masonry. EZ Masonry also moved to dismiss on the ground that it could not be sued unless the general contractor (Platt) was insolvent. The trial court denied the motion.

The First District reversed. Based on Pratt I, the Court reiterated that the IWOH applies to builders who are not vendors, because of the underlying policy to protect homeowners and apportion responsibility for latent defects that homeowners cannot immediately discover. Thus, the claim against Platt could proceed even though Platt was a builder and not a seller. The court further held that Platt could not meet the high standard required to prove a knowing waiver of the IWOH because the disclaimer at issue only referenced the seller and purchaser; it did not explicitly include the general contractor or its subcontractors. The court found “nothing whatsoever in the contract to indicate that the individual unit owners agreed to disclaim the warranty as to Platt or EZ Masonry, or that they were even aware of the possible consequences of disclaiming the warranty as to these two parties.”

The First District then held that the association could not sue EZ Masonry without first establishing that Platt was insolvent. Rejecting the association’s attempt to rely on Pratt I, the court cautioned that it had not considered the applicability of the IWOH to subcontractors in that opinion. Rather, Pratt I addressed only the implied warranty’s application to builders who are not also vendors. The court reaffirmed Minton v. The Richards Group of Chicago, 116 Ill. App. 3d 852 (Ill. App. 1st Dist. 1983), and held that the association must demonstrate that Platt was insolvent in order to assert a direct IWOH claim against EZ Masonry.