Let the Builder-vendor Beware: the Demise of Caveat Emptor in Colorado-part I
| Publication year | 1987 |
| Pages | 463 |
1987, March, Pg. 463. Let the Builder-Vendor Beware: The Demise of Caveat Emptor In Colorado-Part I
Traditionally, buyers of new and used homes had little or no recourse against the builder or seller. However, in recent years caveat emptor has been completely eroded by a tide of judicial and legislative pronouncements. Colorado courts have been in the vanguard of this change and now permit buyers to recover for a variety of construction problems under various legal theories. It may even be difficult to find reported Colorado decisions in which the homeowner does not prevail. When substantial defects exist, the home builder will prevail only in the rarest of cases.
Builders and sellers should be aware of the litigation risks and available defenses which may limit their exposure. Part I of this article summarizes the development of the significant theories of recovery and the availability, attendant benefits and possible detriments of recovery. Part II, to be published in the April issue, will address limitations of liability, the statute of limitations, available defenses and damages.
Property law historically has provided few protections for buyers of realty. Caveat emptor, a rigid doctrine originally applicable to all commercial transactions between buyers and sellers, denied protection for buyers purchasing defective products, absent an express agreement to the contrary. This doctrine, based on the buyer's affirmative duty to inspect prior to purchase, remained viable in real estate transactions long after its curtailment in the personal property arena. Buyers were denied recovery if they failed to perform inspection, and their only recourse was to establish fraud by the seller, who conversely had no duty to disclose defects.(fn1)
The "merger" doctrine provided further protection for sellers of realty. Under this doctrine, a contract of sale was deemed to be merged into the deed at closing. Thus, any warranties and representations contained in the contract expired. The buyer had a duty to inspect the premises in the comparatively short time between contracting and closing and to require the seller to correct all such defects before closing.
The harsh results of these doctrines and society's changing perception of the morals of the marketplace led to the gradual demise of caveat emptor and the merger doctrine. Initially, courts focused on traditional exceptions such as fraud, mistake or latent defects which were not discoverable by a reasonable inspection.(fn2)
The first major curtailment of caveat emptor came with the unfinished home exception, under which a buyer purchasing a home during construction was entitled to certain implied warranties.(fn3) However, these warranties arose from the contract to build, not the contract to sell. Merger did not avoid such collateral covenants since delivery of the deed was only one of many acts to be performed under the contract. This extension culminated in the current implied warranties for all houses.
Contemporaneously with these developments, courts were extending protection to buyers based on negligence and fraudulent concealment, particularly on a seller's affirmative duty to disclose defects. Additionally, since the demise of the merger doctrine, buyers may use breach of contract and express warranty claims to recover for construction defects.
Colorado courts have led the nation in judicially implying warranties in home sales. Colorado abrogated the rule of caveat emptor over twenty years ago in Carpenter v. Donohoe.(fn4) In Carpenter, the Colorado Supreme Court cast aside the distinction between finished and unfinished houses and implied warranties arising out of the contract to sell. This
In explaining the rejection of caveat emptor, the Colorado Supreme Court later explained that this archaic doctrine was based on an arm's length transaction between buyers and sellers of comparable skill and experience, a situation which normally does not exist between home builder and home buyer.(fn5) Rather, the builder-vendor holds out as having the expertise to construct a habitable home. Moreover, even in an unusual case where the buyer is knowledgeable in home construction, rarely does the buyer have the access necessary to inspect the home's underlying structural, mechanical or electrical work.(fn6) Colorado quickly limited the implied warranty of habitability to the sale of new homes,(fn7) and it remains the most potent weapon for buyers of new homes who confront construction problems.
Liability under an implied warranty theory occurs when the "original" buyer(fn8) purchases from a builder-vendor a home(fn9) which contains a "defect." Warranties also apply in the sale of multi-family residences.(fn10) Warranties are implied when the seller "either built, participated in the building of, or supervised the building of real property."(fn11) Additionally, the builder must be regularly engaged in the physical acts of construction, so that the sale is commercial, not casual or...
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