A shocking court decision might free builders from responsibility for home defects

This is just what you homeowners need.

After all, home sales in parts of the Valley have slowed to a trickle. (Thought you could buy a new house and flip it in a few months? Ha! You're locked in for years.) And, because of the sub-prime scourge, thousands of Arizona residents are upside down on their mortgages. Kind of hard to sell at a discount when you owe three times more than what the place is worth.

Yep, these are lousy times to be a homeowner — and it may get much worse in this state.

That's thanks to a recent court decision that consumer advocates believe will dramatically weaken new homebuyers' rights. The ruling basically lets builders off the hook for construction defects, saying that unless homeowners have a contract with their builder, they can't sue him.

Here's the rub: Many homeowners simply do not have contracts with their builder. Instead, they contract with a developer — the guy who assembles the land, deals with city codes, handles sales, and hires someone else to do the actual construction. That guy, the builder, does much of the work, but he's not actually on the contract.

And now that means the builder's likely off the hook.

So, your foundation has developed a crack the size of the San Andreas Fault? Mold is sprouting, petri-dish style, on your walls? Don't bother complaining to the guy who actually built the house.

If the decision stands, advocates say, it could create a giant loophole affecting the majority of new homebuyers in Arizona — "millions of owners," in the words of one lawyer.

An informal coalition of condominium associations, professional home inspector organizations, and consumer groups are now petitioning the Arizona Supreme Court to consider the case. All argue that the appellate decision could have catastrophic consequences.

"If this decision stands," writes John F. McGuire, the lawyer arguing the case, "Arizona will become the only state where an owner is left without a remedy while the builders who caused the construction defects walk away with no responsibility."

So, where's Governor Janet Napolitano's point person? Where's Attorney General Terry Goddard? Okay, then, why isn't a bill moving through the Legislature to fix this mess so the court doesn't have to?

Good questions.


As the first loft-style condos in downtown Phoenix, the Lofts at Fillmore were supposed to herald this city's long-awaited urban renaissance.

Instead, the project is at the center of the legal tussle that could affect millions of homeowners.

Nobody at the Lofts returned my call, but court files tell the story. The project, which opened in 2001, was a rehab of a 1929 apartment building. After the building was gutted, and stylish loft-style details (exposed brick, industrial-looking ductwork) were created, the 18 units were sold to the sort of well-off urban pioneers who had long avoided downtown Phoenix.

Then came the rains. Apparently, the place suffered serious water damage — not the most common construction defect in the bone-dry Valley, but bad enough in this case to cause flooding. I've been told by two sources that damages topped $1 million.

In Arizona, new homebuyers enjoy seven-year warranties, and the flooding came early enough that the Lofts residents expected a fix. Not so. When the project's developer refused to make good, they sued.

The problem is, the developer had few assets. As with many infill projects today, the developer was merely a limited liability company, formed specifically for the project at hand. After selling the units, the LLC essentially closed up shop. (Under Arizona law, the individuals who form the LLC aren't personally liable for anything that goes wrong; they may have the bucks, but homeowners will never get a penny.)

That being the case, the Lofts at Fillmore Condominium Association also sued the general contractor, Tucson-based Reliance Construction. But the superior court judge threw out that part of the suit, saying that the builder had no contract with the homeowners. Last November, the appeals court upheld the decision.

The issue now before the Arizona Supreme Court is whether to consider if the two lesser courts were wrong.

To consumer advocates, the case could have a major impact.

That's because, for insurance and tax purposes, few homes today are developed and built by the same entity. Even big companies, like Pulte and KB Homes, tend to form separate LLCs for each project. Pulte Construction may have built your home, but you probably bought it from an entity like Pulte Desert Vista Bloom LLC. The court is saying that only a single entity that both builds and develops is responsible for construction flaws.

And if that stands as law, why would anyone choose to both build and develop?

You can see where this is going — and why construction-defect lawyers and consumer advocates are freaking out. After all, a home is the biggest investment most people will make.

I talked to Reliance's lawyer, John J. Belanger, who says his client isn't responsible for the flooding at the Lofts at Fillmore. He blames a faulty city storm drain. Bigger picture, though, he says the appeals court ruling won't have a huge impact on other cases. In most cases, he says, if homeowners sue their developer, the developer will then sue the builder.

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6 comments
M Philip Escolar
M Philip Escolar

Looks like Ms. Fenske wasn't quite as "out to pasture" as many of the commenters would like to think! The AZ Supreme Court UNANIMOUSLY reversed the wacky Lofts decision of the Court of Appeals.

Now, builders will be held liable for their defective work and latent defects throughout the home's warranty period, or at least throughout the implied-by-law warranty period of six years.

John
John

This has got to be the most ridiculous article I have ever seen, all the article is referencing is some over zealous "renter" that obviously could not get approved for a mortgage and is renting some dilapidated shanty and is throwing his or her money in the garbage every month. "This is what you homeowners need", obviously someone has given this clown the authority to write whatever he pleases, this article is an opinion and he has provided no facts of pertinent information to his justification. To the writer, I know that you dislike living in a run-down apartment and understand that you are upset, because even you could not get approved by a sub-prime lender. You obviously need to find another job that you are better at, like maybe cleaning out septic tanks, because after all, you are very good in dealing with sh*t.

Mason
Mason

Mold problems like these are all too common due to lack of ventilation behind the brick. Masonry Innovations sells a product, BrickVent, designed to provide significant air flow to the space behind the brick. This helps keep the wall dry and control moisture related problems like mold. Go to www.brickvent.net for more information.

Kevin Peck
Kevin Peck

I would like to comment on the writer's reference to Arizona's current real estate market. It is stated that it is; "kind of hard to sell at a discount when you owe three times more than what the place is worth". Lets say a borrower did do a "subprime" loan at 100% of the purchase price, and lets say the purchase price was $150,000 at their time of purchase. Show me a place in the Valley where that same home is now selling for $50,000. The math doesn't add up, and this is another example of media sensationalizing the current real estate market to appear worse than it really is. Certainly, home prices are down, and some areas more than others. But even in the outlying areas (for example, Queen Creek), we don't see houses selling for $50,000.

Cindy
Cindy

I lived in Phoenix and Tempe for over 25 yrs and owned a new tract home in the valley in the 90's. I have lived in several states and owned new homes there, too. What Fenske is saying is true; builders often set up Limited Liability Corporations for developments and fold them when they're done. You often cannot go after a builder's other companies or assets no matter how valid your case or how serious the defects. Proving fraud and being able to 'pierce the corporate veil' is hard to do. Lawyers know these cases are money pits, and hard to collect on if you win, so they decline to help many homeowners.

WARRANTIES are a JOKE. These are from a separate company that escapes most state insurance regulation by forming a 'risk retention group.' The real warranty policy arrives after closing, a 'gift' from the builder that contains so many exceptions that the coverage is an illusion, a false sense of security, and a marketing tool for builders. If you make a claim on these warranty policies they frequently deny it or offer only pennies on the dollar...and if you want to dispute the claim you cannot sue a warranty co under most circumstances because they typically have a binding mandatory arbitration clause, and often they choose the arbitrator and do repeat business with them. Because these are private procedures, complaints that go to warranty arbitration are NOT public record so you can't find out when you're researching builders before buying.

It's outrageous that a state with a so-called good licensing agency lets things get this out of hand. If the ROC was doing what it was supposed to be doing, no builder, no matter how big or well connected, could keep building junky homes and getting away with it. And plenty ARE getting away with it.

Mr Bill
Mr Bill

It's no wonder your paper has a circulation of "Free outside of any store off of Van Buren" This is the most moronic article I've read on the housing industry yet! There are warantees on every home. The ROC won't comment, because they don't want to waste their time or give this "piece" credibility.

Given this loose interpretation of one potential issue, I believe that there are many builders out there that are happy that you're a renter too.

 
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