Let’s say that you moved into a newly constructed home, only to discover a serious problem with the structure’s foundation. The issue will require major repairs to correct. Once you discover the problem, you file suit against the builder. That lawsuit is ongoing, but now you would like to sell your house and move elsewhere. How do you go about this?
Although it might cause some troubles for both the buyer and the seller, a home can be sold while construction defect litigation is pending.
A construction defect is essentially any problem in workmanship, design, or materials that lowers the value of a home.
A defect in workmanship might be something like the failure to properly install certain windows. A design defect might be a failure to properly specify the openings for the windows to be installed. A defect in materials might be the use of low-quality glass that easily cracks in cold weather.
All of these situations could give rise to litigation against the contractors, subcontractors, or architects. Read more about the process for suing your homebuilder in the face of such defects, which vary between states, in Nolo’s guidance to Suing Your Home Builder or Seller: Legal Rights in Selected States.
You might have the instinct to cover up any construction defect litigation, and to hide the issue from potential buyers. This is a mistake. Even if you believe that the litigation will be wrapped up well before the closing, and even if you think all necessary repairs will be made by then as well, you still have a legal duty to disclose the situation.
Owners have, in most U.S. states, a common-law and in some cases statutory obligation to disclose known defects to buyers. Courts consider this disclosure to be the seller’s obligation. Although the standard disclosures involve physical defects, a dispute with a builder would also likely be considered a material issue with the property that merits disclosure.
If you do not disclose, you run the risk that the buyers will sue you after the sale, once they inevitably learn of the litigation and the underlying defects. The buyers might seek money damages for fraud if the defect lowers the value of the home.
If the defect is especially significant, the buyer might even attempt to unwind the sale – meaning that legal title would be transferred back to you and you would need to refund the amount paid.
Moreover, a buyer doing reasonable due diligence would discover the lawsuit anyway, before the closing, and would use this as a reason to distrust you and take a hard line in all other negotiations.
Avoid all of this trouble and do the right thing: Disclose any construction defect litigation, and the defect itself, from the beginning.
Even while the lawsuit is pending, and even while the home is on the market, you have an obligation to the seller to make necessary repairs to prevent further damage. In the hypothetical described above, if you have discovered that your home’s foundation is unstable, you cannot simply sue the contractor and hope to sell the house as soon as possible.
An when it comes to your relationship with potential buyers, issues like an unstable foundation could lead to all sorts of issues that would lower the value of the home (and perhaps make it unsafe, in which case the buyer's mortgage lender may not let the sale go until the condition is corrected).
Similarly, if you discovered that your pipes were leaky and defective, you should not just sue the contractor and supplier; you should actively repair or replace the faulty pipes to prevent flooding or other issues. These repair costs would be recoverable in court, assuming you are victorious in the underlying lawsuit.
As you interview real estate agents, make sure to ask about their experience in selling homes that are under litigation or have some sort of encumbrances (liens, easements, restrictive covenants, and so on). Such properties do require a bit of expertise to sell, especially since some buyers might have a difficult time finding financing.
If the scope of the litigation has a significant effect on the value of the property, banks and other lending institutions might become nervous. An experienced real estate agent will be able to guide you, and potential buyers, through this process.