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Unwritten Rules: Oregon Could Learn How Implied Warranties are Done from Iowa

Unwritten Rules: Oregon Could Learn How Implied Warranties are Done from Iowa

Oregon’s case law regarding implied home warranties have long floated derelict, lacking the clarity needed for effective consumer protection and simultaneously subjecting developers to uncertain liability.  Now 40 years since Oregon’s adoption of implied warranties, recent decisions from other states focus our attention on the lack of evolution and refinement here in Oregon.

Warranties and Implied Warranties Generally

The term “warranty” describes a right of correction or repair associated with the purchase of a specific item.  Warranties are typically written, describing the scope of the protection, the time period, and the logistics of making a claim.  Common examples are folded-paper inserts found in consumer purchases such as toasters and televisions, the language of which is remarkable for uselessness and indecipherability.  However, most consumers do not realize that the law provides warranties not found in any fine print: so-called “implied warranties.”  Implied warranties for consumer goods are found within the Uniform Commercial Code (“UCC”) adopted throughout the United States.  These UCC implied warranties are almost perfectly uniform in language and interpretation, which makes them fairly predictable for both consumers and manufacturers.

Home Warranties Specifically

Implied warranties in home purchases are far less uniform and less predictable.  Home implied warranties are not statutory, but rather have been adopted by courts when appropriate cases present themselves.  Oregon first adopted these implied warranties in 1974, proclaiming Oregon would “join the ranks of those courts recognizing an implied warranty of fitness in the sale of new dwelling houses.”  The warranty would apply to new homes sold by a “builder-vendor” and would imply into the sale “that the house is constructed in a reasonably workmanlike manner and is fit for habitation.”  The new implied warranties were fairly vague when first announced, and the Oregon Supreme Court recognized that the new implied warranties would require future clarification, but declined to provide any advance hints.  Since then, precious little clarification has come.  Oregon builders, home buyers, and even lawyers struggle to find precision in the application of the implied warranties.

Iowa’s Implied Warranties as Contrast

Recent decisions from Iowa contrast Oregon’s imprecision, and also highlight the variation among implied warranties from state to state.  The Iowa Supreme Court in Luana Savings Bank v. Pro-Build Holdings, Inc. recently declined to allow a foreclosing bank to rely upon the implied warranties.  In that case, the bank provided a loan to for construction of farmworker apartments, and two years later took over ownership after the original borrower defaulted.  The bank discovered a mold infestation and filed suit against the original contractor.  Because the bank was not an occupant and because the original builder was not a “builder-vendor,” the Iowa Supreme Court decided that that the bank was not entitled to the benefit of the implied warranties.

Simultaneously, the Iowa Supreme Court decided Rosauer Corp. v. Sapp Development, in which a builder sought the protections of the implied warranties for bare lots.  After building homes on the lots, the builder discovered soil compaction problems.  After analyzing the implied warranty elements, the Iowa Supreme Court ruled that the implied warranty should not apply to bare lots because there was no “builder-vendor” for a lot with no house at the time of sale, and because the core purposes are not achieved when there is no consumer dwelling to fail.

These two cases also discuss other decisions already reached in Iowa.  For example, the Iowa implied warranty does not apply to homes purchased as rentals, because the purchaser will not physically occupy the home.  The Iowa implied warranty does not apply to a home built by a private owner for his own use but then changes his mind and sells the home when first completed.  The Iowa implied warranty will protect second or third owners who lack privity with the original builder-vendor.

Other states have equally-developed doctrines, and some of the rulings from other states are given passing mention in the two very recent decisions from Iowa.  Idaho implied warranties apply to rental properties.  California implied warranties apply to apartment complexes.   New Jersey implied warranties apply to mixed-use residential and commercial properties.  Texas implies a very similar warranty in commercial leases.  Other states echo Iowa’s holdings as to subsequent purchasers.

Oregon’s Unevolved Protections

The Iowa cases provide fascinating contrast to the vagaries found in Oregon and other states.  As Oregon celebrates 40 years of implied warranty protections, we re-ask ourselves the same questions asked a generation ago:

  • Will the implied warranties protect subsequent purchasers?

  • Will the implied warranties protect rental properties?

  • Will the implied warranties apply to homes sold by a developer who hired a separate builder?

  • Can a builder defeat the implied warranties by transferring the home to a separate selling entity?

No resolution appears imminent.  The lack of answers to these questions leaves builders unsure of what liabilities exist or how best to negotiate contracts with buyers that account for the implied warranties.  Similarly, the vagueness of Oregon’s implied warranties leaves consumers vulnerable to less scrupulous builders.  Worse, because of the vagueness and unanswered questions, lawyers cannot accurately predict conflict outcomes for their clients, whether consumer or builder.

Of course the Oregon court system is at the whim of the cases presented for resolution, meaning no proactive correction is possible unless litigants are forced to appeal a case with appropriate facts.  On the other hand, no such hurdle faces the Oregon legislature.  Hopefully soon, various interest groups will collaborate on a statutory clarification of Oregon’s stagnant implied warranties, so that builders and owners alike may better order their affairs.

For the time being, builders should be very cautious in drafting warranties and in deciding exactly how to structure their construction and sales processes.  Similarly, owners should read sales contracts very carefully to understand their legal rights should future problems arise.  Hopefully we need not wait another 40 years for the needed clarity.

Note: I authored this post for while I was employed at Ball Janik.

Daniel T. Goldstein

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