I. INTRODUCTION Arizona has enjoyed a construction boom in the current decade. However, the unfortunate corollary to Arizona's impressive housing start statistics, is a corresponding increase in construction defects found in new homes. According to the Arizona Registrar of Contractors, there has been a 42.7% increase in complaints about shoddy home construction from 1992-1996. 1 For this reason, it is essential that homeowners be familiar with the laws governing construction defect litigation. Towards that end, the following general summary of the applicable laws and guidelines on current Arizona home construction defect law has been compiled for your reference. Back to Table of Contents     II. Q & A OF PROPERTY OWNERS' RIGHTS UNDER ARIZONA LAW Each year thousands of property owners are surprised to discover that their homes are built or designed with significant construction defects. Typically, these individuals carefully purchased new homes to take advantage of modern building codes and the representations of quality advertised by their builder/developer. With the builder's 1 year express warranty period expired, they are at a loss as to what to do. There is help. Arizona law affords important and valuable protection to homeowners. The following Q & A provides a useful explanation of the present state of Arizona residential construction law, embodied in the Arizona Revised Statutes (ARS), and possible future trends in that body of law: Q. What is a Construction Defect? A. There is no exact definition of 'construction defect" found in Arizona law. However, a construction defect is generally defined as a failure of a building or any of its components to be erected in a reasonably workmanlike manner or to perform in the manner intended by the builder or reasonably expected by the buyer.2 Construction defects arise from deficiencies in the development, construction, alteration, repair, maintenance, moving, demolition or excavation of a building (ARS section 32-1159(2)). Typical construction defects include, among others, leaky roofs, cracked foundations, poorly applied stucco coatings, and improper finish carpentry. Q. Who is responsible for defective conditions? A. Persons who develop and sell property, or perform and furnish the design, specifications, surveying, planning, supervision, testing, construction or observation of construction to the residential structure are responsible for defective conditions (ARS ' 12-552(A)). Typically, the persons held responsible under this definition are the general contractor, developer, or builder because they are responsible for all defective conditions even if the work was performed by subcontractors or if the defective materials used in construction were manufactured by others. Since the builder/developer is responsible for his/her own acts as well as those of the subcontractors, it is often prudent to singularly pursue the builder/developer/general contractor. Q. Who can make a claim? A. Any individual or entity that is the "real party in interest" can make a claim (Arizona Rule of Civil Procedure 17(a)). The real party in interest is the party recognized in the law as having sufficient interest in the litigation to assert a claim. Homeowners, either individually or in a class-action lawsuit, are viewed as the real party in interest for purposes of asserting their own construction defect claims. In addition, condominium associations have been found to be the real party in interest and have standing to assert claims on behalf of condominium unit owners in connection with construction defects3 (see Section V). Q. What are my recoverable damages? A. Damages may include reasonable cost of repairing the defects, reduction in market value in the event of fundamental structural failure, expenses for temporary housing during repairs, value of any other damaged property, prejudgment interest if authorized by statute, reasonable attorney's fees, and any additional costs for pursuing the litigation. 4 A homeowner can also receive punitive damages if the builder's conduct is wanton, shows spite or ill will, or is recklessly indifferent to the rights of others. Rhue v. Dawson (Ct. App. 1992) 173 Ariz. 220, 841 P.2d 215. In addition to the above remedies, homebuyers can file complaints against licensed contractors under ARS section 32-1154. Pursuant to that statute, the Registrar of Contractors can order the contractor to correct defective work or to make restitution for it. Additionally, the Residential Contractor's Recovery Fund (ARS section 32-1132) provides a source of recovery for plaintiffs who obtain judgments against licensed Arizona contractors.5 Contractors must pay into this fund to receive a license from this state. Homeowners can recover as much as $20,000 in actual damages suffered as a result of the contractor's violation so long as it does not exceed the amount needed to repair the home. Q. How much time do I have to make a claim? A. Regardless of the builder's 1 year express warranty, various Arizona statutes extend the time in which a homeowner can make a claim depending on what the specific claim or cause of action is (see Section IV). These statutes are complicated and triggered by specific facts. We highly recommend that you consult an attorney on your individual case. Q. How do I make a claim? A. Current Arizona law allows homeowners to file a lawsuit against the contractor/ builder immediately upon learning of the construction defects in their homes.6 However, recently, the Senate passed a bill which would have imposed various specific procedural requirements to be fulfilled by homeowners before they could file a lawsuit against the contractor.7 Although this bill was refused a hearing by the House of Representatives Economic Development, International Trade and Tourism Committee, it is very likely that proponents of the bill will attempt to get it heard by a different House committee who might give it a favorable review.8 Thus, the procedural guidelines embodied in the bill are outlined in Section VI for your reference. Conclusion Each significant defect that you allege to exist within your property must be later disclosed to a would-be buyer under Arizona law, so it is best to pursue only significant problems. However, there is no question that a new homebuyer is entitled to the quality product the builder/ developer/contractor represented. The intent behind Arizona law is to allow homeowners recourse when the American dream of owning a home turns into a nightmare. Back to Table of Contents     III. CAUSES OF ACTION COMMONLY ASSERTED IN ARIZONA CONSTRUCTION DEFECT LAWSUITS Traditionally, buyers of homes had little or no recourse against the builder or seller because of the doctrine of caveat emptor ("Let the buyer beware"). Arizona courts have followed the national trend in eroding the caveat emptor doctrine and have permitted buyers to recover for a variety of construction problems under various legal theories. Arizona allows the causes of action outlined below in construction defect lawsuits.9 However, these causes of action are extremely complicated and it is therefore, strongly recommended that you thoroughly review your claims with a qualified lawyer and construction expert before making this most important decision: (a) Breach of Express Warranty/Breach of Contract: To obtain financing insured by the Federal Housing Administration ("FHA") or Veterans Administration ("VA"), houses must have a one-year warranty of completion in construction in substantial conformity with approved plans and specifications.10 This warranty gives rise to a cause of action for breach of express warranty against the contractor when substantial defects appear within the one-year period. Also, most residential purchase contracts and sales agreements contain an express contractual warranty for workmanship and materials, which typically lasts for 1 year. If the defects in the house appear during this warranty period, buyers may have a breach of contract action against the contractor. One major limitation of this cause of action is that since the builder only has a contractual relationship with the original buyer (privity of contract), subsequent buyers of the house cannot use this warranty. Furthermore, the warranty period is so short that it may expire before the buyer discovers any defects. (b) Breach of the Implied Warranty of Habitability and Workmanship: To give added protection to homeowners who typically do not have the knowledge or the access to inspect the home's underlying structural, mechanical or electrical work, courts judicially imply that the house is suitable for habitation and that it was built in a workmanlike manner.11 Unlike the express warranty, subsequent purchasers of the house can use this implied warranty against the builder. However, the homeowner can only use this implied warranty with defects that are not discoverable through reasonable inspection (latent defects). A cause of action based on the implied warranty arises when the most recent purchaser discovers the latent defect and the builder abandons all remedial efforts and disclaims any responsibility. (c) Negligence: Negligence claims potentially give buyers the broadest scope of relief. The greatest advantage of a negligence claim is that buyers may sue parties with which they have no contractual relationship. The gist of the action is that the builder/contractor has a duty to perform construction with reasonable care and skill. The homeowner must prove either that the builder/contractor unreasonably created the unsafe condition or that he/she was aware of it when he/she first sold the home. Additionally, under Arizona law, homeowners must show that there was some personal injury or damage to personal property (not just defects in the home) to recover under a negligence theory.12 (d) Fraudulent Concealment/Misrepresentation: In Arizona, a seller has an affirmative duty to disclose any known deficiencies in the house to the buyer. If a builder actively misrepresents that a house is free from any substantial defects when in fact he/she knows that this is not the case, then he/she has committed fraud and may be liable under a theory of misrepresentation.13 Similarly, a builder acts fraudulently if he/she does not disclose facts that greatly affect the value of the property and which are not known or discoverable by the buyer. The buyer can then bring an action for fraudulent concealment against the builder. Homeowners can also bring an action against the builder under the Arizona Consumer Fraud Act. ARS ' 44-1522 et. seq. The Act is intended to eliminate unlawful practices in merchant- consumer transactions. A claim brought under this Act is easier to prove than the common law actions of fraudulent concealment and misrepresentation but the drawback of bringing a fraud action under the Act is that attorney's fees are not recoverable. Back to Table of Contents     IV. STATUTES OF REPOSE AND LIMITATION In most construction defect cases, an analysis must be made as to potential statute of repose and statute of limitation issues because builders often use these statutes as defenses to a homeowner's case. Statutes of repose are distinguishable from statutes of limitation because statutes of repose bar lawsuits after a certain period of time, regardless of whether damage or an injury has been discovered. Under these statutes, the limitation period may expire before a homeowner's cause of action has arisen. Statutes of limitation, on the other hand, foreclose suits after a fixed period of time following occurrence or discovery of an injury. A. Statute of Repose: Statutes of repose are enacted to protect developers and builders who would otherwise endure unending liability, even after they had lost control over the use and maintenance of the property. Arizona has a statute of repose specifically targeted to construction defect cases: Eight Year Statute of Repose (Contract Actions)14: The homeowner must bring an action against the builder/contractor for construction defects based on a written contractual agreement within 8 years of substantial completion (see below) of the home. Examples of written contractual agreements include, among others, real estate contracts, sales agreements, and construction agreements. This 8-year statute of repose also applies to actions based on the implied warranty of habitability and workmanship. ARS ' 12-552(A). (1) If, however, the defect has caused injury to the land or to the house and that injury occurs during the eighth year after the substantial completion of the house, an action may be brought within 1 year after the date on which the injury occurred but no more than 9 years after substantial completion of the house. ARS ' 12-552(B). (2) Similarly, in the case of latent defects (defects that are not discoverable by reasonable inspection such as defects in slope, landfill, etc), if the latent defect is not discovered until the eighth year after substantial completion of the home, an action may be brought within 1 year after the date it is discovered but no more than 9 years after substantial completion of the house. ARS ' 12-552(B). The following table outlines the statute of repose governing construction defect actions detailed above: TIME LIMIT TYPE OF DEFECT/ACTION ARIZONA CODE SECTION 8 years from "substantial completion" All construction defect contract actions including implied warranty of habitability and workmanship ARS ' 12-552(A) 9 years from "substantial completion" Defects which cause injury to the land or house in the 8th year after substantial completion ARS ' 12- 552(B) 9 years from "substantial completion" Latent Defects which are not discovered until the 8th year after substantial completion ARS ' 12-552(B) "SUBSTANTIAL COMPLETION": ARS ' 12-552(E) describes the home as "substantially complete" when any of the following first occurs: It is first used by the owner or occupier of the house. It is first available for use after being built according to the real estate agreement. After final inspection the building inspector. B. Statutes of Limitation: The following causes of action are often directly or indirectly involved in construction defect cases. For that reason, the statutes of limitation for those causes of action are indicated below: Personal injury: 2 years. ARS ' 12.542(1). Breach of Oral Contract: 3 years. ARS '12-543(1). Fraud/Mistake: 3 years from when aggrieved party discovers the fraud or mistake. ARS '12-543(3) unless the action is based on the Consumer Fraud Act (ARS ' 44-1521), in which case, the statute of limitation is one year. Injury to Personal Property: 2 years. ARS '12-542(3). There are instances when a defect can be covered by both a statute of repose and a statute of limitation. An example is a fraud cause of action based on an express warranty against a contractor for construction defects in the home. The courts will, in those circumstances, typically construe the statute of repose to be limiting so that the shorter statute of 3 years would be the applicable one rather than the longer 8-year statute of repose. An analysis of statutes of limitation and repose issues is a complex and necessary element of every construction defect case and should only be performed with the aid of a qualified professional. Back to Table of Contents     V. STANDING TO SUE Arizona condominium law specifically gives a condominium association the power to institute and defend litigation in its own name on behalf of itself and its members (ARS section 33-1242(4)). This provision enables the association to effectively represent its homeowners in construction defect matters and eliminates the problems each individual homeowner would have in trying to instigate costly and complicated litigation. Alternatively, homeowners can file a class action lawsuit against the builder/developer. Arizona law has long recognized class or representative actions, in which one or more plaintiffs sue on behalf of others (Arizona Rule of Civil Procedure 23(a)). Class-action lawsuits involving any number of plaintiffs are allowed after a judge certifies that they all share a common and typical grievance and seek similar relief. By joining together, homeowners can afford to pursue cases far beyond the financial reach of any single plaintiff. Therefore, a class-action lawsuit is a common and appropriate vehicle for Arizona homeowners who share a builder and are facing construction defect litigation.15 Back to Table of Contents     VI. PROPOSAL TO REFORM ARIZONA HOME CONSTRUCTION DEFECT LITIGATION DEFEATED IN THE HOUSE The rights of homeowners and homeowner associations to sue developers over shoddy workmanship and construction defects would have been sharply curtailed under Senate Bill 1401 approved March 10th, 1998 by the Arizona Senate.16 However, the House Economic Development, International Trade and Tourism Committee refused to give the bill a hearing because the "measure went too far to protect the builders at the expense of the homeowners".17 Proponents of the bill contend that the bill is aimed at preventing large-scale lawsuits that could drive up housing costs and insurance rates. The bill's opponents argue that the bill allows builders to get away with shoddy workmanship by making it more difficult to hold them accountable.18 Senate Bill 1401 only permits two different types of lawsuits for defects in homes: breach of implied warranty and common law fraud. The bill also significantly reduces the ability of homeowners associations to sue developers over construction defects by requiring them to establish a special assessment, approved by two-thirds of the association members, to fund the action. Currently, associations can use general or reserve funds to finance such actions. The proposed law also prevents associations from taking on any actions on behalf of individual homeowners. Associations could only sue over common areas and other things that associations jointly own with homeowners.19 Under the proposed law, homeowners could recover only amounts directly related to the repair of the defects, certain out-of-pocket expenses and any reduction of the fair market value of the property as a result of the defect. They would be prohibited from recovering emotional distress or punitive damages and it is questionable whether they could recover attorney's fees and costs associated with filing lawsuits. Under the bill, properties would be covered by an implied warranty that assumes the dwelling or common facility such as a community swimming pool is "substantially free from structural defects, substantially constructed in a workmanlike manner and substantially fit for habitation." Structural defects such as cracked foundations would be covered for 8 years; workmanlike construction (faulty plumbing, wiring, etc.) and proper habitation for 1 year each. The bill allows developers to include disclaimers on sales contracts that waive the implied warranties. Opponents of the bill fear that unsuspecting buyers would not realize the waivers were in the contracts and consequently, waivers would become the builder's commonplace method of avoiding liability. The bill also establishes a statute of limitations on construction defect cases that requires the owner to file suit within 2 years after the defect is discovered, or should have been discovered. The bill does not say who gets to decide when a defect should have been discovered. Currently, owners have up to 8 years to file such cases. The proposed statute of limitations would work against homeowner associations because the developer usually controls the board of developers for several years after beginning to sell units. The law also requires a homeowner to attempt to negotiate a settlement with the developer before suing. Specifically, it requires the owner to notify the developer of the defect at least 115 days before filing a lawsuit. During that period, the owner must allow the developer to inspect the property and must formally respond, within 25 days, to any offer by the builder to repair the defect.20 Although the bill has been refused a hearing by one committee the House of Representatives, homebuilders will almost certainly attempt to have it heard by a different committee in the near future which might give it a more favorable review. Other states have enacted similar laws which impose procedural requirements on homeowners before allowing them to file lawsuits for construction defects. Even if this particular bill is not enacted in Arizona, the builder's lobby will almost certainly continue to attempt to get similar bills passed in the legislature. For this reason, the following chart has been provided for your reference: CHANGES PROPOSED BY SENATE BILL 1401 CURRENT STATE OF ARIZONA LAW IMPLICATIONS FOR HOMEOWNERS Only two types of lawsuits allowed: implied warranty and common law fraud. A variety of causes of action are currently allowed: negligence, breach of contract, statutory fraud, misrepresentation, and other minor causes of action. Builders would be able to avoid liability for defects outside the warranty period. Also, implied warranties could be waived away with codicils in the contract. Associations would have to establish a special assessment to fund actions against the builder/contractor. Associations can use general or reserve funds to finance lawsuits against builders/ contractors. Two-thirds of association members would have to approve any special assessment, causing needless delay when immediate repairs have to be made. Associations can only sue over common areas and things jointly owned with the homeowners. Associations can represent the homeowners in a lawsuit against the builder/contractor. It is very difficult for individual homeowners to engage in expensive and protracted litigation without the help of the association. It also makes sense for the association to undertake the suit rather than separate actions by each individual homeowner. Homeowners can only recover amounts directly related to repairs and loss of market value. Homeowners can recover emotional stress damages, punitive damages, attorney's fees, etc. Even victorious homeowners would emerge from the lawsuit only partially compensated. Statute of limitations would be 2 years after the defect is discovered or should have been discovered. Homeowners have up to 8 years after the defect is discovered to file suit Builders often try to appease homeowners by making sporadic repairs and 2 years can easily go by without the homeowner realizing that an action should be filed. Also, developers usually control the board of directors for several years. Homeowners have to attempt to settle with the builder by following various procedural guidelines. Homeowners can sue directly upon learning of the construction defects in their home. Typically, builders use this requirement to stall rather than resolve the matter. Back to Table of Contents     VII. CAVEAT The preceding was intended as a general summary of the applicable law for Arizona home construction defect litigation. It is intended only for educational purposes and is not meant to give specific legal advice nor as a comment on any particular situation or set of facts. For specific legal advice concerning a particular fact situation, please consult a legal professional. Back to Table of Contents     VIII. ENDNOTES 1 - Max Jarman and Ruben Navarrette Jr., Home-Building Gripes Soar Complaints to Agency Rise 42% As Bill To Curb Suits Advances, The Arizona Republic, March 14, 1998. Back to text 2 - Rosalie Robles Crowe, Get Lawyer For Septic-System Stink, The Arizona Republic, September 6, 1997. Back to text 3 - ARS ' 33-1242(4). Back to text 4 - Arizona courts, in their discretion, may also allow damages for emotional distress and loss of enjoyment of the home. Back to text 5 - Sunpower of Arizona v. Arizona State Registrar of Contractors (1990) 166 Ariz. 437, 803 P.2d 430. Back to text 6 - The board of directors of a homeowner's association must conduct a meeting to decide whether to litigate. This meeting may be closed to the other members. Back to text 7 - Senate Bill 1401. Back to text 8 - Max Jarman, Bill On Home Defects Dies, The Arizona Republic, April 3, 1998. Back to text 9 - Other causes of action such as mutual/unilateral mistake may be asserted only if warranted by the facts. Back to text 10 - Columbia Western Corp. v. Vela (1979) 122 Ariz. 28, 592 P.2d 1294. Back to text 11 - Woodward v. Chirco Construction Co., Inc. (1984) 141 Ariz. 514, 687 P.2d 1269. Back to text 12 - Woodward, supra at p. 516. Back to text 13 - Brazee v. Morris (1949) 68 Ariz. 224, 227, 204 P.2d 475, 477. Back to text 14 - The 8-year statute of repose applies to all contractual actions brought on or after September 15, 1989. For all contractual actions brought before that date, see the statute of limitations for breach of contract detailed in Part B of Section IV. Back to text 15 - Continental Townhouses East Unit One Ass'n v. Brockbank (App. 1986) 152 Ariz. 537, 733 P.2d 1120. Back to text 16 - Max Jarman, Bill Curtails Homeowner Suits Backers Say Measure Aimed At Calif. -Type Cases, The Arizona Republic, March 11, 1998. Back to text 17 - Max Jarman, Bill On Home Defects Dies, The Arizona Republic, April 3, 1998. Back to text 18 - Ernie Heltsley, Builder's Brawl, The Arizona Daily Star, March 22, 1998. Back to text 19 - Rosalie Robles Crowe, Legislation Would Limit Liability In Home-Building, The Arizona Republic, March 28, 1998. Back to text 20 - Max Jarman, supra at note 16. Back to text   Back to Table of Contents