Most of the time, one thinks of implied warranties of workmanlike construction as something that applies to home builders. After all, they enter into the agreement to build and sell a new home to a homebuyer. But a recent case required the court to go back a step and look at the actions of a subdivision developer in preparing the land for sale—and came to a startling result.
In Rosauer Corporation v. Sapp Development, LLC., Sapp Development developed a residential subdivision on the southeast side of Sioux City. Its earth moving contractor scrapped some hills and filled in valleys but apparently did not adequately compact the soil, even though Sapp Development represented that the fill had been tested and met industry soil compaction standards.
A realtor purchased Lot 13 and marketed it for its hilltop views of the adjacent golf course. Rosauer Corporation, a homebuilder, purchased Lot 13 from the realtor to develop two town homes. Rosauer had heard that other builders were encountering settling problems and asked to have the soil tested before entering the purchase agreement, but the realtor refused. Rosauer purchased the lot anyway. A short time later, Rosauer had the soil tested, which test found that the top 15 feet of soil was not properly compacted. Rosauer confronted the owner of Sapp Development seeking to have Sapp Development pay the increased construction costs, but it refused.
Rosauer spent $76,858.84 to remove improperly compacted fill materials and to properly compact the replacement soil and then sued Sapp on the ground that the subdivision developer had violated an implied warranty of workmanlike construction to develop a buildable residential lot. Rosauer argued that prior Iowa case law, holding that the implied warranty applied to homebuilders, should be extended to make a subdivision developer liable for an implied warranty of workmanlike construction of residential lots.
In its decision in this case issued on April 16, 2014, the Iowa Court of Appeals recognized that other states had allowed home buyers to sue the subdivision developer from whom they purchased a lot on which to build a home for defective construction of the lot. However, it stated that the justification was that home buyers generally were not sophisticated land purchasers and they rely heavily on the expertise of the subdivider or home builder.
In contrast, the court found that Rosauer was a sophisticated home builder who was knowledgeable about soil compaction issues and could have acted to protect itself. Therefore, the Court of Appeals refused to extend doctrine of an implied warranty of workmanlike construction to a subdivision developer for the benefit of a home builder without direction from the Iowa Legislature or the Iowa Supreme Court.
This decision will likely be appealed to the Iowa Supreme Court as suggested by the Court of Appeals. In the meantime, home builders should consider inserting provisions in their lot purchase agreements discussing the need for proper soil compaction and remedies for failing to do so. And on the subdivision developer’s side, the case is a reminder that subdivision developers are builders too, and that the implied warranty of workmanlike construction, under the right circumstances, might apply to them.