In a decision released yesterday, the Fourth District Court of Appeal held that a second purchaser of a new construction home was not required to arbitrate its claims for construction defects, despite receiving an assignment of the homebuilder’s warranty from the original purchaser of the home.
In Oakmont Custom Homes, LLC v. Billings, a contractor built a home for a purchaser. As part of that transaction, the purchase and contractor entered into a building agreement, which contained an arbitration provisions. When the work was completed, the purchaser received a limited warranty from the contractor. Thereafter, the purchaser sold the home to another person. As part of that transaction, the original purchaser assigned all warranties to the second purchaser.
The second purchaser ultimately sued the contractor, claiming construction defects and building code violations resulted in water damage and mold in the home. The second purchaser did not seek relief under the limited warranty in her lawsuit. The contractor moved to compel the dispute to arbitration, arguing that the claims were sufficiently related to the original building agreement containing the arbitration agreement, in part because the second purchaser had received an assignment of the limited warranty. The trial court denied this motion, resulting in an appeal to the Fourth District Court of Appeal.
On appeal, the District Court agreed with the trial court, ultimately concluding that the second purchaser could not be compelled to arbitrate her claims because the second purchaser’s contract to purchase the home did not indicate it was subject to the building agreement and the second purchaser had not received a copy of the building agreement before closing on the home. Further, the court noted that her claims did not seek to enforce the building agreement or otherwise depend on the building agreement. Based on this, the District Court concluded that there was no agreement between the contractor and the second purchaser to arbitrate any claims between them.
The key takeaway from this case for contractors who use arbitration agreements or provisions as part of their construction contract is that they should make sure to include those provisions in any warranty they give separate from the contract. Further, contractors who are selling the land in connection with the home may want to consider referencing the arbitration provision in the deed to ensure that subsequent purchasers are on notice of the arbitration agreement/provision. Finally, contractors may want to consider including language obligating the original purchaser of a home to notify a subsequent purchaser of the arbitration provision as part of any sale.
It is important to note that based on the Fourth District’s reasoning, it would not be enough to simply cut off the warranty and prevent its transfer to a subsequent purchaser. The second purchaser in this case did not sue to enforce the limited warranty, and the court did not take it into account in reaching its decisions. If contractors want the arbitration provisions in their construction contracts to apply to subsequent purchasers, they should focus on ways to ensure those provisions are transferred to subsequent purchasers or that subsequent purchasers are put on notice of their existence.