Rosauer Corp. v. Development

856 N.W.2d 906

ROSAUER CORPORATION, Appellant

v.SAPP DEVELOPMENT, L.L.C.; Todd Sapp; Whispering Creek, L.L.C. ; and W.C. Development, Inc., Appellees.

No. 13–1285.

Supreme Court of Iowa.

Dec. 12, 2014.

Paul D. Lundberg of Lundberg Law Firm, P.L.C., Sioux City, for appellant.

Patrick L. Sealy and John C. Markham of Heidman Law Firm, L.L.P., Sioux City, for appellees.

Opinion

WATERMAN, Justice.

In this appeal, we must decide whether to extend the implied warranty of workmanlike construction to the sale of a residential lot without a home or other structure. The plaintiff, a contractor-developer, bought the lot from a realtor to build townhomes for sale. He alleges the lot had improperly compacted backfill, requiring extensive additional work to get it ready for construction. Plaintiff sued the original developers whose contractor had performed the substandard soil work. The district court granted defendants' motion for summary judgment, ruling that the implied warranty did not apply to the sale of a lot without a dwelling. The court of appeals affirmed, appropriately deferring to our court whether to extend the implied warranty to this scenario. We granted further review.

We now join the majority of courts reaching this question and hold the implied warranty of workmanlike construction does not apply to the sale of a lot with no dwelling. As explained below, the implied warranty was judicially created to protect residents from substandard living conditions. The purpose of the implied warranty is to redress the disparity in expertise and bargaining power between consumers and builder-vendors in recognition of the difficulty of discovering latent defects in complex modern residential structures. We decline to extend the implied warranty to the sale of land between developers able to protect themselves through express contract terms and simple soil tests.¹ Accordingly, we affirm the decision of the court of appeals and the judgment of the district court.

I. Background Facts and Proceedings.

Defendants, Todd Sapp and his company, W.C. Development, L.L.C., developed a large residential subdivision, Royal Highland, out of farmland on the southeast side of Sioux City, Iowa. W.C. Development hired an engineer to prepare a topographical map, perform soil testing, and create a plat. At the center of this dispute is lot 13 of the third addition. The actual grading, backfilling, and compaction of lot 13 was performed by Burkhardt Construction, hired by W.C. Development. W.C. Development also hired Certified Testing Services (CTS) to ensure that the fill and soil compaction were done correctly. In April 2003, W.C. Development sold lot 13 to Kenneth Beaulieu, a realtor.

Plaintiff, Rosauer Corporation, owned by Anthony Rosauer, is a home building and landscaping corporation doing business since 1997. Rosauer purchased lot 13 from Beaulieu for $50,000 on July 24, 2007. It was Rosauer's first purchase of a residential building lot. The lot was subject to restrictive covenants, and Rosauer planned to build two townhomes for sale. Before he purchased lot 13, Rosauer heard rumors that homes in the development were settling due to soil compaction problems. Rosauer nevertheless failed to request any soil tests on lot 13 before he bought it. After the sale was final, Rosauer's lender required soil testing on the lot, which revealed undocumented fill with inconsistent moisture levels. CTS recommended complete removal and replacement of existing fill material before building on lot 13. Rosauer telephoned Sapp to discuss the CTS report. During this phone call, Sapp told Rosauer that the problem had happened on several other lots, and W.C. Development had paid extra costs associated with soil work for those lots. They had no further discussions before this litigation commenced. Rosauer spent $76,858 to comply with the CTS recommendations, with $69,995 of the work completed by his own landscaping company.

Rosauer ultimately built two townhomes on lot 13 and continued to buy other lots in the same development. As he purchased additional lots, Rosauer requested soil testing, but the lot owners refused, asserting liability concerns. Rosauer then negotiated contractual provisions that allowed the option of rescission of those purchases based on postsale soil testing.

In June 2012, Rosauer filed this lawsuit to recover the costs of the soil work on lot 13, naming Sapp and W.C. Development as defendants on theories of negligence and breach of implied warranty. Sapp moved for summary judgment, alleging that Rosauer's economic losses were not recoverable in tort and that Iowa courts had not recognized a claim for implied warranties in the sale of unimproved land. Rosauer conceded that the economic loss doctrine precluded recovery in negligence,² but resisted summary judgment on his implied warranty claims. The district court granted summary judgment for Sapp, reasoning that the land was an unimproved lot lacking a dwelling, and therefore the implied warranty of workmanlike construction did not apply. Rosauer appealed, and we transferred the case to the court of appeals. The court of appeals affirmed, declining to extend the implied warranty to land without a dwelling. We granted further review to decide whether to extend the implied warranty of workmanlike construction to these facts.

II. Standard of Review.

We review rulings that grant summary judgment for correction of errors at law. Parish v. Jumpking, Inc., 719 N.W.2d 540, 542 (Iowa 2006). Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Iowa R. Civ. P. 1.981(3). We view the evidence in the light most favorable to the nonmoving party. Parish, 719 N.W.2d at 543.

III. Analysis.

We must decide whether to extend the implied warranty of workmanlike construction to the sale of land without a dwelling. This is a question of first impression in Iowa. We begin our analysis with a review of the history of the implied warranty of workmanlike construction in our state and the policies underlying that doctrine. Then we examine the elements of the implied warranty as applied to the sale of a lot. Next, we determine whether the underlying policies support extending the doctrine to these facts. Finally, we examine cases from other jurisdictions adjudicating whether to allow implied warranty claims on the sale of lots without dwellings. We conclude the doctrine should not be extended to the sale of lots between developers.

A. The Implied Warranty of Workmanlike Construction in Iowa. Iowa has long recognized in construction contracts an implied warranty that a building “ ‘will be erected in a reasonably good and workmanlike manner’ ” and that it “ ‘will be reasonably fit for the intended purpose.’ ” See Busker v. Sokolowski, 203 N.W.2d 301, 303 (Iowa 1972) (quoting Markman v. Hoefer, 252 Iowa 118, 123, 106 N.W.2d 59, 62 (1960) (discussing the implied warranty found in construction contracts)); see also Smith & Nelson v. Bristol, 33 Iowa 24, 25 (1871) (stating the rule that in a construction contract that did not express a specific manner in which work was to be done, the work “was to be done in a workmanlike manner”). This warranty, however, was not initially recognized in residential construction.

In Mease v. Fox, we recognized an implied warranty of habitability in a residential lease.³

200 N.W.2d 791, 793–95 (Iowa 1972) (describing the retreat from the common law of caveat emptor in leases and the growing trend of implying a warranty of habitability). Mease emphasized that changing housing conditions gave a tenant far less bargaining power than landlords. Id. at 794 (describing a tenant's inability to know about potential housing law violations or deficiencies on the premises).

We did not adopt the implied warranty of workmanlike construction in the sale of residential real estate until our decision in Kirk v. Ridgway. See 373 N.W.2d 491, 493–94, 496 (Iowa 1985) (explaining that there had been no prior implied warranties in Iowa residential real estate contracts). “Traditionally, the common law presumed the home buyer was on the same footing as the seller because he or she could inspect the property and negotiate accordingly. Therefore, each side should live with the bargain.” Dee Pridgen, Consumer Protection and the Law § 18:2, at 18–3 (2002). After World War II, sales of premade homes that builder-vendors mass-marketed to consumers increased dramatically, and purchasers complained of shoddy construction. Id. § 18:2, at 18–4. Because of the harshness of the common law, courts began to recognize implied warranties in the sale of a home for the protection of innocent consumers. See Kirk, 373 N.W.2d at 493.

In Kirk, we adopted an implied warranty of workmanlike construction in the sale of new homes by a builder-vendor. See id. at 496. Kirk had purchased a new home from Ridgway, a contractor who built and owned the home. Id. at 492. After purchasing the home, Kirk discovered peeling paint resulting from defective construction and brought an action for breach of an implied warranty. Id. The district court found that Ridgway had breached the implied warranty of workmanlike construction, and on appeal we addressed the situation in which “a prospective homeowner does not hire the builder to build the house but buys one from him already built.” Id. at 492–93.

In Kirk, we gave three reasons for adopting the implied warranty of workmanlike construction in the sale of a new home. Id. at 493–94. First, we noted the change in house-construction techniques “from single-unit construction under the supervision of the owner, to the tract development commonly found today.” Id. at 493. Second, we noted the increasing interest other courts had taken in consumer protection in real estate transactions. Id. Finally, we pointed out the increasing complexity of home construction makes it more difficult for the buyer to discover latent defects, requiring...