SB 800's Nasty Surprise: An Expanded 10-Year Warranty for Construction Defects


June 9, 2003

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Thelen Reid Brown Raysman & Steiner LLP

SB 800 significantly modifies warranty obligations owed by developers, contractors and subcontractors on residential construction projects. Because of SB 800's length and complexity, a careful review and analysis of its warranty provisions is needed to fully understand the impact of the new statute. This article summarizes such a review.

The Law

SB 800 was signed into law on September 20, 2002, by Gov. Davis. It applies to new construction intended to be sold as individual dwelling units, whether as single-family homes or attached units. It was sought by plaintiffs' attorneys in response to the Aas decision, which precluded recovery in tort for construction defects that had not yet caused property damage or physical injury. SB 800 is codified at Civil Code §§895, et seq.

The New 10-Year Warranty

Civil Code §896 provides that a "builder" and other participants in the construction process shall be liable for violation of certain standards set down for new residential construction. The standards establish quality requirements for residential construction and use warranties as the enforcement mechanism. A key issue is the time period for which parties may be held liable under the warranties.

Prior law provided a 4-year limitation for patent construction defects and a 10-year limitation for latent defects. Code of Civil Procedure §§337.1, 337.15. Most of the SB 800 standards are silent as to their duration. But, Civil Code §941 (a) provides a 10-year limitation period for actions under the SB 800 while §941 (d) expressly provides that §§337.1 and 337.15 "shall not apply to actions under this title." With that, developers, contractors and subcontractors in California now provide 10-year warranties for all but a few SB 800 standards.

While those involved in residential construction generally understood that potential liability existed for up to 10 years if a building developed severe water leaks or experienced serious soil subsidence and settlement, it is a safe bet that few of them appreciate the breadth of SB 800's 10-year warranties. Some of the more startling examples:

• For 10 years, paths, patios and drainage systems, as installed, shall not cause water or soil erosion to enter into or come into contact with the structure so as to cause damage to another building component.
  
  
• For 10 years, "[r]etaining walls and site walls, and their associated drainage systems, shall only allow water to flow beyond, around or through the areas designated by design."
  
  
• For 10 years, "[t]he lines and components of the plumbing system, sewer system, and utility systems shall not leak" (regardless of whether the leaks cause resulting damage) and "shall not corrode so as to impede the useful life of the systems."
  
  
• For 10 years, "[s]hower and bath enclosures shall not leak water into the interior of walls, flooring systems, or the interior of other components."
  
  
• For 10 years, "[s]tucco, exterior siding, and other exterior wall finishes… shall not contain significant cracks and separations."

The 10-year period applies even if the defect is patent or was noticed within the first year after the residence was purchased. Further, §901 provides that "a builder may not limit the application of Chapter 2 (commencing with Section 896) or lower its protection through the express contract with the homeowner." Thus, a "builder" cannot contract out of the new 10-year warranty.

Exceptions to the 10-Year Warranty

Because of the broad language of §941, one must assume that a 10-year warranty exists unless there are exceptions. There are some. Section 896 (e), (f) and (g) revisit some of the issues addressed in §896 (a) through (d), address some new issues and provide the following primary limitations periods, all of which run from the date of "close of escrow":

Some systems are listed in different portions of the statute, requiring careful consideration. For example, §896 (a) (14) provides that plumbing systems "shall not leak," and §896 (a) (15) provides that plumbing lines "shall not corrode so as to impede the useful life of the systems." But, §896 (e) provides a four-year limitation for material impairment of use. Thus, an action cannot be brought for defects in plumbing systems when their use has become materially "impaired" after four years from close of escrow unless they leak (even though no property damage occurs) or they have corroded so as to impede the useful life of the system, in which case there is a 10-year limitations period. This illustrates the level of detail needed to determine the nature of the warranty and the warranty period for a given defect.

Useful Life

The term "useful life" appears in connection with many of the standards. But, no definition of "useful life" is provided, with one exception. Courts will have to determine the meaning in all other contexts.

Section 896 (g) (3) (B) does define "useful life:" the "representation of how long the product is warranted or represented, through its limited warranty or any written representation, to last by its manufacturer." But, this definition is limited to the "manufactured products" listed in §896 (g) (3) (A), including electrical and plumbing fixtures and appliances.

The Fit-and-Finish Warranty

Under §900, a "builder" is required to provide a homebuyer with a "minimum express one-year limited warranty covering the fit-and-finish of" several specified building components, including cabinets, flooring, countertops, painted finishes and trim. The "fit-and-finish" warranty is not defined, but whatever it is, if the builder fails to provide one, "the warranty for these items shall be a period of one year."

Builders have an incentive to provide the narrowest possible "fit-and-finish warranty." If an extraordinarily limited fit-and-finish warranty is provided, plaintiffs may argue that the limitations are invalid. As noted above, §901 provides that "a builder may not limit the application of Chapter 2 (commencing with Section 896) or lower its protection through the express contract with the homeowner." But, the "fit-and-finish" warranty is in Chapter 3. By implication, the statutory scheme allows builders to "lower" the protection of the statutory fit-and-finish warranty through an express fit-and-finish warranty.

Because of this, a builder should provide an express written fit-and-finish warranty. It should contain generous tolerances, strict notice requirements and a provision that the fit-and-finish warranty does not extend to alleged fit-and-finish defects that existed and could have been observed on the date of the walk-through with the buyer and that were not included on the buyer's punchlist. This should go a long way toward minimizing nuisance fit-and-finish claims, an important exercise considering the potentially extended fit-and-finish warranty periods on condominium projects, which are discussed below.

Warranty Commencement Dates

Section 941 (a) provides an outside limit of "10 years after substantial completion" for bringing an action to recover damages under SB 800. Thus, the new 10-year warranty does have a definite commencement date - the date of substantial completion.

However, the 1-, 2-, 4- and 5-year warranties in §896 all run from the date of "close of escrow." In the case of single-family homes, the "close of escrow" date is easily determined. However, the date is not clear for condominium projects. Section 895(e) provides:

With respect to claims by an association, as defined in Section 1351, "close of escrow" means the date of substantial completion, as defined in Section 337.15 of the Code of Civil Procedure, or the date the builder relinquishes control over the association's ability to decide whether to initiate a claim under this title, whichever is later.

While the statute does not define "relinquishment of control," presumably this date always will be well after substantial completion, as condominium units cannot be sold until a certificate of occupancy is obtained, which typically also is the date of substantial completion. In theory, the date of relinquishment of control could be several years after the date of substantial completion because it is not unusual for large condominium projects to take several years to sell out. Thus, the 1-, 2-, 4- and 5-year warranties on condominium projects may be for considerably longer periods than if measured from the date of substantial completion.

The fit-and-finish warranty under §900 also does not contain a commencement date. Associations will argue that it is the date of "close of escrow." For condominium common areas, this date could be several years after substantial completion. Thus, common interest developments may attempt to force builders to "tune up" the fit and finish of common areas several years after substantial completion. Builders will attempt to flow these obligations down to the subcontractors. Therefore, it is advisable for the developer to provide a narrow fit-and-finish warranty for the common areas, including a statement that the fit-and-finish warranty for the common areas will commence not later than the date they were first put into use.

Warranties for Individual Condominium Units

An argument can be made that the warranties in §§896 and 900 do not apply to individual condominium units. Section 895 (e) provides only one definition of "close of escrow" for the commencement date for certain claims by an association, and it is not the date of the sale of the individual condominium unit. Rather, the "close of escrow" date is the date of substantial completion "or the date the builder relinquishes control over the association's ability to decide whether to initiate a claim," whichever is later. Further, the definition of "claimant" and "homeowner" is limited, in the case of common interest developments, to the association. Thus, an argument can be made that the warranties under §§896 and 900 do not apply to individual condominium units.

Whether SB 800 warranties apply to the "separate interests" in a condominium project has substantial implications. A 200-unit, high-rise condominium project provides a good example. Usually none of the units will be sold until the entire building is substantially completed. Subcontractors typically will demobilize from the project shortly after substantial completion, around the time the first units are being sold. It is not unusual for a large condominium project to take several years to sell out. If the fit-and-finish warranty applies to sales of individual units, the developer (and subcontractors) will have "punchlist" obligations extending for many years -- until one year after the sale of the last unit.

Contractual Responsibility for SB 800 Warranties

The "builder" under SB 800 (which at least includes the developer of a project) is the entity with the most direct exposure for fulfilling SB 800 warranties. But, claims also can be made directly against subcontractors and suppliers. Developers also are likely to include provisions in their contracts obligating general contractors to fulfill all warranties under SB 800. Developers may even want general contractors to agree that they are "builders" under SB 800 and that developers may list them as "builders" in SB 800 notices to buyers. Contractors are likely to include provisions in their subcontracts and purchase orders obligating subcontractors and suppliers to fulfill all SB 800 warranties within their scopes. These added warranty obligations are likely to increase the cost of new residential construction in California as contractors, subcontractors and suppliers increase their prices to cover their expanded warranty obligations.


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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.





©2003 Thelen Reid Brown Raysman & Steiner LLP