Lender Beware: Liability for Construction Defects
With the financial and mortgage market fallout, home and condominium sales throughout the country are taking a hit. Many home and condominium developers have defaulted on construction loans resulting in an explosion of distressed projects. Lenders face the prospect of foreclosing on residential property developments that are in various stages of construction as a consequence of the downturn of the residential real estate market and developer defaults. The foreclosing lender may acquire completed projects or may wish to complete construction before the homes or condominiums can be sold. Due to the conflicting and complicated issues involved, financial institutions in today’s market face a daunting task deciding whether to foreclose on a construction loan and what to do with the property upon foreclosure. Not only does the lender have to consider the factors ordinarily involved in the foreclosure process, the lender also has to consider the exposure to liability for construction defects when it steps into the shoes of the developer.
In most jurisdictions, a mere lender is not liable to the purchaser of a new home for construction defects. Instead, the buyer traditionally looks to the builder or contractor for relief in tort or contract for construction defect claims. However, with the ever-increasing role of construction lenders, the question arises as to whether the buyer’s contract and statutory remedies should extend to the lender.
Each situation is different. Depending on the level of involvement, lenders may become a joint venturer with the developer, a de facto developer, or a successor developer, all of which have varying levels of liability for the lender. Stay tuned for more on this issue.