BAM NEWS

May a builder sell a new home “AS IS”? The answer is no or, more accurately, almost always no. A builder who is selling at a significant discount, or at a loss, may want to sell “AS IS” to avoid being responsible for warranties. However, under Minnesota law, a true “AS IS” sale of a new home by a builder to a homeowner is not permitted.
In Minnesota, a builder is required by statute to warrant a new home (called a “dwelling” under the statutory warranties) against faulty workmanship and defective materials for a period of one year, against defects caused by faulty installation of plumbing, electrical, heating and cooling systems for a period of two years and against major construction defects for a period of ten years. A builder is required to make these warranties, “… in every sale of a completed dwelling and in every contract for the sale of a dwelling to be completed.” These warranties cannot be waived or modified by contract or otherwise.
It is this language in the law which prevents “AS IS” sales because it prohibits the waiver of the statutory warranties. There are a few exceptions to this rule. The first deals with a sale to an investor. The law requires builders to warrant a dwelling to a “vendee.” A vendee is defined as a purchaser of a dwelling and includes both the initial vendee and any subsequent purchasers. However, the law defines the “initial vendee” as a person who first contracts to purchase a dwelling from a builder, “… for the purpose of habitation and not for resale in the ordinary course of trade.” This definition suggests that a builder is not required to warrant a new home to an investor because the investor is purchasing the new home not for purposes of habitation but, rather, for resale.
Less clear is whether the warranties do not apply at all or whether they do not apply to the investor but will apply to a subsequent purchaser. Another exception has only limited application. The law requires a builder to make the one, two and ten year warranties, “in every sale of a completed dwelling and in every contract for the sale of a dwelling to be completed…”
This exception could arise, for example, in a condominium development where the buyer is purchasing only a “shell” unit. In this situation, the builder is not selling a completed unit and it is the buyer, not the builder, who will complete the unit. (There are additional warranties which apply to the sale of a condominium unit which must be considered, although there are exclusions which may also apply.)
A third exception permits the waiver of the warranty against major construction defects as to a specific defect if the defect is discovered before the sale. There must be full disclosure of the defect, 2008including disclosure of the difference in value between the dwelling with and without the defect, as determined by an independent appraiser, contractor, insurance adjuster, engineer or other similarly knowledgeable person selected by the buyer.
There are other requirements which must be met, including the recording of the waiver with the county recorder or registrar of titles. This exclusion applies only to the warranty against major construction defects and cannot be used to waive the one or two year warranties. A fourth exception is more of an exclusion than an exception.
A “dwelling” under the warranty law is defined as a, “…new building, not previously occupied, constructed for the purpose of habitation…” I highlight the words “not previously occupied” to emphasize that occupancy of a new home - prior to the first sale – excludes the new home from coverage under the new home statutory warranties.
For example, if builder builds and then lives in a model home, that home to be excluded from coverage under the one, two and ten year statutory warranties on that home. Under these circumstances, the builder license law requires the builder to disclose to the buyer, in writing and before entering into a purchase agreement, that the home will not be covered by the statutory warranties.
If the builder has occupied the home for one year or more, the license law requires the builder to also disclose that the home is not covered under the Contractor’s Recovery Fund. Finally, there is a provision in the warranty law which allows a builder to exclude or modify the one, two and ten year warranties but only by providing substitute express warranties offering substantially the same protections. There are specific requirements which must be met.
This exception does not allow a builder to exclude warranties but it does allow a builder to substitute express warranties for the statutory warranties if the requirements of the statute are met.
Remember that the warranty law applies only to persons, firms or corporations which construct dwellings for the purpose of sale. So, for example, a bank, which has acquired a new home through a mortgage foreclosure, is not required to warrant the new home under the statutory warranties because the bank is not in the business of constructing dwellings for the purpose of sale.