Between a Seller and a Buyer, Who Owns a Construction Defect Claim?

If a construction defect exists in a home both before and after sale
to a buyer, who owns the claim? It depends on who learned about the
problem, and when.

Suppose Owner owns a residential property that recently underwent a
substantial remodel of an upstairs bathroom. One day, Owner opens a
rarely used closet and finds that the closet ceiling, located
immediately below the upstairs bathroom shower, is stained, wet, and
crumbling. There’s not much debate that the cause of action—the right to
demand reimbursement and to sue the contractor—belongs to Owner.

But, what if the damage goes unnoticed before Owner sells to Buyer?
Who, then, has the right to sue the contractor—the Owner who owned the
property when the damage occurred, or the Buyer who first noticed the
damage some time later? Traditionally, a cause of action would have
accrued—gelled and become the basis for a potential lawsuit—to the Owner
when the damage occurred, even if not yet discovered. California courts
have recognized, however, that construction defect claims on real
property present a unique situation where damage to the property may
occur over the course of successive owners, with each one not being
aware of the damage.

In Krusi v. S.J. Amoroso Construction Co., the court held
that if obvious damage occurs while Owner owns the property, then Owner
has the cause of action. 81 Cal. App. 4th 995 (2000). Even if the damage
is not repaired and the property is sold to Buyer, Owner still owns the
cause of action and Buyer is not entitled to sue the contractor for the
existing damage because a cause of action is a personal right that
doesn’t automatically transfer by mere virtue of sale of the property.
Once the cause of action came into existence, it remained with the
person owning the property at the time. Krusi was clarified in Siegel v. Anderson Homes, Inc.,
where the court held that the cause of action belongs to the owner who
first becomes aware of the damage. 118 Cal. App. 4th 994 (2004). Both
conditions are necessary—(1) an owner who (2) first becomes aware of the damage.

There are practical implications here for brokers, agents, buyers,
and sellers of residential real property. The owner who first learns of
the damage owns the cause of action. If Owner is not aware of the
damage, but during escrow receives a copy of Buyer’s inspection report
noting the damage (perhaps for purposes of negotiating a reduction in
price), Owner is now aware of the damage and owns the cause of action, even if Owner sells the property to Buyer.
The cause of action is a personal right that belongs to the Owner and
does not automatically transfer to Buyer when the property is sold.

If there is any potential that a selling owner is aware of damage
that could be the basis for a cause of action, it behooves the buyer to
request that the seller transfer that right to the buyer through a
separate assignment. Otherwise, the buyer could be precluded from suing
the contractor. This preclusion could be insignificant for minor drywall
damage, but significant for major damage due to structural problems,
for example.

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