Insight

When a Dream Home Becomes a Nightmare

A modern-day Bleak House* offers a cautionary tale about buying real estate—and a legal strategy that helped our clients gain redress.

Blueprint of a house with yellow caution signs
Peter B. McGlynn

Peter B. McGlynn and Robert Stetson

September 21, 2020 01:37 PM

Buying a home is the most important purchase most people will ever make. A house, after all, is a place to raise children, entertain friends and family, and always feel safe and secure. For one family, though—clients of ours—their dream home turned out to be nothing of the sort. The following is taken from the record in their case.

Our clients are a successful, well-educated married couple. In 2013, they bought a large house—with an eye toward the requirements of their special-needs daughter—in a suburban community. The sellers, also a married couple, had made renovations to the house which they prominently displayed in their sales literature and which were a significant factor in our clients’ decision to purchase the home.

The sellers have owned a licensed construction business for more than 40 years. They’ve also operated a successful business that acquires, renovates, and sells or leases single and multifamily properties and one commercial property. Those factors would become an important aspect of this case.

After our clients bought the house, they began renovating the second-floor bathrooms. When their contractor began taking out walls and flooring, he discovered several hidden defects: A load-bearing wall in the kitchen ceiling on the ground floor had been removed as part of the sellers’ kitchen expansion, and, in its stead, the sellers installed a non-building-code-compliant beam.

The sellers had failed to obtain building permits for the renovations, failed to have the work inspected.

The contractor soon discovered more design and construction defects in the kitchen and in an adjacent room—defects that could have caused both rooms’ ceilings to collapse without warning. Our clients also retained a structural engineer who concluded that the work in both rooms was defective, non-code-compliant, and dangerous—conclusions consistent with those reached by the town’s building inspector following his own inspection of the work.

The sellers had failed to obtain building permits for the renovations, failed to have the work inspected, and failed to obtain a certificate of occupancy from the town—none of which they disclosed to our clients during the pre-closing inspection.

Our clients contacted the sellers’ broker to request information from the sellers about the renovations and who had performed them—information the sellers refused to provide. Per their counsel’s advice, they refused to communicate with our clients.

After further unsuccessful attempts to reach out to the sellers, the buyers retained our firm. We sent a letter to the sellers containing a settlement demand of $210,000—the contractor’s repair estimate—and a demand for the disclosure of the identity of whoever had done the renovations. The sellers were required to make a reasonable settlement offer within 30 days.

The sellers’ response letter—which would end up playing a dramatic role in the consequent trial—denied liability, claimed that all the work was code-compliant and structurally sound, and failed to identify who had done the work. It also threatened our clients with a claim for damages and attorneys’ fees if our clients filed suit.

Our clients filed a lawsuit against the sellers in September 2014. The complaint contained four counts: defective construction work, fraud, breach of the implied warranty of habitability, and violations of consumer-protection law. In response, the sellers denied any liability, claimed that the statute of repose barred our clients’ claims and that because the sale was a private transaction, it was not covered by consumer-protection laws or the implied warranty of habitability.

During discovery, the sellers continued to balk at disclosing the identity of those who had done the renovations. We obtained a court order directing the sellers to disclose this information. The sellers eventually identified three individuals. During their depositions, those individuals admitted that the sellers knew they were legally required to obtain a building permit and certificate of occupancy for the work, but failed to do so. During their depositions, meanwhile, the sellers admitted that the wife had shredded most of the renovation documents.

We survived two motions for summary judgment filed by the sellers, though two of the four counts in our clients’ complaint—for fraud and defective workmanship—were dismissed by the court. The remaining two counts, for breach of the implied warranty of habitability and consumer-protection violations, survived to be decided by a jury.

There were several significant issues we needed to address at trial:

  • Whether the law recognized a cause of action for breach of the implied warranty of habitability regarding the sale of a renovated home rather than the sale of a newly built one.
  • Whether the sellers could avoid liability under the exculpatory provisions contained in the Purchase and Sale agreement.
  • Whether the sellers had engaged in “trade or commerce” (an element of proof under the consumer-protection laws), and whether they were “builder-vendors” (an element of proof in connection with the breach of the implied warranty of habitability claim).
  • Whether the renovation work was completed after the six-year statute of repose for construction-defect claims—which allegedly commences upon beneficial use and legal occupation of the renovation work—had elapsed, as the sellers also claimed.

We retained a jury consultant to help us refine our trial themes, and with jury voir dire and selection. We conducted online a mock voir dire and mock jury trial, both of which revealed our need to retool some of our themes and trial strategies.

In response to the sellers’ statute-of-repose defense, one of our pretrial motions in limine sought to preclude the sellers’ use of that defense based on the wife’s spoliation of renovation documents. We also argued that the statute of repose was inapplicable to the breach of the implied warranty of habitability claim given that the sellers never obtained an occupancy permit for the renovations. The trial judge deferred ruling on our motion until the trial was underway.

Jury selection was aided by our jury consultant, who amassed information on potential jurors and helped us retool our trial themes. Members of the jury had technical or construction backgrounds and would, we hoped, understand the technical issues presented during the trial.

During the nine-day trial, we called the sellers to the stand as part of our case-in-chief, presenting them with transcripts of their deposition testimony in which they admitted they knowingly failed to obtain a building permit and certificate of occupancy for the work. They continued to maintain that the renovations were neither defective nor structurally unsound. Photographs of the work presented to the jury provided evidence of improperly poured foundations, bowed structural members hidden behind interior walls, improperly installed electrical wiring, an untested gas line, and a missing ceiling beam. The sellers also admitted that key portions of their response letter were incorrect—an admission their counsel acknowledged during the trial.

The jury also heard the wife admit that she had shredded the renovation documents—and, while she was still on the stand, she unexpectedly revealed that she hadn’t previously disclosed the name of a fourth individual who performed some of the renovation work, a potential violation of the court’s prior disclosure order. The next morning, we presented the court with a second motion in limine seeking to bar the sellers from introducing any evidence concerning their statute-of-repose defense. The motion was allowed.

The jury heard evidence that the sellers’ ownership and use of the house advanced their business model of acquiring and renovating real estate to boost its value and leverage its equity to purchase additional real estate. For more than 40 years, the jury learned, the sellers had operated a successful business of this sort. The income they derived from what they called their “rental business” exceeded the income from their construction business.

The house was also the location for the management and record-keeping for both businesses. The jury was informed that the sellers had leveraged the equity in their rental properties to acquire the house they sold to our clients, and then leveraged the equity in that house to buy another that they rented out for several years thereafter.

The jury deliberated about two and a half hours before awarding our clients compensatory damages on the breach of the implied warranty of habitability claim, and double damages for the defendants’ willful and knowing violations of consumer-protection laws and for their “bad faith” response letter. Our clients were also awarded over $400,000 in costs and attorneys’ fees, but the court declined to award costs or fees for the jury consultant. Our clients contend that the current judgment, with accrued interest, is approximately $2.6 million. This amount is contested by the sellers, who appealed the judgment. Our clients cross-appealed the trial court’s dismissal of the fraud and defective-workmanship counts, as well as its denial of our request for jury-consultant fees and costs. Oral arguments are expected sometime this fall.

The appellate court is being asked to consider, among other things, whether the trial court applied the correct legal standards in denying the sellers’ motions for a new trial and for a directed verdict; vis, that “trade or commerce” and “builder/vendor” proof elements under consumer-protection laws and the laws governing breach of the implied warranty of habitability were not met in what the sellers alleged was only a private transaction. The court is also being asked to consider if the trial court committed reversible error in declining to award jury-consultant fees and costs.

Preventing Your Own House of Horrors

From the Publisher

The authors' clients’ discovery of latent defects in their house was neither unique nor novel. “Do-it-yourselfers” across the country renovate their homes every day. Most follow the law, while others—either ignorant of the applicable laws or knowingly skirting them—do not. Detection of unpermitted renovations by overworked municipal inspectors is often difficult, and many states lack adequate remedies for innocent homebuyers.

Occurrences like those experienced by the authors’ clients are likely to increase in the near term. In response to the COVID-19 pandemic, people are leaving their urban dwellings for the suburbs at an unprecedented rate. Many will purchase houses that have been renovated, ideally by owners who followed the law. Other, less fortunate homebuyers, though, may be required to perform costly repairs and attempt to recover such costs from their sellers. Before you purchase a house, take the time to understand the laws regarding undisclosed renovation work in your state, check the house’s records on file at the local building department, ask your seller about the house’s renovation history, and engage experienced counsel to help you navigate the laws concerning disclosure of renovation work.

*Bleak House by Charles Dickens, published in 1853, was a satirical novel about a long-running legal case that helped support a judicial-reform movement in England culminating in the enactment of legal reforms.

Peter B. McGlynn, a partner at Bernkopf Goodman LLP, is a trial attorney specializing in construction, surety, malpractice, commercial, and bankruptcy cases. Peter has tried to verdict or decision in excess of 150 cases throughout the United States representing general contractors, subcontractors, architects, engineers, lenders, sureties, and owners, among others, on a wide array of commercial, construction, surety, and bankruptcy disputes.

Robert W. Stetson, a partner with Bernkopf Goodman LLP, has significant experience in disputes involving corporations and other business organizations, construction projects, contracts, real estate, landlord-tenant, and shareholder disputes. Bob represents a variety of clients ranging from individuals to multi-national corporations in all phases of litigation including trial and appellate practice.

Headline Image: ISTOCK / VASKO, STEVECOLDIMAGES, KLH49

Related Articles

IN PARTNERSHIP

Foiled Plans: How Adam Leitman Bailey, P.C. Thwarted A Famous Building’s Trickery


by Rebecca Blackwell

When the Frick building, planned renovations that would threaten the welfare of nearby residents, Adam Leitman Bailey, P.C. jumped in to uncover the truth.

Front of the Frick Building in New York City

House Trap


by Heidi E. Storz

Special districts are often being used as profit centers that leave residents to foot the bill. These homeowners deserve protection from unscrupulous developers who attempt to fleece them and avoid accountability.

Special Districts Changing Property Ownership

Client Service in Real Estate Law: Identifying Attorneys Who Truly Care


by Best Lawyers

What is client service in real estate law, and why is it important? Learn more about the value a real estate lawyer who emphasizes client service can provide.

Two unseen individuals shake hands with miniature house models in background

4 Essential Steps for Commercial Real Estate Due Diligence


by Best Lawyers

Due diligence in real estate is essential for all parties. Best Lawyers walks through the key steps of effective due diligence in commercial real estate.

Animated magnify glass in front of building and checklist

The Role of Title Insurance in Real Estate Transactions


by Best Lawyers

Title insurance can provide benefits, protection and peace of mind in a real estate transaction, which can often be complex. Best Lawyers take a closer look.

Individual signing a document with house keys in background

Leasing Commercial Real Estate


by Best Lawyers

We have compiled this “leasing commercial real estate checklist” to help guide discussions with a commercial real estate lawyer before signing a lease.

Unseen figure with pen points to apartment building model

IN PARTNERSHIP

A Street Fight in the Bronx


by Adam Leitman Bailey

Adam Leitman Bailey’s firm helped settle a Bronx brawl over land between two parties and brought victory against a long-standing powerful family in New York.

Warehouse in New York at night

IN PARTNERSHIP

Heroes Among Men: How Adam Leitman Bailey, P.C. Saved Lives of the Lifesaving


by Rebecca Blackwell

When a 911 Center in New York City was put in danger, Adam Leitman Bailey, P.C. went to work against the unlawful and hazardous actions of a developer whose construction threatened the peace and safety of all who worked for the Fortune 500 company.

Danger construction site no trespassing sign on fence

The Role of Flood Zones in Florida Real Estate Transactions


by Best Lawyers

Get a comprehensive understanding of flood zones in Florida real estate. Learn about the risks, insurance requirements and disclosure obligations.

Trees blowing in flood waters and storm

How Real Estate Transactions in the Residential Sector Work


by Best Lawyers

Discover how real estate transactions in the residential sector work with this guide. Learn about the stages, parties involved and legal requirements.

Man looking at houses on computer

IN PARTNERSHIP

Adam Leitman Bailey Saves Upper East Cooperative From Forced NYU Combination With Neighboring University Building


by Rebecca Blackwell

When a New York resident of an iconic building was faced with a potentially devastating renovation to his beloved home, powerhouse real estate lawyer Adam Leitman Bailey tightened the knot on the loophole others said didn’t exist.

Large brownstone building with blue sky above in New York City

IN PARTNERSHIP

Residential Real Estate Slowdown Expected To Continue in 2023


by Mick Harris

Rising housing costs and mortgage rates were becoming the norm in 2022. Experts anticipate that 2023 may show much of the same.

Apartment buildings with yellow haze

IN PARTNERSHIP

How To Run a Board Meeting


by Adam Leitman Bailey

Adam Leitman Bailey explains how using Robert's Rules of Order can assist with effective and productive board meetings in real estate matters.

Several people sitting in chairs around boardroom table

IN PARTNERSHIP

The Wolf Near Wall Street


by Rebecca Blackwell

When tensions among shared real estate owners reached their tipping point, Adam Leitman Bailey P.C. stepped in and solved a modern issue with an ancient remedy.

Mortgage documents on desk

There’s Hope for the Canadian Real Estate Market Post COVID-19


by Steven Tulman

Clover Mortgage offers advice and predictions on the Toronto real estate market as we move on post-pandemic.

Canadian Real Estate Market Post COVID-19

Brick to Click


by Lindsay Mesh Lotito

Trends in commercial real estate have been fast-tracked by the pandemic. Here’s what lenders and borrowers must do to ensure their viability in a rapidly changing world.

Online Shopping Shifts Commercial Real Estate

Trending Articles

Announcing the 2023 The Best Lawyers in America Honorees


by Best Lawyers

Only the top 5.3% of all practicing lawyers in the U.S. were selected by their peers for inclusion in the 29th edition of The Best Lawyers in America®.

Gold strings and dots connecting to form US map

Announcing the 2022 Best Lawyers® in the United States


by Best Lawyers

The results include an elite field of top lawyers listed in the 28th Edition of The Best Lawyers in America® and in the 2nd Edition of Best Lawyers: Ones to Watch in America for 2022.

2022 Best Lawyers Listings for United States

2021 Best Lawyers: The Global Issue


by Best Lawyers

The 2021 Global Issue features top legal talent from the most recent editions of Best Lawyers and Best Lawyers: Ones to Watch worldwide.

2021 Best Lawyers: The Global Issue

The U.S. Best Lawyers Voting Season Is Open


by Best Lawyers

The voting season for the 31st edition of The Best Lawyers in America® and the 5th edition of Best Lawyers: Ones to Watch® in America is officially underway, and we are offering some helpful advice to this year’s voters.

Golden figures of people standing on blue surface connected by white lines

How To Find A Pro Bono Lawyer


by Best Lawyers

Best Lawyers dives into the vital role pro bono lawyers play in ensuring access to justice for all and the transformative impact they have on communities.

Hands joined around a table with phone, paper, pen and glasses

The Best Lawyers in Australia™ 2024 Launch


by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

How Palworld Is Testing the Limits of Nintendo’s Legal Power


by Gregory Sirico

Many are calling the new game Palworld “Pokémon GO with guns,” noting the games striking similarities. Experts speculate how Nintendo could take legal action.

Animated figures with guns stand on top of creatures

What the Courts Say About Recording in the Classroom


by Christina Henagen Peer and Peter Zawadski

Students and parents are increasingly asking to use audio devices to record what's being said in the classroom. But is it legal? A recent ruling offer gives the answer to a question confusing parents and administrators alike.

Is It Legal for Students to Record Teachers?

Inflation Escalation


by Ashley S. Wagner

Inflation and rising costs are at the forefront of everyone’s mind as we enter 2023. The current volatile market makes it more important than ever to understand the rent escalation clauses in current and future commercial lease agreements.

Suited figure in front of rising market and inflated balloon

The Upcycle Conundrum


by Karen Kreider Gaunt

Laudable or litigious? What you need to know about potential copyright and trademark infringement when repurposing products.

Repurposed Products and Copyright Infringemen

Best Lawyers: Ones to Watch in America for 2023


by Best Lawyers

The third edition of Best Lawyers: Ones to Watch in America™ highlights the legal talent of lawyers who have been in practice less than 10 years.

Three arrows made of lines and dots on blue background

A Celebration of Excellence: The Best Lawyers in Canada 2024 Awards


by Best Lawyers

As we embark on the 18th edition of The Best Lawyers in Canada™, we are excited to highlight excellence and top legal talent across the country.

Abstract image of red and white Canada flag in triangles

8 Different Types of Criminal Defenses in Law


by Best Lawyers

Learn about the different types of criminal defenses available in law, including innocence, self-defense, insanity and more. Protect your rights today.

Silver handcuffs laying on finger printed papers

Wage and Overtime Laws for Truck Drivers


by Greg Mansell

For truck drivers nationwide, underpayment and overtime violations are just the beginning of a long list of problems. Below we explore the wages you are entitled to but may not be receiving.

Truck Driver Wage and Overtime Laws in the US

Choosing a Title Company: What a Seller Should Expect


by Roy D. Oppenheim

When it comes to choosing a title company, how much power exactly does a seller have?

Choosing the Title Company As Seller

The 2024 Best Lawyers in Spain™


by Best Lawyers

Best Lawyers is honored to announce the 16th edition of The Best Lawyers in Spain™ and the third edition of Best Lawyers: Ones to Watch in Spain™ for 2024.

Tall buildings and rushing traffic against clouds and sun in sky