Lender Beware: Part III

A lender who becomes the seller of new homes acquired from his defaulting builder or developer may be exposed to liability for construction defects whether or not the lender actively participated in any aspect of the original construction.  The actual sale of the home or condominium to the buyer gives rise to the liability under the implied warranty of habitability.  When a lender or bank’s role expands to that of seller, the new role carries increasing liability.

When a lender takes title to a foreclosed home or condominium and completes construction, that lender is under a duty to act with reasonable care in completing construction.  If the lender fails to exercise reasonable care, he may also be held liable for construction defects arising from his negligence. 

Many courts have expanded liability beyond the items that the lender actually completes, and have made the lender liable for other aspects of the project.  In Chotka v. Fidelco Growth Investors, a condominium homeowners’ association sued the construction lender for defects in construction of the project. The lender had taken title to the project when the developer defaulted on its construction loan. When the lender acquired the project, the building was complete except for several recreational features, such as a pool, sauna, tennis court and game room. After these amenities were completed by the lender, the lender sold units to purchasers. The court found that by completing the project and selling the units to consumers, the lender took on more duties than just a financier. The lender was found liable for (1) all express representations made to purchasers, (2) patent construction defects in the entire project, even if completed by the defaulting builder, and (3) breach of applicable warranties due to defects in the portions of the project the lender completed.