Long & Levit LLP Construction Update

Issue No. 3

December 1998

Liability To Contractors And Engineers For Claims Brought By Subsequent Purchasers Of Properties Is Limited

Keru Investments Inc., et al. v. Cube Company, Inc. (1998) 63 Cal.App.4th 1412

A recent case, Keru Investments Inc., et al. v. Cube Company, Inc. (1998) 63 Cal.App.4th 1412, holds promise for limiting or elimating liability to contractors and engineers for claims brought by subsequent purchasers of properties for which the contractors and engineers rendered work and services to prior owners.

Keru holds that the subsequent purchaser of a property may not bring a negligent construction claim against a contractor hired by a prior owner where the purchaser was fully aware of the significant damage sustained by the property as a result of the purported negligence at the time it took ownership and was not assigned the prior owner's claim.

While the Keru holding does not specifically deal with a design engineer defendant, the reasoning in the case should be persuasive to a court that the defenses afforded contractors should also be afforded engineers, given similar facts.

The plaintiff in Keru obtained title to an apartment building in Hollywood, California that had been heavily damaged by the 1994 Northridge earthquake. Plaintiff was aware of the damage to the building and took the property in an "as is" condition, for a discounted price.

Approximately six years prior to the earthquake, the prior owner retained a structural engineer to design a seismic retrofit for the building. The retrofit was ultimately performed by a general contractor retained by the same owner.

After the plaintiff took control of the earthquake damaged property, it claims to have discovered the reason for the damage. Plaintiff alleged that the damage resulted because of errors and omissions in the engineer's plans, because the general contractor did not follow the plans and specifications and because the contractor failed to perform the work in a complete, workmanlike manner. Plaintiff sued the engineer and the general contractor. By the time of trial, the general contractor entities were the only remaining defendants.

Even though the Keru court ruled against plaintiff, it recognized that in some cases, subsequent purchasers may assert claims for negligence which occurred prior to their ownership. In such cases, the issue of whether the damage was sustained during the subsequent purchaser's ownership will be pivotal to the viability of those claims.

However, in situations such as Keru, a purchaser that takes ownership of damaged property in "as is" condition is not the owner of a negligent construction claim. If any such claim exists, it belongs to the entity owning the property when the damage was suffered. Absent an assignment of the claim from the prior owner, the claim stays with the prior owner. A subsequent purchaser cannot gain ownership of the claim simply because it discovered the reason for the damage after it gained ownership of the property.

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This publication is intended for general information purposes only and does not constitute nor is intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances including whether the case may have been depublished after the date of this publication.