FAQ.09

Question:

Where a building is complete and during a warranty period are the construction warranties transferable if the building is sold? If so, is there a specific procedure to follow to transfer the warranties?

Answer:

Probably the only area where selling in the warranty period is very common is with condominiums.

It is apparently a rare situation for a building to be sold during the warranty period. However, the answer turns on the terms of the contractual assignment provision contained in the original contract between the vendor-owner and the general contractor. As the administrator of the contract, the architect should be aware of the contract provisions. It would also be helpful for the architect to ask the client if they had reviewed the transfer of warranties with their lawyers.

To be transferable, a warranty – which in these circumstances is simply a type of contractual obligation – has to be assignable on its terms. Assume, for example, the contract said that neither party may assign the contract to another entity (which would include the warranty obligations contained within the contract) without the express prior consent of the other. As an illustration, the CCDC 2-2020 contract says:

GC 1.4 ASSIGNMENT

1.4.1     “Neither party to the Contract shall assign the Contract or a portion thereof without the written consent of the other, which consent shall not be unreasonably withheld.”

Under this scenario, if the owner went ahead and sold the project to another without the contractor’s consent, the remaining 1‑year warranty obligations may not have transferred over to the new owner. If the new owner tried to enforce the obligations by calling up the contractor and demanding something be done about some deficiency or warranty issue, the contractor could rightly say “Who are you? I don’t have to do anything for you.”

On the other hand, if the contract was properly assigned, including the remaining warranty obligations, then the new owner steps into the shoes of the prior owner and could enforce the obligations.

Extended warranties are intended to create direct relationships between the subcontractor or supplier and the owner, but again those rights are contractual in nature as arranged by the contractor, and have to be provided in writing. If the Owner told a contractor in the contract specifications that the roof had to be a 20-year roof, then the contractor has to arrange for and provide that roof supplier’s warranty to the Owner. Unless the Owner receives the actual warranty documentation and the commitment from the roof supplier, the Owner won’t necessarily be able to hold the roofing company to anything directly. The Owner would be left with a claim against the contractor for breach of the contractual obligation to obtain such a warranty.

Bottom line is that the supplier warranties have to be both transferable (in the same way as the contractor’s own 1‑year warranty discussed above) and actually put into place. Certainly if it’s not transferable, the supplier warranty wouldn’t pass to the new owner.

It is important then for the architect to address the issue of transferability of warranty by writing an appropriate supplementary condition to deal with any general conditions in the construction contract; to require similar conditions in the contractor-subcontractor contracts; and to indicate what is required in Divisions 00 and 01 and in the technical divisions of the specifications.

One aspect of what should be addressed is who any extended warranties are between. It is recommended that the warranties be between manufacturer/supplier/subcontractor and the owner rather than the contractor. That way the owner is in control of assigning the extended warranties to a new owner, and the warranties don’t evaporate if the contractor ceases business for any reason.