Iowa Supreme Court limits a lender’s right to remedy of implied warranty of workmanlike construction

This blog has given similar warnings to foreclosing banks and attorneys in the past, and in the constantly changing legal world I can guarantee that the changes and related warnings will keep coming. Today’s warning to lenders centers around a recent Iowa Supreme Court decision that has a direct and substantial impact on lenders seeking to foreclose upon or otherwise take ownership of real estate collateral.

In short, in Luana Savings Bank v. Pro-Build Holdings, Inc. and United Building Centers (December 2014), the Iowa Supreme Court declined to allow a lender (which took a condominium property back via a deed in lieu of foreclosure) the right to bring a claim for breach of implied warranty of workmanlike construction, which is typically available to other homebuyers and owners of newly constructed buildings. This implied warranty of workmanlike construction is a broadly recognized remedy that protects homebuyers from defective construction. In its decision the court reasoned that the implied warranty should not be extended to lenders due to the fact that lenders can protect themselves against construction defects in other ways, including inspections, the purchase of warranties and contract terms (i.e. an assignment of claims).

The range and depth of the applicability of this decision (beyond its specific set of facts) is not precisely clear, but for the time being I would recommend that lenders view any foreclosure/repossession of real estate to be “AS-IS, WHERE-IS.” If there are concerns about the property an inspection should be done prior to commencing foreclosure proceedings. Further, I would recommend that the lender, to the extent possible, obtain an assignment of claims from the borrower related to any potential defect claims.