## Facts

- The Petersens contracted with a builder–vendor to buy land and a newly constructed home for $71,000.
- The Petersens paid $10,000 in earnest money and arranged a contract-price offset of about $9,000 for the buyers’ labor and materials supplied to the project.
- After construction progressed, the Petersens complained of numerous items; the builder agreed to complete repairs listed on a punch list but did not satisfactorily do so.
- The trial court found multiple serious construction defects, including a basement floor pitched away from a drain, improperly installed siding, a defective bay window, a defective front door and frame, and drywall deterioration and nail-popping.
- Repair of the defects would require significant work, though the house was physically occupiable and not dangerously unsafe.
- The Petersens proposed an escrow holdback to assure completion of repairs; the builder refused.
- The Petersens refused to close; the builder invoked a forfeiture clause claiming the earnest money and the value of the buyers’ labor/materials.
- The buyers sued for restitution of the earnest money and the value of their contributions; the trial court entered judgment for $19,000, and the intermediate appellate court affirmed.

## Issues

1. Whether a builder–vendor’s sale of a newly constructed home carries an implied warranty of habitability protecting buyers against substantial latent construction defects even if the home is physically occupiable.
2. Whether substantial construction defects constitute a failure of substantial performance that prevents the builder from enforcing a contractual forfeiture clause against the buyers.
3. Whether contract language (including merger or exclusionary provisions) defeats or limits enforcement of the implied warranty of habitability in a new-home builder–vendor transaction.

## Decision

- The Supreme Court of Illinois affirmed the judgment for the Petersens.
- The court held that a builder–vendor’s sale of a new home includes an implied warranty of habitability.
- The court concluded the warranty was breached by substantial defects in the construction.
- The builder’s defective performance was not substantial performance, so the builder could not enforce the forfeiture clause.
- Restitution was proper; the buyers recovered the $10,000 earnest money and approximately $9,000 for their labor and materials (total $19,000).

## Legal Principles

- In the sale of a new home by a builder–vendor, an implied warranty of habitability arises to protect the buyer from significant latent defects.
- “Habitability” is not limited to bare physical safety or minimum livability; it extends to substantial defects in construction that materially impair the home’s quality and intended residential use.
- The implied warranty operates as a limitation on strict caveat emptor and limits the effect of merger concepts in builder–vendor new-home sales.
- A builder who has not substantially performed due to substantial construction defects cannot invoke a forfeiture clause to retain the buyer’s payments or credited contributions.
- General contract language is not readily construed to disclaim the implied warranty in a builder–vendor new-home transaction.

## Conclusion

Illinois treated a builder–vendor’s new-home sale as carrying an implied warranty against substantial latent construction defects and held that such defects can defeat substantial performance, barring contractual forfeiture and supporting restitution of the buyer’s deposit and credited contributions.


Petersen v. Hubschman Construction Co., 389 N.E.2d 1154 (Ill. 1979)