Johnson v. Scandia Associates, Inc. 717 N.E.2d 24 (Ind. Sup. Ct. 1999)

Scandia Associates, Inc., owned an apartment complex in Indianapolis. Terri Johnson resided in one of the apartments. While cooking in her apartment, Johnson simultaneously touched the oven and the refrigerator and received a severe electric shock. She sustained physical injuries as a result. Alleging claims for negligence and breach of the implied warranty of habitability, Johnson sued Scandia. The trial court granted Scandia's motion to dismiss the implied warranty claim but allowed the negligence claim to go to the jury. The jury returned a verdict in favor of Scandia.

Johnson appealed the dismissal of her implied warranty of habitability claim. The Indiana Court of Appeals reversed, holding that an implied warranty of habitability exists in a residential lease if the landlord is a professional in the residential apartment business. The Court of Appeals further held that the implied warranty of habitability extends to claims for personal injuries caused by a hidden or concealed dangerous condition in the leased premises. Scandia appealed to the Supreme Court of Indiana.

Shepard, Chief Justice   Some Indiana [lower-court] cases have recognized that a warranty of habitability may be implied in a residential lease, giving rise to damages for breach of contract upon appropriate proof. In this appeal, we recognize for the first time that such a warranty may be implied in some leases and explore the conditions under which it may be held to exist.

This Court first imported a warranty of habitability into conveyances of real property [in a 1972 decision] holding that a warranty of fitness for habitation may be implied in a builder-vendor's sale of a new house to the first purchaser. [In a decision four years later,] we extended the protection of the implied warranty to subsequent purchasers of the house, but limited [the warranty's] scope to latent or hidden defects.

Asked whether a warranty of habitability is implied in the residential leasehold contract, the Court of Appeals held in Breezewood Management Co. v. Maltbie (Ind. App. 1980) that a landlord could be found liable to his tenant on a breach of implied warranty, at least where there was a housing code and city inspectors had cited the landlord with multiple violations. [The plaintiffs were awarded] damages based on the law of contract: the difference between the rents paid for the apartment as warranted and its fair rental value in the substandard condition, compensating the tenants for their economic loss.

Plainly, a warranty of habitability, whether in the sale or lease of residential dwellings, has developed in the common law of Indiana, and its roots are in the law of contract. Habitability means reasonably fit for occupation as a dwelling. Habitability is not the same as no risk of harm.

When a landlord enters a lease agreement with her tenant, she voluntarily confers certain rights upon the tenant, such as possession and quiet enjoyment for a specific term. She does this in consideration of the tenant's promise to pay rent, not to waste the property, not to use it for illegal purposes, and not to "hold over" beyond the term. The landlord agrees to this legal relationship after balancing the costs and benefits, and the same is true for the tenant.

Defining a warranty of habitability broadly as a tenant's right to be free from injury might have many effects. A broad definition might cause landlords to increase maintenance of properties, at least where doing so would still produce an economic return. It would undoubtedly prompt landlords to purchase additional insurance, spreading the risk of harm more broadly. Landlords would, of course, attempt to pass along increased insurance costs to tenants by raising rents. Increased leasing costs might also cause conversion of some properties from residential uses and outright abandonment of others. This would shrink the supply of affordable housing, which could have potentially adverse social effects and would, of course, be borne by society's poorest renters.

Potential negative outcomes also could flow from a warranty rule on injury—because high standards of upkeep could be discouraged by shifting the risk of liability, and thus economic incentive, from the landlord to the insurer. A contractual right could diminish a tenant's incentive to report or repair defects by eliminating the economic risk of contributory negligence. All of these outcomes would increase the risk of harm to tenants, residents, and guests.

In light of these considerations, we conclude that a warranty of habitability is best thought of along the lines of Breezewood: a landlord's promise to convey to a tenant an apartment suitable for living. Habitability is an objective factual determination which may be codified, but is not necessarily prescribed by a housing code. A community's adoption of a building or housing code is evidence of its conception of habitability standards for dwellings in that locale. These codes vary enormously in their prescriptions. Absent explicit statutory or regulatory language imposing on landlords the obligation to warrant a codified standard of habitability in a property rented as a residence, a housing code does not impose a warranty on the residential leasehold transaction.

Even though an implied warranty of habitability is not imposed by law on every residential lease contract, it may be implied in fact in the agreement between landlord and tenant. Contracts and covenants implied in fact arise from the course of dealing between the parties and may be evidenced by acts done in the course of performance or by ordinary practices in the trade. This seems the best way of viewing Breezewood. The warranty extended by the landlord was implied in fact from the parties' course of dealing, which included dealings related to the Bloomington Housing Code. [These dealings led to the landlord's stated but unfulfilled promise to take corrective action after the landlord was cited for housing code violations.] The Code thus provided evidence for determining that the landlord breached his promise.

Johnson does not identify any state or local law as the source of the warranty she pleads as implied in her contract. Moreover, she has not identified any facts demonstrating that a warranty of habitability was either express or impliedin-fact in the agreement.

When a landlord warrants his property to be suitable for living and then breaches that promise …the tenant's remedy may take several forms, including conveyance of a suitable property, rescission and reformation of the agreement while the tenant retains possession, rescission of the contract, or damages at law. Consequential damages may be awarded in a breach of contract claim when the nonbreaching party's loss flows naturally and probably from the breach and was contemplated by the parties when the contract was made. This rule generally limits consequential damages to reasonably foreseeable economic losses. Accordingly, recovery for personal injury on a contract claim is allowable only when the particular injury was within the parties' contemplation during contract formation. Thus, to claim consequential damages the tenant must show the parties intended to compensate for personal injury losses caused by the apartment's unfitness. The tenant may prove the promise to compensate personal injury by showing its expression as a contract term or by pointing out evidence showing it to be implied in the agreement.

Johnson complains that her apartment was not suitable for living because its fixtures unexpectedly released an electric current, and, second, that her injuries were foreseeably caused by the breaching condition. She does not allege whether the defect was present at the time of entry or arose after [she took] possession, nor does she have any contention about giving Scandia notice of the defect. Johnson says her leasehold contract is governed by a writing, so we look within the document to see if it extended her a warranty. Because the writing does not show that Scandia expressly warranted the apartment's habitability, Johnson's assertion can mean just one thing: [in Johnson's view,] Scandia impliedly warranted the habitability of Johnson's apartment. Johnson pleads no facts which, if true, tend to show that the agreement formed with Scandia gives a warranty of habitability. Her failure to plead a factual basis showing that Scandia . . . extended the warranty as part of her agreement results in a failure to state a valid claim that the warranty was breached. Moreover, because Johnson's claim is based on an implied warranty theory, the only way she could receive the relief she requests would be through consequential damages. Inasmuch as consequential damages for physical injury are not available on a claim for breach of an implied warranty of habitability, Johnson cannot state a claim entitling her to relief.

Indiana's common law of contract governing the landlord- tenant relationship has developed a warranty of habitability. The warranty is not universally imposed by law, but derives from the agreement between the tenant and the landlord and may be express or implied. The existence of an implied warranty may be proven through evidence of the parties' course of dealing or performance and by evidence of ordinary practices in the trade. Where the warranty is express, consequential damages for injury to the person may be available as a remedy. Where the warranty is implied-in-fact, however, consequential damages may not be awarded because personal injury is outside the parties' contemplation. Johnson's complaint does not aver facts tending to show that Scandia warranted the apartment's habitability or that her injury was reasonably foreseeable within a warranty of habitability.

Decision of Court of Appeals reversed; judgment in favor of Scandia granted.