In a recent case, St. Louis, L.L.C. v. Final Touch Glass and Mirror, Inc., 386 N.J. Super 177, 899 A.2d 1018 (App. Div. 2006), the Appellate Division of the New Jersey Superior Court found that appropriate compensation for defective construction was the disunion in value of the home, and an acceptable way of valuing that disunion is to look at the cost to repair the defects.

A husband and wife bought 48 acres of land in Franklin Township, New Jersey. They hired an architect to design a two-story, 36,000 square foot house with all of the exterior walls made of glass. The house was built on the property at a cost of $8.5 million. Id. at 179. The homeowner served as his own General Contractor, and he hired defendant Final Touch to install the glass panels that would make up the walls. There were numerous roof drains, vent pipes and other utilities, and these were all designed to be contained within vertical steel columns which also supported the house. Id. The glass panels were to be attached to the steel columns with screws. When Final Touch attached the panels, it punctured nearly all of the pipes contained within the columns. Id. at 180. These pipes then leaked water into the house every time it rained. Id. at 183. Due to these defects, the plaintiffs could not live in the house, and ultimately sold it during the litigation. The house was listed at $18 million, but after more than a year, it was ultimately sold for $2.5 million, largely due to the existence of construction defects. Id. at 184-185.

At trial, Final Touch offered expert testimony that the house was only worth $2.8 million, primarily because it was too big, and the local market would not support a more expensive house. Plaintiff obtained a jury verdict it its favor of $737,000. Id. at 191. Final Touch appealed, arguing that Plaintiffs had not established damages.

The Court of Appeals strongly disagreed with Final Touch. The analysis started with the observation that, generally, compensatory damages (in a breach of contract case) are supposed to put the injured party in as good a position as he would have been if performance were rendered as promised. Id. at 188. (citing 525 Main St. Corp. v. Eagle Roofing Co., 34 N.J. 251 (1961)) Specific rules or formulae are subordinate to this broad purpose. The general rule with respect to building contracts is that the owner may recover the costs of completion, or the costs of making necessary repairs. Id. The determination of whether to use cost of repair or diminution in value as a measure of damages depends on “good sense rather than a mechanical application of a single formula.” Id. The Court stated that “generally, either diminution in the value of the property, or the reasonable cost of restoring or repairing the damage may be appropriate. The Court held that Final Touch’s position that the plaintiff could only be compensated if he proved a diminution in value is incorrect. Cost of repair is also an appropriate measure of damages. Id. at 190.

This is a useful decision, since in many cases it is difficult to determine if a home has decreased in value due to construction defects. In a hot real estate market, many buyers simply overlook what they see at the time as “minor” defects, or they negotiate a nominal redaction in the purchase price, which usually has very little to do with the actual cost to repair the defects. Also, many pieces of real property are difficult to value, therefore diminution is difficult to prove. For example, common areas of a condominium project may be the property of the unit owners, but there is no way to do a real estate appraisal on that property, since there is no market for it. Allowing proof of damages to include cost to repair is the only sensible and fair way to ensure that injured parties, be they homeowners or condominium associations, get compensated properly and fairly for their damages.