An implied warranty of habitability in construction contracts means that a contractor is deemed by law to represent and to promise that a building is fit for habitation. The implied warranty of habitability for a purchaser of a new home means that the contractor is liable for any defects in the new home after an express warranty has expired.

Prior to the creation of an implied warranty of habitability, a purchaser of a new home could not file an action against a contractor or a subcontractor after the express warranty had expired. The purchaser was also not able to file a breach of contract action against the subcontractor because the purchaser did not have a contract with the contractor. The purchaser could only file an action against the contractor for defects that occurred during the period of the express warranty. 

An implied warranty of habitability is a doctrine that was created by the courts. It is a departure from the traditional rule of caveat emptor or "let the buyer beware." It is based on the concept that a contractor builds a new home knowing that a purchaser will live in the home and therefore promises that the home will be suitable for habitation. It is also based on the theory that the purchaser does not have a contractor's expertise, does not stand on equal footing with the contractor, and should therefore be protected in his or her purchase of a new home, which purchase is normally a major expense for the average homeowner.

Whether a contractor is liable for a defect in a new home under an implied warranty of habitability depends upon the type of the defect. The more serious the defect, the more likely that the contractor will be held responsible for the defect. The defect may be a construction defect, a design defect, a patent defect, that is, a defect that is discovered by a reasonable inspection, or a latent defect, that is, a defect that could not have been discovered by a reasonable inspection.

A contractor's liability under an implied warranty of habitability is not indefinite. It is generally imposed for a reasonable period of time after a new home is completed. Some states have enacted statutes of limitations for such actions. Where states have not enacted statutes of limitation, courts apply a balancing test, which test balances the non-discoverability of the defect against the seriousness of the defect.

The measure of a purchaser's damages for a contractor's breach of an implied warranty of habitability is generally the cost of the repair or the replacement of the defect. However, if the purchaser's damages are substantial, the purchaser may be entitled to rescind or to annul the contract.

When the doctrine of an implied warranty of habitability was first applied to the purchase of a new home, it only applied to the initial purchaser of the new home. The initial purchaser was the person who entered into the contract with a contractor and who dealt with the contractor. The doctrine has recently been expanded by some courts to subsequent purchasers of the home. These decisions are based on the theory that the subsequent purchasers are no different than the initial purchaser because they did not have the ability to inspect the contractor's work during the construction of the home and because they relied on the contractor's expertise in constructing the home.