October 25, 2016
There is a lot of litigation and arbitration in the construction contracting industry. Most of these cases are disputes over whether the contractor did the work and if so, whether it has been appropriately compensated under the terms of the agreement. Some construction disputes include allegations of deceptive practices. Virginia law approaches unprofessional practices in the construction contracting industry in two ways: First, construction contractors must obtain licenses to do business here. A builder is subject to professional sanction if the Board for Contractors finds that the conduct violated regulations. There is a fund managed by the board, from which unsatisfied claims may be paid if certain criteria are met. Second, owners, general contractors, subcontractors and other parties can bring lawsuits (or where agreed, arbitration claims). Can residential owners bring Virginia consumer protection claims against contractors? Parties unfamiliar with these rules often need help navigating the legal system to protect their rights.
VCPA & License Regulation:
In the 1970’s, the General Assembly adopted the Virginia Consumer Protection Act (“VCPA”). The main purpose of the VCPA is to make it easier for consumers (including homeowners) to bring legal claims against suppliers for deceptive practices. Before the VCPA, consumers had to prove fraud. Suing for fraud is attractive because a court may award attorney’s fees or punitive damages for fraud. However, fraud carries a higher standard of proof and many defenses that the consumer must overcome. In a proper case, the VCPA allows for tripled damages and attorney’s fees. The legislature has exempted certain types of real estate related business activity from the VCPA, including regulated lenders, many landlords and licensed real estate agents. What about contractors? Are contractors subject to professional regulation and exempt from the VCPA? Last month, the Circuit Court of Loudoun County considered this question in a lawsuit arising out of a residential custom contracting dispute.
Closing the Sales Process for the Custom Residential Construction Project:
On May 20, 2015, licensed contractor Interbuild, Inc. made a written agreement with Leslie & John Sayres for the construction of a large recreational facility on their property. The Sayres agreed to pay $399.624.00 for what would include a batting cage, swimming pool, exercise area and bathroom. According to the Sayres, they relied upon certain false representations by Interbuild in their decision to move forward with the contract. They allege that Interbuild told them the following:
- Interbuild had been established since 1981.
- The project did not require a building permit.
- The contractor already priced things out with subcontractors.
- Interbuild would supervise construction full-time.
- The project would be completed in 16 weeks.
- 4000 PSI concrete would be used.
- The building would be constructed upon an agreed upon area.
On October 20, 2016, attorney Chris Hill discusses this Sayres opinion in his Construction Law Musings blog. He observes that many of the alleged misrepresentations sound like things that would be specifications or terms of the contract. Hill raises concerns expressed by Interbuild’s lawyers that the Sayres complaint attempts to transform a breach of contract case into a fraud claim. I agree that this fraud in the inducement claim will be a challenge to pursue. However, I think that some of the fraud claims described in the Sayres counterclaim sound more like promissory fraud than anything else. Under Virginia law, promissory fraud occurs when one party makes a promise to the other that they have no intention of keeping, and the listener relies upon this empty promise to their detriment. In July, I blogged about this in the foreclosure context. If a false promise remains fraud even after reduced to a contract, then the Sayres fraud in the inducement claims make more sense.
Some of these alleged misrepresentations appear potentially more serious than others. While contract management experience is important, the Sayres contracted with Interbuild for a certain result. The experience was not an end unto itself. A missing permit could become a problem if the county later decided that the construction was not code-compliant and wanted substantial, costly corrections. The subcontractor pricing could become an issue if it could be proven that Interbuild was effectively unable to complete the job from the get-go. A contractor is required to provide adequate supervision regardless of what is represented. Rarely will you see a written agreement that absolves a contractor of this. In a proper case, courts will award damages for delay. However, the Sayres would have to prove that they relied upon the agreed delivery date. I suspect that this lawsuit is not about the Sayres inconvenience of continuing to exercise in a different place. The strength of the concrete raises serious structural questions, but would require proof by expert testimony. Building the project on the spot where the customer wants is indeed a fundamental issue. However, it might be shown that the location under the contract is unfeasible due to site conditions or that the difference is only slight. In general, the damages must flow from the misrepresentations. Courts are reticent to award a windfall to purchasers if the lies are of minimal consequence.
After paying most of the purchase price but before completion, the Sayres terminated the contract. Interbuild sued for work that was allegedly performed but not paid for. The Sayres filed counterclaims for fraud in the Inducement, VCPA and breach of contract.
Fraud in the Inducement:
Interbuild sought a court ruling on whether the Sayres could move forward with their fraud in the inducement and VCPA claims. The Contractor argued that the fraud claim should be thrown out. Interbuild maintained that the fraud claim was not proper because the customer only alleges that their expectations under the contract were disappointed. In its September 8, 2016 opinion letter, the Court dispensed with this argument, distinguishing between fraud inducing formation of the contract and fraud in the performance of the contract. The court found that the counterclaim clearly alleged that the misrepresentations were made to convince the Sayres to sign the contract. Because the alleged fraud occurred before the contract came into being, the claim is not alleging disappointed contractual expectations.
When legal disputes arise, owners and contractors frequently focus their attention on things that were most recently said or done. A contractor may be unhappy about an owner’s hands-on attitude about a project. Customers may take offense at the contractor’s customer service. However, the case might be about fraud in the inducement issues that come from the sales process. In the Sayres case, the judge allowed the fraud in the inducement claim to move forward.
Interbuild adopted a different approach in its attempt to get the Sayres’ VCPA claim dismissed. The contractor argued that since it is subject to regulation as a licensee of the state contracting board, it is exempt from the consumer protection statute. While the VCPA does not specifically name contractors as exempt, it does exclude “any aspect of a consumer transaction which aspect is authorized under laws or regulations of this commonwealth. Va. Code § 59.1-199. Contractors are subject to state regulation by Va. Code § 54.1-1000, et seq. In his opinion, Judge Douglas L. Fleming, Jr. followed judicial precedents distinguishing between consumer transactions that are specifically sanctioned by law vs. those that are merely regulated. The absence of a prohibition of a particular practice does not constitute authorization of that practice. Since the professional regulations do not specifically cover the particular types of business practices at issue, this statutory exemption does not protect the contractor from suit. The court found that the alleged misrepresentations are the kind of practices that are actionable under the VCPA. This is consistent with other rulings made by Virginia courts in cases between consumers and construction contractors.
The VCPA also provides that a consumer may sue a contractor for not having a license. Interbuild argued that because it had an active contracting license it was exempt from the VCPA. Since Interbuild is subject to license revocation for conduct that violates professional regulations, that should be the sole remedy under the state statutes. Judge Fleming rejected this argument, observing that the state’s licensure regulations do not, “inferentially cloak licensed contractors with VCPA immunity if they are shown to have committed deceptive practices.” In short, a professional license does not include with it a privilege to engage in fraudulent behavior.
News reports frequently raise public policy questions about professional regulation. Each year, more occupations become subject to licensure requirements. Usually this means that the leaders in that industry regulate its participants by means of a state board. Too often, self-regulating industries use these boards to protect prominent members against competition. Consumers look to the boards for relief from predatory practices, but are often frustrated by the results. Interbuild’s arguments seem to appeal to this notion that as a licensee, its customers should have to go through the board if they want a special remedy. Bear in mind that there is a public demand for housing prices to go down. Builders have a more organized lobby than consumers regarding professional regulation and limiting liability for extra damages in lawsuits. Given market demands, I wonder how close the General Assembly is to exempting contractors from the VCPA. The construction industry provides many jobs to Virginia. However, I think that the public’s interests would not be served if quality and service were sacrificed for job creation and affordability concerns. A defect-riddled house is the most unaffordable of investments to its owner and doesn’t help the “property values” of others.
All the September 8, 2016 opinion decided was that Interbuild’s counterclaims may move forward in litigation. Even under the lower standards and enhanced remedies of the VCPA, claims based on deception are difficult to prove and obtain an award of damages.
When disputes arise over custom construction contract projects, the parties cannot rely upon the board of contractors or the county’s permitting office to advocate or mediate for them. When payment issues, construction defects or other disputes arise, the services of an experienced construction litigator are necessary to protect one’s best interests.
For Further Reading:
October 13, 2016
The issue of restrictive covenants often comes up in news or social media stories where a HOA or condominium demands that an owner take down an addition, a shed, a statue or some other architectural feature on the grounds that it offends the rules. The board claims that the rule is found in (or derived from) a document recorded in the land records encumbering all of the properties in the community. The board’s assertion of the restriction may come as a surprise to the owner. In a recent blog post, Does an HOA Disclosure Packet Effectively Protect a Home Buyer?, I wrote about how the existing legal framework fails to adequately disclose to the purchaser what it means to live in a HOA. That post started some great conversations with attorneys, realtors and activists about how consumers could be better protected during the sale process. Today’s post focuses on what the legal requirements are for a contractual relationship to arise between the community association and a resale purchaser who did not sign off on the restrictive covenants originally.
Restrictive covenants that bind future owners are a legal device that predate HOAs and condominiums by hundreds of years. Community associations derive their power to collect $$$ from and enforce rules against their owners through restrictive covenants. However, many owners are not aware that enforcement of restrictive covenants are disfavored by Virginia courts on public policy grounds.
Restrictive covenants are contract terms which, if enforceable, follow the property or the person around even after the contract between the original parties is over. They aren’t limited to real estate. For example, a pest control company may ask an employee to sign an agreement not to compete against the employer even after leaving the company. Courts are skeptical of contracts that restrict the ability of a worker to make a living in the future. For public policy reasons, workers should be able to reasonably put their skills to use in the marketplace regardless of what a written agreement might say. The courts enforce only very narrowly tailored covenants-not-to-complete in the employment context. Judicial precedent and the uncertainties of litigation make many businesses reluctant to sue former employees now working as rivals.
Courts disfavor restrictive covenants on real estate for similar policy reasons. Covenants that bind future owners narrow the usefulness of the property. Labor and property should be freely marketable without short-sighted, unreasonable restrictions. Such a policy protects property values and market liquidity.
The Supreme Court of Virginia still shares this viewpoint. On February 12, 2016, the Court decided Tvardek v. Powhatan Village HOA. That case was about the validity of an amendment to the HOA declaration, including its restrictive covenants. In ruling in favor of the homeowners, the Court reaffirmed the strict construction of covenants that run with the land, even in contemporary HOAs. Justice D. Arthur Kelsey’s opinion explains:
“The common law of England was brought to Virginia by our ancestors” in large part “to settle the rights of property.” Briggs v. Commonwealth, 82 Va. 554, 557 (1886). At that time, English common law had developed a highly skeptical view of restrictions running with the land that limited the free use of property. “Historically, the strict-construction doctrine was part of the arsenal of restrictive doctrines courts developed to guard against the dangers imposed by servitudes.” Restatement (Third) of Property: Servitudes § 4.1 cmt. a (2000).
Virginia real estate law generally views restrictive covenants as a threat to liberty. University of Virginia law professor Raleigh Minor prophetically wrote in his 1908 treatise, “perpetual restrictions upon the use of land might be imposed at the caprice of individuals, and the land thus come to future generations hampered and trammeled.” If only Professor Minor could see how property rights have eroded in many communities today.
The viewpoint of many people in today’s real estate industry and local governments is the opposite of what courts have traditionally held. Buyers are told that covenants protect their investments from barbarian neighbors who might do something to make the surrounding properties look undesirable. But as Professor Minor pointed out 100 years ago, these rules give an opportunity for capricious enforcement. Is the message of our contemporary industry an insight misunderstood by previous generations, an appeal to the preferences of certain buyers who dislike non-HOA neighborhoods or merely a sales pitch?
English common law recognized very few restrictive covenants running with the land. Those receiving judicial approval appeared to be limited to easements appurtenant “created to protect the flow of air, light, and artificial streams of water.” United States v. Blackman, 270 Va. 68, 77, 613 S.E.2d 442, 446 (2005); see also Tardy v. Creasy, 81 Va. 553, 557 (1886). Over a century ago, we noted that “attempts have been made to establish other easements, which the [historic common] law does not recognize, and to annex them to land; but the law will not permit a land-owner to create easements of every novel character and attach them to the soil.” Tardy, 81 Va. at 557. Since then, in keeping with our common-law traditions, Virginia courts have consistently applied the principle of strict construction to restrictive covenants.
The court applied this principle in the Tvardek case where the association sought to enforce an amendment to the declaration against certain owners who didn’t vote for it. As the court reaffirmed in this 2016 decision, restrictive covenants are not always enforceable. The Tvardeks opposed being deprived of their right to rent out their property. The covenant has to fall within a recognized category. The principle of “strict construction” works against the restrictor and to the benefit and protection of the owner.
A restrictive covenant running with the land that is imposed on a landowner solely by virtue of an agreement entered into by other landowners who are outside the chain of privity would have been unheard of under English common law. See generally 7 William Holdsworth, A History of English Law 287 (1925) (“Whether or not the burden of other covenants would run with the land, and whether or not the assignee of the land could be sued by writ of covenant, seem to have been matters upon which there is little or no mediaeval authority.”). Privity has long been considered an essential feature of any enforceable restrictive covenant. Bally v. Wells (1769) 95 Eng. Rep. 913, 915; 3 Wils. 26, 29 (“There must always be a privity between the plaintiff and defendant to make the defendant liable to an action of covenant.”). Many of our cases have recognized this common law requirement. See, e.g., Beeren & Barry Invs., LLC v. AHC, Inc., 277 Va. 32, 37-38, 671 S.E.2d 147, 150 (2009); Waynesboro Village, L.L.C. v. BMC Props., 255 Va. 75, 81, 496 S.E.2d 64, 68 (1998); Sloan v. Johnson, 254 Va. 271, 276, 491 S.E.2d 725, 728 (1997). We thus approach the statutory issue in this case with this historic tradition as our jurisprudential guide.
Someone is “in privity” with another if they have legal standing to sue them because he (or his predecessor-in-interest) was party to the contract that creates the rights at issue. The court affirmed the common law privity requirement, rejecting any suggestion that it should be discarded as outdated. For this reason, the legal requirements that the association disclose certain documents and the seller honor a right of cancellation of the purchase contract have the effect of establishing privity between the HOA and the subsequent purchaser. Do these statutes fairly balance the respective rights of resale purchasers and community associations?
The Tvarkeks did not contest that they were not bound to the HOA covenants that existed when they bought their home. Instead, they sought to have an amendment to the covenants declared invalid because the statutory procedures were not properly followed. If you are curious about the technical reasons why the court found this particular amendment invalid, there are other bloggers, such as Jeremy Moss, following community associations law developments in Virginia have written about Tvardek from this angle. An HOA may have hundreds of members. The membership changes every year. Most owners have never personally made any transactions with the developer or the owners who voted to amend the declaration of covenants. How can privity exist if the declaration can be amended without a signature from every owner? That’s where the legislature comes into play:
The Virginia Property Owners’ Association Act, Code §§ 55-508 to 55-516.2, expanded the concept of privity considerably beyond common-law limits. In general terms, the Act permits the creation of a restrictive covenant running with the land and enforceable against subsequent owners of the parcels covered by the declaration, whether or not they consent, so long as the association follows the statutorily prescribed procedures governing the association’s declaration and amendments to it.
The enactment of the HOA statutes do not wipe out the rule of strict construction of covenants that run with the land. Instead, the General Assembly expands certain exceptions to the privity requirement for the enforceability of restrictive covenants. The basic rule of skepticism holds. The Property Owners Association Act must be understood within the context of the common law.
One might think that the modern age of statutes would have marginalized the role of English common law, but this is not so. “Abrogation of the common law requires that the General Assembly plainly manifest an intent to do so.” Linhart v. Lawson, 261 Va. 30, 35, 540 S.E.2d 875, 877 (2001). We do not casually presume this intent. “Statutes in derogation of the common law are to be strictly construed and not to be enlarged in their operation by construction beyond their express terms.” Giordano v. McBar Indus., 284 Va. 259, 267 n.8, 729 S.E.2d 130, 134 n.8 (2012) (citation omitted). A statute touching on matters of common law must “be read along with the provisions of the common law, and the latter will be read into the statute unless it clearly appears from express language or by necessary implication that the purpose of the statute was to change the common law.” Wicks v. City of Charlottesville, 215 Va. 274, 276, 208 S.E.2d 752, 755 (1974).
Case law is very important to make sense of any HOA. Otherwise the statutes just seem to be an enablement of legal powers for the boards that are not found in the governing documents.
The Virginia Property Owners’ Association Act authorizes the creation and enforcement of restrictive covenants against nonconsenting landowners in a manner unknown to the common law. The General Assembly, however, policed the imposition of these covenants with a host of strict procedural requirements — not the least of which is the plainly worded command that no recorded amendment shall be “effective” unless it is accompanied by a certification verifying that the requisite majority signed the amendment or a ratification of it. See Code § 55-515.1(F). In effect, the General Assembly created something entirely new to the law (the right to form private associations having power over land use) while adding precautions to honor the common law’s ancient antipathy toward restrictions on the free use of private property.
The POAA is not some sort of freeway that allows boards to completely bypass the old traffic lights of the common law. As attorney John F. Faber, Jr. observes in his July 2016 Hampton Roads Realtor magazine article about Tvardek, “‘close enough’ does not count when interpreting statutes that allow broad application of restrictive covenants prohibiting the free use by owners of their properties.” In Tvardek, the court articulates three important, related legal protections for owners:
- A restrictive covenant has to be expressly stated in a public land recording (or fairly implied by very narrow exceptions).
- Restrictive covenants must fall within narrow exceptions to the general rule prohibiting them in order to be enforceable.
- If the board relies upon the POAA to enforce the covenant but can’t show that it meets the strict requirements of the statute, it is out of luck.
Does this mean that an owner should disregard notices from the HOA or condo that there is a rules violation or monthly assessments due? Certainly not. Owners should presume that courts will enforce clear and validly adopted restrictive covenants. But what the board, property manager or other representatives of the association is tell the owner may not accurately reflect what the owner’s legal obligations actually are. The owner may not even have a complete set of the governing documents in her possession. In any dispute with an HOA or condominium, owners should see a qualified attorney to help them protect their rights.
For Further Reading: