December 12, 2016
Construction Defect Warranty Claims
Construction defect warranty claims are a frequent source of conflict between contractors and new home buyers. Builders feel pressure to get the purchasers through closing so they can pay their employees, subcontractors and suppliers. For the past few years there has been a severe shortage of experienced tradespeople and supervisors. This makes the contractor’s quality control efforts more challenging. Inexperienced buyers can get frustrated with delays. They may wonder what would happen if they try to back out of the deal. When consumer complaints about construction defects are not resolved amicably, the parties often find themselves pursuing or defending lawsuits or arbitration proceedings.
New home buyers feel pressure from the contractor and the circumstances of their lives to go to closing. Later, they may discover decreased responsiveness to their customer service inquiries to the builder. What should parties do to prevent construction defect litigation from becoming necessary? How are these cases won and lost? I took up these issues in an October 14, 2015 blog post entitled, “Common Misconceptions about Home Builder Warranties” On November 21, 2016, the Circuit Court of Norfolk, Virginia decided a case that provides some valuable insights for contractors and purchasers.
In April, 2007, Benjamin Bessant and Dorothy Horne contracted with Dey Street Properties, LLC for the construction of a new home in Norfolk, Virginia. The buyers got the standard new home warranty pursuant to Va. Code § 55-70.1. Dey Street impliedly warranted that the home was constructed in a workmanlike manner and free from structural defects for one year from settlement or possession. The implied new home warranty includes a strict requirement that the buyer give the seller written notice of the alleged defects. This notice must be properly submitted to the seller within the one-year warranty period.
During construction of the home, Mr. Bessant purchased $650 in floor tile out of his own pocket and delivered it to the jobsite for an upgrade. Unfortunately, someone stole this tile while Dey Street maintained control over the premises. Because Dey Street failed to complete the project by the agreed upon delivery date, Bessant and Horne had to stay in a hotel for three weeks. On August 15, 2007, the purchasers moved in.
Shortly after move-in, the purchasers discovered several construction defects. Bessant mailed Keith Freeman (principal of Dey Street) a notice letter on September 5, 2007. Not getting much of a response, on December 20, 2007, the purchaser’s attorney sent another letter, this one addressed to “Freeman Homes, Inc.” Enclosed with the attorney letter was the purchaser’s September 5, 2007 letter with the list of defects. Dey Street proceeded to do some warranty repairs.
Note the confusion regarding who the purchasers were dealing with. In the facts of the case, the purchasers signed a contract with Dey Street. However, many contractors provide consumers with different pieces of correspondence that have different business names. Judge David Lannetti found that the buyers only had privity of contract with Dey Street Properties, LLC. However, because Mr. Freeman also sent correspondence to Bessant on Freeman Homes, Inc. letterhead, the court found that notices actually received by Mr. Freeman put the Dey Street company on actual notice of the warranty claim.
These parties were not able to amicably resolve these construction defect damages issues. Bessant and Horne sued Dey Street. This family experienced some struggles preparing for trial. The homeowners had certain damages excluded from the jury because they failed to submit a timely expert witness designation. Also, the owners failed to disclose the details of certain defects in response to the builder’s pretrial discovery requests.
Judge Lannetti’s opinion only talks about certain items at issue post-trial: $1,500 for flooring defects, $200 for subfloor repairs, $2,000 for the drainage and concrete problems on the porch and $200 for a porch column. The owners also wanted reimbursement for the stolen tile and the hotel stays. I suspect that there were additional defects claimed in the lawsuit but because pretrial disclosure deadlines weren’t met, the owners were prejudiced to assert them at trial. For purchasers, properly documenting the defects and the estimates to repair is not always easy. In most cases this requires finding another contractor to assess and estimate it.
After a two-day trial, the jury returned a verdict of $15,000.00 in favor of the owners. After the jury returned its verdict, the contractor moved to invalidate or set it aside the jury verdict. First, Dey Street argued that the owners waived their implied warranty claim because the first notice letter was never received and the second one was sent to Freeman Homes, Inc. and not Dey Street Properties, LLC. Virginia law requires the purchaser to send the written notice letter to the seller by hand delivery with retention of a receipt or by certified mail. The court found the certified letter to Freeman Homes, Inc. to be sufficient. The court observed that the owner of Dey Street used Freeman Homes, Inc.’s name and address in correspondence to the buyer. At trial Mr. Freeman admitted on the witness stand that he actually received the second notice letter and its enclosures. The owners are lucky that Mr. Freeman did not simply deny receiving anything. Because they have the burden of proof, the owners should take care to follow all formalities required in the contract or statute so that they don’t have to rely upon their opponent’s moment of candor in court.
Dey Street also argued that the evidence was insufficient to support a verdict of $15,000.00. Judge Lannetti found this argument more persuasive. Since the implied new home warranty statute doesn’t say anything about negligent security for the tile or consequential damages like hotel room bills, those items were thrown out. The court could not figure out how the jury could possibly have added the remaining evidence of defect damages could total $15,000.00. The judge recognized in his opinion that he was not permitted to substitute his own independent assessment of damages for the jury award, and could only look to what the maximum verdict that the evidence would support. Judge Lannetti reduced the $15,000 verdict and entered a judgment against Dey Street for $3,900. A tough result for owners when their jury was convinced that they were owed much more. If larger dollar amounts were at stake I would not be surprised if the owners petitioned to appeal the case.
Lessons from Bessant v. Dey Street include the following:
- Who Are the Parties? Purchasers should be clear about what party they are in contract with so that they can correspond with and sue the proper entity. Contractors must take care to ensure that everything is done in the name of the contractor identified in the written agreement to avoid personal liability.
- Formalities of Notice. When lots of money are at stake, parties shouldn’t rely upon their opponents to follow through on oral demands or representations. Notice requirements in statutes should be carefully followed. Assume that at trial the judge will expect proof of notice and one’s opponent will deny receipt of the written notice.
- Use Professionals. Engage with a construction litigator and independent expert witnesses early so that legal formalities can be observed and deadlines met to maximize results.
- Be Prepared to Deal with Delays & Headaches. Purchasing a home that hasn’t been built yet can be an exciting, and even cost-saving means of acquiring one’s dream home. It also carries with it significant risks of delays, defects and added expenses which may be difficult to get reimbursed for.
When legal disputes appear on the horizon, contractors and purchasers should seek the assistance of qualified counsel to preserve and protect their rights.
Legal Authorities:
Va. Code § 55-70.1 (Implied warranties on new homes)
Bessant v. Dey Street Properties, LLC (Norfolk Cir. Ct. Nov. 21 2016)(link available to VLW subscribers only)
Photo Credit:
Jason OX4 B-R Corridor at Sunset via photopin (license)(disclaimer: does not depict anything discussed in blog article)
October 25, 2016
Virginia Consumer Protection Claims Against Contractors
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.
The VCPA:
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:
Photo Credit:
Phil’s 1stPix Too Many Tonka Toys? via photopin (license)
July 28, 2016
Walking on Sunshine
Americans are increasingly frustrated by federal, state, local and HOA officials making decisions in secret. On the floor of the nominating convention, supporters of Senator Bernie Sanders protested Hillary Clinton’s undisclosed collusion with the Democratic Party leadership during the presidential primary. On the Republican side, Donald Trump continues to refuse to disclose his tax returns. Democracy doesn’t work unless voters, boards and legislators can make informed decisions. Virginia already has “sunshine” laws on the books to safeguard “open government” on the state, local and HOA levels. These laws mandate freedom of information and often have a beneficially deterrent effect. As Katrina and the Waves sang in their 1980’s hit, “I’m walking on sunshine, and don’t it feel good!” Property owners feel good when they can observe, understand and react to decisions that affect them. Many decry the “partly cloudy” forecast for “open government.” Property owners often struggle to resolve impasses with HOAs, land use officials and construction contractors. In many cases owners can use “open government” laws as a tool to seek favorable outcomes. As an attorney, I seek documents and information from whatever sources are available to help clients. Owners “walking on sunshine” make better decisions.
Developments at a July 15, 2016 Loudoun County Board of Supervisors meeting illustrate how confusing and frustrating “open government” rules can be. Harris Teeter Properties, LLC obtained permission to open a grocery store in Aldie, Virginia. Harris Teeter wanted the Board of Supervisors to deny requests for three neighboring restaurants. This would allow them to plant their largest store in one of Loudoun County’s Transition Policy Areas. “Transition Policy Area” is a land use designation “incorporating an innovative blend of rural and suburban development features.” Under the Board’s official policy, Aldie is a border-town of sorts between Northern Virginia and rural areas. These competing retail proposals are for development along this fault-line. If a mega-grocery store comes to Aldie, shoppers will drive there from all over. Aldie folks were mostly fine with getting a regular Harris Teeter. They have to eat. The Board of Supervisor’s Transportation & Land Development Committee considered these controversies. Although he was not on this Committee, Republican Supervisor Tony Buffington took a keen interest because he represents the Aldie district. Many of his constituents fear that an expanded Harris Teeter proposal would create traffic congestion, destroying the hamlet’s rural identity. Some questioned the Board of Supervisor’s commitment to its overall plan for land development. The Loudoun Times quotes Gem Bingol of the Piedmont Environmental Council as saying, “The question I see facing you is, ‘Are you going to support your Transition Policy Area policies?’” Supervisor Buffington’s day job with the U.S. Capitol Police took him on the day of the committee meeting away to the Republican National Convention in Cleveland, Ohio. From the GOP convention, Buffington texted Supervisors at this committee meeting. He was “against everything they [Harris Teeter] are currently proposing.” He shared that the “residents are adamantly opposed to the proposals.” He and a group of other Supervisors carried on a lengthy discussion text message on what to do about the Harris Teeter proposals.
Randall Minchew, the lawyer for Harris Teeter, noticed that the Supervisors were all very active on their cell phones during the Committee hearing. Mr. Minchew asked if Buffington was texting them. The other Supervisors read their texts with Buffington into the official meeting record. Minchew accused the Supervisors of a “blatant” Virginia Freedom of Information Act violation. Mr. Minchew’s appeal to the open government laws at least gave him and the grocery an opportunity to respond to criticisms submitted off the record. However, VFOIA can’t really be used make the Board to give the grocery the decision they want.
Loudoun County Attorney Leo Rogers reviewed these text messages. Rogers, in consultation with the Virginia Coalition for Open Government, reached an opinion that the Buffington-instigated texts did not violate the FVOIA:
First, given that the text messages were exchanged between only two Board members, there was no participation in the meeting itself. A public meeting of the county’s elected body is defined under FOIA as a meeting of three or more Board members.
Second, in order to be an electronic communication under FOIA, there needs to be an audio or visual component, which the text messages did not include. In any event, in order for a FOIA violation to be actionable, it must be done “willfully and knowingly,” and there is no evidence that is the case.
Of course, Mr. Rogers only speaks in his role as an advocate and advisor for the County. Harris Teeter could try to bring a legal action in court to obtain a ruling. However, what Harris Teeter wants is to gain an edge on its competitors in the mega-grocery field. They are more interested in the ultimate decision that the Board will make than a mere FOIA issue. After the incident, Buffington publically expressed regret that his actions may have caused a perception of wrongdoing by the public.
County supervisors and other elected officials reading the opinions of the county attorney and FOIA council are probably breathing a sigh of relief. Undoubtedly, board members everywhere make all sorts of communications with one another that it would be unduly burdensome and unnecessary to put on the record. The Harris Teeter hearing illustrates why it pays to make inquiries to find out what off-the-record communications shape governmental decisions that affect how many people a grocery store will give jobs, serve goods or delay commutes. The same can be said for HOA and condominium board and committee deliberations.
The Transportation & Land Use Committee hearing was broadcasted. Mr. Buffington or any other interested party could stream it on their computer or mobile device. Lawyers represented the interests of Harris Teeter and Loudoun County. Local newspapers quickly covered the scoop for the interest of county voters. At stake is the identity of one of the fastest growing counties in the nation. In this instance, the recording and inquiries allowed the threats to transparency to be quickly addressed.
In many condominiums and homeowners’ associations, these safeguards do not practically exist. HOA board and committee meetings aren’t broadcast on television. Meetings are recorded in brief minutes, if at all. The news media are unlikely to commit personnel and resources to covering HOA controversies unless something juicy erupts. Owners rarely bring legal counsel to HOA hearings. Owners frequently complain that their Board’s ruling clique keeps them in the dark. The Virginia Property Owners Association Act and the Condominium Act contain statutory protections of the integrity of HOA meetings and owners’ rights to review records. Although most Associations would rather simply disclose the requested meeting records than defend an owner’s lawsuit, few owners take advantage of their rights. On a practical level, the association president, board majority, Association lawyer and property manager make many decisions without the “open government” sunshine that many owners want. HOAs present themselves to state and local policymakers as mini-governments that relieve county budgets from service obligations in entire communities. For many people, their neighborhood community is the least transparent “government” making decisions that affect their lives. It should be the other way around.
VFOIA is a useful tool for property owners in construction cases as well. Contractors must obtain county approvals and inspections throughout the construction process. The local government maintains records of all of these applications, permits, inspections, correspondence and other documents. Owners can use VFOIA requests to find useful information for construction disputes with the builder.
Property owners don’t have to be big grocery store chains to protect their rights and get their voices heard before their local elected government officials and HOAs. HOA and local government boards and committees have legal counsel and managers on their team. Owners need to have a “team,” which could consist of like-minded neighbors, sympathetic board members, attorneys, CPAs and others. With help, owners can understand the laws and governing documents. “Walking on sunshine” can help owners protect their rights and make smart decisions.
News Articles:
Selected Virginia Statutes:
Virginia Freedom of Information Act
Va. Code § 13.1-933. Inspection of records by members (Virginia Nonstock Corporation Act)
Va. Code § 55-79.74:1. Books, minutes and records; inspection (Virginia Condominium Act)
Va. Code § 55-79.71:1. Use of Technology (Virginia Condominium Act)
Va. Code § 55-510.1. Meetings of the board of directors (Virginia Property Owners Association Act)
Va. Code § 55-515.3. Use of Technology (Virginia Property Owners Association Act)
Photo Credit:
Harris Teeter Quail Corners Charlotte, NC via photopin (license)
July 15, 2016
Dealing with Memorandum for Mechanics Lien
A disgruntled contractor or supplier may attempt to collect a payment from owners by filing a Memorandum for Mechanics Lien against the real estate. Under Virginia law, claimants (contractors or material suppliers) can interfere with owners’ ability to sell or refinance property by filing a lien in land records without first filing a lawsuit and obtaining a judgment.
A March 2016 opinion by federal Judge Leonie Brinkema shows why purchasers at Virginia foreclosure sales must give care to mechanics liens. In April 2013 and October 2015 Jan-Michael Weinberg filed a Memorandum of Mechanics Lien against a Fairfax County property, then owned by Ann & James High. J.P. Morgan Chase Bank later foreclosed on the High property. In early 2016, Mr. Weinberg brought a lawsuit to enforce the mechanics lien against J.P. Morgan Chase and the property.
If a claimant pursues a Memorandum for Mechanics Lien correctly, the property may be sold to satisfy the secured debt. A Memorandum for Mechanics Lien is a two-page form that anyone can download online for general contractors or subcontractors. The filing fee is a few dollars. By contrast, removal of the lien may require significant time and attention by the owner. Overall, it is best for owners to work with their advisory team to avoid having contractors file mechanics liens in the first place. Sometimes, disputes cannot be easily avoided and owners must deal with recorded liens. A Memorandum for Mechanics Lien differs from a mortgage or a money judgment. Fortunately for the owner, Virginia courts apply strict requirements on contractors pursuing mechanic’s liens. Just because a contractor fills out all the blanks in the form that doesn’t meant it necessarily is valid. This blog post is a brief overview of key owner considerations. The Weinberg case provides a good example because the court found so many problems with that lien.
- Who? The land records system in Virginia index by party names. For this reason, the claimant must correctly list its own name and the name of the true owner of record. The owner’s team will need a title report and the construction contract. Whether the claimant is a general contractor, subcontractor or supplier will determine which form must be used. Mr. Weinberg’s Memorandum for Mechanics Lien claimed a lien of $195,000. Virginia law requires a contractor to have a “Class A” license for projects of $120,000 or more. Judge Brinkema found this Memorandum defective because Weinberg’s claim was not supported by a reference to a Class A license number. In some residential construction jobs, the Virginia Code requires appointment of a “Mechanic’s Lien Agent” to receive certain advance notices of performance of work from claimants that might later become the object of a mechanics lien. This creates an additional hurdle for the contractor, suppliers and subcontractors. In many construction projects, the builder works with the owner’s bank to obtain draws on construction loans. If mechanics lien disputes arise, owners can work with the bank to obtain documents.
- What? The Memorandum for Mechanics Lien must describe the dollar amount claimed and the type of materials or services furnished. The written agreement determines the scope of work, payment obligations and other terms. Generally speaking, only construction, removal, repair or improvement of a permanent structure will support a mechanics lien. Mr. Weinberg claimed that he conducted “grass, shrub, flower care,” “week killer,” “tree removal/cutting,” general property cleanup,” “infrastructure work,” “planting grass,” “site work,” “general household work” and “handy man jobs.” The Court found that this description of work was invalid. The work described was either landscaping or too vaguely connected to actual structures. Where the agreement was for work that could actually be the basis of a mechanics lien, the owner should consider how much of the work the contractor actually performed? Is the work free of defects? Does the Memorandum state the date the claim is due or the date from which interest is claimed?
- When? The contractor or supplier must meet strict timing deadlines for the mechanics lien. Generally speaking, the Memorandum for Mechanics Lien must be filed within 90 days from the last day of the month in which the claimant performed work. Judge Brinkema observed that Mr. Weinberg failed to indicate on the Memoranda the dates he allegedly performed the work. Also, no Memorandum may include sums for labor or materials furnished more than 150 days prior to the last day of work or delivery. Furthermore, the claimant must bring suit to enforce the lien no more than 6 months after recording the Memorandum or 60 days after the project was completed or otherwise terminated. Weinberg’s 2013 Memorandum was untimely because he did not sue to enforce it until 2016. Because Weinberg’s 2015 Memorandum was the same as the 2013 version, they both probably describe the same work on the property.
- Where? The Memorandum for Mechanics Lien must correctly describe the location of the real estate that it seeks to encumber. If it lists the wrong property, the lien may be invalid. Property description problems frequently arise in condominium construction cases because the same builder is doing work in the same building for multiple housing units. The Memorandum must be filed in the land records for the circuit court for the city or county in Virginia where the property is located.
- Why? There is usually a reason why a contractor decides to file a Memorandum for Mechanics Lien instead of pursuing some other means of payment collection. The Highs allegedly didn’t pay Weinberg for his landscaping and handyman services. The Highs’ weren’t able to pay their mortgage either. Weinberg filed for bankruptcy. In order to resolve a mechanics lien dispute with a contractor, an owner should consider how the dispute arose in the first place. Is someone acting out of desperation, confusion, or is the lien a predatory tactic? Could investigation need some other explanation?
- How? The owner must understand how the mechanics lien dispute with the contractor relates to the overall plan for the property. Mr. Weinberg tried to use mechanics liens to collect on debts. At the same time, he went through bankruptcy and the property went through foreclosure. Context cannot be ignored. Few owners can afford to remain completely passive in the face of a dispute with a contractor. The owner may have a construction loan or other debt financing to consider. An unfinished project is difficult to sell at a favorable price. Potential tenants won’t lease unfinished property.
On March 15, 2016, Judge Brinkema denied Mr. Weinberg’s motion to amend his lawsuit and dismissed the case. When a contractor or supplier files a Memorandum of Mechanics Lien against property, the owner must carefully consider whether to pay the contractor directly, deposit a bond into the court in order to release the lien and resolve the dispute with the contractor later, bring suit to invalidate the lien on legal grounds or simply wait 6 months to see if any suit is brought in a timely fashion to enforce the lien. Fortunately for owners, there are strict requirements on contractors for them to take advantage of mechanics lien procedures. A Virginia property owner should consult with qualified legal counsel immediately upon receipt of a Memorandum of Mechanics Lien to protect her legal rights.
Case Citation: Weinberg v. JP Morgan Chase & Co. (E.D. Va. Mar. 15, 2015)
Photo Credit: Views from a parking garage via photopin (license)
March 21, 2016
Finding Traction in Construction Defect Claims against Contractors
New owners frequently struggle to timely resolve construction defect disputes with builders. For example, owners in Palm Beach Gardens, Florida have home workmanship complaints. Their HOA sued Kolter Homes, LLC for defects including lighting problems, window gaps, sloping balconies and water intrusion. On March 15, 2016, the Daily Business Review reported that Kolter began a new, larger development nearby before resolving their defects. Furious, the owners took to the streets to protest in front of the new project. Owners have rights to effective repairs under warranties arising out of the contract or law. When owners make warranty claims and builders send repair crews in response, these disputes are rarely resolved satisfactorily. The owner’s life is disrupted by living with the undesirable reality of the defects, communicating with the builder, and making arrangements for repairs that may not even be effective. For many owners the “playing field” seems unbalanced because the builder wrote the contract terms, knows the construction business, and has their money. How can owners break out of this cycle of frustrating customer service and get the house they initially bargained for? With smartphone cameras, it is easy for a buyer to record visible defects and the date they took the photographs. When calling and emailing isn’t enough, owners need more effective strategies for finding traction in construction defect claims against contractors.
Understanding Contractual & Warranty Rights. The sales process gives the buyer an understanding of what they will get for their money. New construction is an expensive consumer purchase. Builders know what consumers are looking to hear. Buyers usually make substantial financial sacrifices and commitments to purchase a property that they hope will fit their lifestyle and be a solid investment. Once they make the down payment, sign the contract and go to closing, the buyer’s bargaining position shifts. What builder promises, assurances and expectations can be legally enforced after they have been paid? Deceptive practices may lead to a consumer protection, fraud or even criminal prosecutorial action. However, for most owners the remedy for unfulfilled expectations lies in the contract and warranty commitments made by the builder. The owners can confirm what they bargained for by collecting and understanding the contract and warranty documents provided by the builder. This helps the owner to sort out sales talk from contract rights. Many of the documents may be organized into a packet provided when the parties went under contract or at closing. Other documents may be found elsewhere. For example, warranties, manuals, arbitration rules and other documents may be on file with the builder or available on its website. The contract may reference drawings that are on file with the city or county’s permitting office. If the documents are unclear on a particular point the owners or their attorney may have to consult building codes to understand their rights.
Mark Warranty Deadlines on the Calendar. The written warranties, contracts and state law will impose strict time limits on defect claims. Usually the builder is entitled to a written notice of a defect claim. For many warranties this must be done within a year. The owner usually has a subsequent deadline for submitting the claim to the court or arbitration. It is not really in the builder’s financial interest for the owner to focus on these deadlines. Just because the builder has actual knowledge of a defect does not preserve the claim absent legal notice requirements.
Obtain Reports for Defects & Estimates for Repairs. Once an owner knows the builder’s legal obligations, the next issue is diagnosing the defects and determining the cost to make it conform to the warranty. Owners making defect complaints to the builder have a strong sense of what is wrong from their day-to-day experience of living or working in the property. However, the defects may not be limited to what is immediately experienced by the senses. There may be latent defects that will require expensive repairs in a few years. Owners owe it to themselves to fully understand what is wrong and how much it would cost them to fix by a third party. After six to ten months of frustrating negotiations and ineffectual repairs, the owner may have lost confidence in the builder’s willingness or practical ability to make the repairs. The owner cannot effectively negotiate with the builder for a cash settlement without written assessments by experts that are independent from the builder. The needs of each case are different, and might require engineers, home inspectors, contractors or other qualified experts. At a minimum, the owner usually needs an experienced, licensed contractor. Strong communication skills are needed to handle cross-examination by builder’s counsel before a judge, jury or arbitrator. The written estimate must be for repair of the defects covered by the warranty and not simply projects that the estimator wants to sell and the owner wants to receive. A written estimate can confirm for the owner whether they have a $10,000.00 or $100,000.00 claim. It is in the owner’s best interests to find out the cost before any decisions must be made in light of warranty deadlines.
In construction disputes, the builder has some advantages. They prepared the contract and warranty documents with their lawyers before presenting them to the owners. The builder passed the contracting license exam and knows the building code requirements to get an occupancy permit. The builder negotiated defect complaints with customers before. But it is the owner who must live with or pay to repair construction defects that aren’t acceptably resolved in the warranty claim process. However, owners can level the playing field and obtain good results by determining the gaps between what was contracted for and the structure’s actual condition. A written estimate for defects covered by an unexpired warranty provides owners with what they need to obtain satisfactory results in litigation, arbitration or settlement negotiations. The builder has their own qualified legal and technical advisors working for them to deal with consumer complaints. Owners can level the playing field, gain traction in negotiations and make financial decisions with greater peace of mind by retaining their own counsel as soon as defect disputes arise, and before they become seemingly intractable.
Photo Credit: Pacific Northwest Architecture via photopin (license)
October 14, 2015
Common Misconceptions about Home Builder Warranties
Home buyers want assurances that someone will correct defects in construction to make it conform to what they bargained for. In the sale of new homes, these assurances usually come in the form of the builder’s warranties. Homeowners must make serious decisions about whether to go under contract, go through with closing and allow a year or so to go by without making a warranty claim. The purpose of this blog post is to identify some of the top misconceptions buyers have about home builder warranties that interfere with good decision-making.
- “My Warranty Coverage is Only Shown in the Packet of Contract Documents.” In fact, warranties can also arise out of legislation or court decision precedents. Warranty law is a solution to the problem that a buyer can inspect something, pay for it and later discover that the construction was materially defective. In Virginia, the courts traditionally ruled that in every contract with a builder there is an implied warranty of good workmanship unless the terms of the contract provided specific disclaimers or modifications. This rule helped consumers by requiring that the contractor would have to stand behind their work unless there was some fine print otherwise. Builders responded by having their attorneys write-up those warranty documents that can range from a paragraph to over 50 pages. The Virginia General Assembly observed that contractors were finding ways to get buyers through real estate closings on properties that did not conform to contracts in spite of the efforts of local building code enforcement officials and the buyer’s inspections. They passed legislation that creates implied warranties of quality workmanship that arise in the sale of each new home construction. Unfortunately, both contractors and homeowners are often unaware of these statutory warranties and their relationship with the written contract documents including the written limited warranties. Homeowners find it much easier to negotiate with their builder if they know the full extent of their warranty rights from review of the agreements and statutes.
- “My Neighbor Couldn’t Make Use out of Her Warranty, So I’m Also Out of Luck.” Tragically, many homeowners allow their warranty rights to expire without preserving their right to exercise them. Builders, neighbors, building code officials and inspectors can give useless or misleading legal advice. Because the contract documents vary builder-to-builder and the implied warranty laws vary by state, it is impossible to give a general summary that can be applied in every case. Understanding warranty coverage requires compiling the contract and warranty paperwork and state statutes. Usually, the basic warranty lasts for only one year.
- “My Builder is the Best Person to Ask about what they are Required to Fix.” Builders know that the courts will not expect them to continue making warranty repairs to one house for as long as they continue to be in business. To the extent a builder is still working on a house they have already sold, they aren’t making any new money. Contractors sometimes use written warranty paperwork to confuse or limit the buyer’s warranty rights at the time of sale. The builder’s warranty too often is used as a sales tactic to assuage nervous buyers concerned about construction defects. If the homeowner complains to the builder about construction defects after move-in, some contractors try to keep them occupied with inspections and ineffectual repairs. If the builder’s employees are frequently at the house, the owner probably won’t invite independent inspectors, experts or other contractors who might diagnose serious warranty claims and help the owner protect their rights. Once the owner starts to lose confidence in the builder or the warranty period is approaching, the owner needs the help of independent experts.
- “The Only Construction Defects Worth Focusing on are the Ones I Look at Everyday.” Homeowners frequently focus on the types of construction defects that they notice everyday. Defects in drywall, painting, grout, trim and other finish work can add up to thousands of dollars in repair costs, but they may not be the most substantial defects made by the builder. Water may be leaking into the house. Major systems such as roofing, plumbing, electrical, HVAC, etc. may require extensive repairs or replacement if not properly addressed during a warranty period. In order to properly diagnose these problems, the owner must coordinate investigation with inspectors, experts or other contractors who are independent from their builder. Every homeowner owes it to themselves to know the truth about the condition of their house.
- My Realtor, Mortgage Broker, Settlement Agent or Builder Recommended This Home Inspector, so they must be fine.” In hiring a third party inspector to help with a home purchase, the independence of the home inspector is just as important as their competence. Most professionals in a real estate transaction are only paid when the deal goes to closing. If a home inspector or other participant does find a defect that would cause a deal to not go through or be substantially delayed, the other professionals won’t want them to be involved in the next sale. Most home inspectors know enough about houses to provide a report that is a great help to the buyer. What’s important to the buyer is having an inspector who isn’t allied with the people being paid out of settlement. That way, the buyer knows he is working for her.
A homeowner should not rely solely on the contractor to clarify what their warranty rights are. It’s better to find out from qualified inspectors, engineers or other contractors what, if anything is wrong with your house. A qualified attorney can help determine whether those defects are legally covered before time runs out. If the closing on the new home was less than 12 months ago, there is a strong chance the owner may be entitled to repairs or financial compensation from the builder for failure to make the house conform to the warranty.
Legal Authority:
Va. Code § 55-70.1. Implied Warranties on New Homes.
Mann v. Clowser, 190 Va. 887, 59 S.E.2d 78 (1950)
Photo Credit:
Northwest Modernism via photopin (license)(provided to illustrate home construction – not known whether depicted property has any construction defects)
December 9, 2014
Resolutions for Homeowners Dealing with Construction Defects
A good home provides a safe, comfortable and enjoyable place to live. When a contractor makes mistakes in construction, renovation or repair, the owner or tenant has to live with those defects every day until the problem is resolved. The coming New Year is a good time for homeowners to prioritize addressing contractor defects. In 2015, devise a strategy for relief from construction defects and feel love for your home again.
The key to efficiently realizing a goal is outlining the steps needed to realize it. This gives the owner a “to-do” list that can be tackled step-by-step over time. This may include a warranty claim against the contractor. Many contractors stand by their work and will honor well-founded warranty claims. It’s difficult to build a business from a base of disgruntled former customers. With some contractors, legal assistance may be necessary to obtain relief under a warranty. No two construction defect cases are the same. In each case, the contracts, warranties, physical conditions and defects are different. However, there are strategies that can make the process easier for the homeowner. The following are 7 New Year’s resolutions for homeowners dealing with construction defects:
- Investigate Defects Fully: Examine and photograph the physical appearance of the defects. Obtain copies of the manufacturer’s installation instructions. Research online reviews or other information about the materials used. Wise homeowners focus first on any safety or health concerns. In some cases, taking temporary action to limit future damage may be necessary. Discovering the truth about the defect is a solid foundation for dealing with it.
- Organize Warranty Information. The contractor likely provided contracts, correspondence, warranties and invoices. Usually installers do not warranty the materials used. The warranties for materials may have been provided in the packaging or available from the manufacturer. These items must be reviewed together and can become easily misplaced if not organized.
- Consult Regarding Implied Warranties. Many homeowners are not aware that a written set of terms is not the only way that products and installation may be covered by a warranty. In Virginia, there are certain contractor warranties that arise under operation of law. Consult with a qualified attorney about how coverage may arise under implied or written warranties. Unfortunately, warranties are easily waived if claims are not timely pursued.
- Consult Regarding Obtaining Expert Reports About Defects. In order to fix the defect, ultimately a qualified person will need to do further work on the house. To prove a warranty claim in court, the owner may need an expert witness to testify regarding the breach of duties or the proper figure of damages. Depending on the needs of the case, that expert may be a home inspector, licensed contractor, engineer, tradesperson or professional estimator. Hiring an expert to provide assistance in a lawsuit, reports or court testimony is not like hiring a professional to work on the house. If an expert is being engaged to provide legal support or trial testimony, the owner’s lawyer is the proper representative to work directly with the expert. One of the most important characteristics in retaining an expert in these types of cases is independence. A homeowner is not well served by an inspector or other contractor who will not be able to testify against the interests of the contractor who committed the defects. It’s best to go completely outside of the referral network of the builder.
- Consider Goals for the Property. When a dispute with a contractor erupts, sometimes even smart homeowners may struggle to maintain focus on how the project fits in to their goals for maintaining and developing the property. The homeowner may need to adjust their goals to fit new circumstances.
- Preserve Copies of Contractor’s Representations: If the contractor used intentional concealment, fraud or misrepresentation in the course of selling his services, the owner may have a claim for enhanced damages. Fraud cases are very difficult to prove, and the facts of most cases don’t support them. However, sometimes misrepresentations can be found in e-mail, text message or social media communications. Savvy owners take care to preserve any electronic communications with the contractor’s representatives.
- Consult with Counsel About Pursuing Claims. Once the case has been properly investigated with the assistance of legal counsel, the homeowner is in the best position to go back to the contractor about the warranty claim and, if necessary, pursue a legal remedy.
Whether a homeowner’s best interests lie in simply fixing the problem on their own or pursuing a legal claim against the contractor depends upon the unique circumstances of the case. Homeowners have the benefit of control over the property where key evidence may be preserved. The New Year is a good time for families to take necessary action to protect their physical, financial and legal aspects of home ownership.
photo credit: ungard via photopin cc (I am not aware of any defects with the house depicted in this photo, which was chosen for its seasonal characteristics)
June 3, 2014
Engineer Personal Liability: Signed, Sealed & Delivered?
An engineer must obtain and maintain a Professional Engineer’s license from the APELSCIDLA Board to practice in the Commonwealth of Virginia. Pursuant to professional regulations, when an engineer, or other design professional, completes a set of drawings, he affixes his professional seal with the date and signature. His seal displays his professional license number. This finishing touch assures the reader, especially the owner and the builder, that the plans are ready to go.
If the project built according to the stamped plans fail, one would expect a claim against the engineering firm. With smaller design firms, the customer may only interact with one representative who handles everything. In such a case, what about engineer personal liability? On May 20, 2014, a federal judge in southwest Virginia issued an opinion in a case where the owner of a collapsing feed barn filed suit against an engineer after a barn he designed fell apart. The opinion shows the tension between the interests of freedom of contract and consumer protection in professional malpractice cases.
Ken McConnell hired Servinsky Engineering, PLLC to design a foundation for a barn on his farm. Mark Servinsky, a Virginia Professional Engineer, was its principal. The foundation constructed according to Servinsky’s plans failed, damaging the structure and tearing the fabric roof. The barn cannot be used safely. McConnell sued both the Servinsky firm and Mr. Servinsky personally. The engineering firm filed for bankruptcy protection. Mr. Servinsky filed a motion to have the personal claims against him dismissed.
McConnell alleged that Mr. Servinsky was personally liable for negligently performing the engineering work that resulted in an unusable barn. McConnell argued for liability on the grounds that Virginia law requires an engineer to affix his professional seal, signature and date to his drawings. Judge James Jones ruled that only the firm, and not the personal defendant, could be liable under the contract with McConnell. Here are a few takeaways in this judicial opinion:
- Privity of Contract: This is a legal principle whereby (except in limited situations) only the parties to a contract may sue other parties to the contract. Whether contractual privity is required in malpractice cases varies by profession and jurisdiction. If the customer sues for an engineer’s failure to meet the expectations set by the contract, then only the parties to the contract may be sued. Judge Jones does not address any arguments that McConnell’s contract was with anyone other than the engineering firm.
- Professional Regulations: Unless they specifically provide for personal liability, laws governing design professionals create duties surrounding licensure, not liability to consumers. The state board decides who can or cannot have a license.
- Professional Standards: If personal liability is difficult to prove and bankruptcy is available, what assurances does working with a professional provide to consumers? Judge Jones observed that in malpractice cases, the professional standards are implicit terms to any contract for services with a professional engineer. The professional standards fill in gaps as to the duty of care in performance of the contract. That is why negligence is discussed in these types of cases. The professional services firm cannot hide behind the absence of a specific term in the contract when there is a professional standard that articulates that duty.
Judge Jones dismissed McConnell’s claims against Mr. Servinsky personally, finding that the professional seal did not create professional duties to the customer above & beyond the professional services contract.
The Bankruptcy Court allowed McConnell’s suit against the engineering firm to proceed, since it was covered by insurance. That case is set to go to trial later this year. Servinsky’s engineer license provided McConnell with a potential remedy, but not by personal liability. The license was the prerequisite by which Servinsky to obtain a professional liability policy that may cover McConnell’s claim.
Case Citation: McConnell v. Servinsky Engineering, PLLC, 22 F.Supp.3d 610 (W.D. Va. 2014)
Photo Credit: Silver Smith, 2009″ Si1very via photopin cc (I could not find a fabric barn roof photo – this is actually of the Dallas Cowboys practice facility, not the facts of case discussed)
December 27, 2013
Client Relationships for the Custom Home Builder in 2014
In the past year or so, demand outpaced supply in the Northern Virginia real estate market. Many home builders and tradesmen went out of business in 2008-2009, creating a shortage of home builders. For home buyers, a custom home offers the prospect of owning a made-to-order dream home. For the builder, the custom home business brings rewards as well. These include the pricing of a premium product and working closely with buyers to help them fulfill their dreams. These dreams bear the legal complexity of contracting for the sale of something that does not yet exist. For the buyer, this is the biggest consumer purchase of their life. They rightly take pride of ownership in the project. This blog post identifies a few key issues from the perspective of the custom builder for the New Year:
- Liability Shield. You stand behind your work and want to keep your customers happy. This is how business grows. At the same time, you owe it to yourself and your family to protect your personal assets and credit. Customers expect that they will be doing business with a company. By incorporating or forming an LLC prior to making contracts, custom builders can exercise reasonable control of the exposure of their own credit and assets. Communications and agreements with customers should clarify the seller’s identity.
- Choosing the Customer. Prospective customers are likely talking to other builders or realtors. If a prospect reminds you too much of a previous problem customer, she may not be a good fit for your business. The wrong customer may distract you away from your more deserving customers and prospects. Consult with legal counsel if anti-discrimination or fair credit laws may apply.
- Written Agreements. Use an attorney-prepared written contract prepared for the particular type of project and state law. It may not be necessary to have a “new” form for each job. However, a realtor form for the sale of homes in Maryland won’t work well for a custom home in Virginia.
- Customer Service. Always have someone available to handle customer inquiries, at least during normal business hours. Buyers of custom homes tend to visit the site frequently and have questions. They feel a tremendous amount of financial and emotional investment in the project.
- Project Control. Don’t allow the consumer to directly supervise your subcontractors on the job site. An excited buyer may want to go outside his contract with you and hire his own tradesman to install items on property they don’t yet own. No car dealer would allow a shopper to take an auto to a body shop for a custom paint job during an extended test drive. The custom home builders do themselves and the customer a favor by anointing a manager or site supervisor to “face” with the client.
- Happy Endings. Take walk through inspections, punch lists and closings as an opportunity to communicate with the buyer and wrap things up effectively.
Home builders unfairly have a reputation for being unresponsive or inflexible with their customers. More often, custom builders struggle with being too accommodating with the demands of buyers. Most of all, custom home buyers expect the builder to provide them with personal leadership and advice. Attention to the legal aspects of your customer relationships is a critical element of entrepreneurial creativity and leadership.
