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)
September 2, 2014
Accepting a New Contract During an Earnest Money Deposit Dispute
On July 31, 2014, I posted about a recent Fairfax Circuit Court opinion concerning Earnest Money Deposits (“EMD’s”). The seller, Sagatov Builders, LLC, sued buyer Christian Hunt. Mr. Hunt had entered into a contract and later failed to make the EMD or complete closing. The Court refused to allow the seller to sue the buyer for the unpaid deposit amount, finding it to constitute an unenforceable penalty.
Recently, an anonymous visitor typed a question into the search feature of this blog, rephrased as follows: “If there is a pending dispute over an EMD, can the seller accept another contract on the same property?” In other words, what are the risks of having two unreleased contracts simultaneously on the same property? In the Sagatov case, the seller used a marked-up, outdated realtor association form as a template for a transaction conducted apparently without brokers. Since the buyer never made the EMD, that wasn’t a classic earnest money dispute. The visitor’s question intriguingly takes a step back and asks how the EMD dispute implicates fundamental contract issues.
Today’s post explores this visitor’s question. This reminds me of a personal experience I had over a year ago. My wife (then fiancée) and I were under contract to purchase a home in Fairfax County, Virginia. We made the EMD. Our home inspector discovered a below-grade crawl space suffering from significant water intrusion problems. Our agent provided our home inspection report to the seller along with a request for release of the EMD. We resolved the dispute by using the home inspection contingency to get out of the contract. We were able to get our EMD back without having to send lawyer letters or go to court. Once we decided to ask for the release, we didn’t care what the sellers did with the house once we moved on, so long as we weren’t involved. However, some buyers may attempt to tie up the disposition of the real estate in order to gain leverage in getting their EMD back. Buyers and sellers can disagree over whether a contingency is still available.
While the circumstances and wording of each contract dispute are different, this visitor’s question brings a few thoughts to mind:
- Conflict Avoidance. Sellers and their agents get their money by selling the house to a willing buyer, not by engaging in EMD disputes. If the buyer doesn’t want to go to closing, then there you are. Yes, the parties (and their agents) time is lost in a failed deal. There is a time value to money. However, usually it is in their best interests to undo the deal and move on. EMD disputes that can’t be amicably resolved end up in Court, possibly going to trial. Some cases continue for months or even years.
- Role of EMD. After the contract and deposit are made, any dispute between the buyer, seller and/or their agents implicates the EMD as a potential remedy for a default. The timing and circumstances of the underlying default are usually determinative.
- Materiality of Buyer’s Default. A seller cannot take a deposit, repudiate a signed contract on a flimsy pretense, pocket the EMD and then move on to the next potential purchaser.
- Available Remedies. The judge will seek to interpret facts of the case according to the terms of the contract. An example of the language of a contract that may be used in Virginia is available here. The Court can do one of any number of things, including (a) forcing an unwilling party to go forward with the sale, (b) undoing the deal and returning the parties to the original positions or (c) awarding money damages as compensation.
- Waiver Issues. Usually, buyers don’t back out unless they discover some defect or simply can’t close due to circumstances, such as not having the money. If the buyer demands a release of a contract and refuses to go to closing, it will be hard for them to expect the seller to keep the property off the market. Likewise, if a seller accepts a new contract, then the seller cannot reasonably expect the buyer to purchase the house.
- Mitigation of Loss. Under some circumstances, the seller may be under a duty to find a replacement buyer. For example, the seller may claim the deposit on the premise that changing market conditions will result in a lower subsequent sale. Or, the seller may claim damages on the theory that it will suffer losses related to having to keep the property on the market. It is unreasonable for a seller to incur avoidable losses and then seek compensation for them from the backing out buyer.
- Failure to Timely Close. If the parties are close to closing, the seller may consider waiting until the closing date passes. The buyer’s failure to prepare for and go to closing prejudices expectations on their part that the property be kept off the market.
- Professional Regulation. The Real Estate Board regulates the conduct of real estate licensees. Agents may have professional duties under their own agreements with the parties and the particular circumstances of the dispute.
In the event that parties to a real estate sales contract cannot amicably resolve disputes over the disposition of the property or the EMD, they are well advised to contact a qualified attorney for counsel and representation.
I took the featured photograph in Shenandoah County, Virginia. It is just for fun and does not depict any of the properties discussed on this blog.
July 31, 2014
Earnest Money Deposit as Liquidated Damages
Your typical disputes over an earnest money deposit as liquidated damages in residential real estate sales go something like this: Home buyers decide to submit a contract and an earnest money deposit as an offer to purchase the property. Before closing, the buyer cannot find financing or discovers a defect with the home. If the buyer still has a contingency she can exercise to get out of the contract, then usually there is not a problem with return of the deposit. Where the seller is worried about finding another buyer and there is no applicable contingency, there might be a dispute over who is entitled to the escrowed funds. In scenarios falling within this classic dilemma, the common fact is that the realtor, seller or some other escrow agent holds the buyer’s funds until they are dispersed pursuant to the sales contract.
What if the buyer signs the contract but never submits the deposit and does not go to closing? Can the buyer still be liable to the seller in the deposit amount? The Circuit Court of Fairfax County, Virginia, recently held that contract default language in a National Association of Realtors form was unenforceable as written under this scenario.
In April 2012, Sagatov Builders, LLC entered into a contract to sell Christian Hunt a residential property in Willow Creek Estates in Oakton, Virginia. The contract required Mr. Hunt to submit a $50,000 deposit within 5 days of the issuance of the building permit. The seller submitted the approved building permit to Mr. Hunt in September 2012. According to the Complaint, Mr. Hunt failed to make the deposit or to go to closing. According to Redfin.com, the property was sold on Dec. 13, 2013 for $2,775,000. Perhaps Sagatov suffered some expenses and inconveniences associated with having the property tied up with Mr. Hunt during peak home selling months. Sagatov’s website has an advertisement for the completed property, including pictures and a description. In April 2014, Sagatov Builders filed a lawsuit against Mr. Hunt for the unpaid $50,000.00 deposit as liquidated damages for his breach of the contract.
Why is Sagatov seeking the deposit amount as liquidated damages instead of a calculation of actual damages suffered? The parties used a National Association of Realtors Sales Contract for Land form No. W-48C (VA) dated 6/95. Section 21, entitled, “Default,” provides that:
If the Purchaser is in default, the Seller shall have all legal and equitable remedies, retaining the Deposit until such time as those damages are ascertained, or the Seller may elect to terminate the contract and declare the Deposit forfeited as liquidated damages and not as a penalty …. If the Seller does not elect to accept the Deposit as liquidated damages, the Deposit may not be the limit of the Purchaser’s liability in the event of a default.
On its face, this provision would seem to give the seller the option of retaining the deposit as liquidated damages and/or going after the buyer for additional damages. What are “Liquidated Damages” in Virginia? Attorney Lee Berlik defines them in his blog post as:
[T]he amount of which has been agreed upon in advance by the contracting parties. When a contract contains a liquidated-damages provision, the amount of damages in the event of a breach is either specified, or a precise method for determining the sum of damages is laid out. This is often done in situations where the parties agree that the harm likely to be caused by a breach would be difficult or impossible to measure with any precision, so they agree on a figure in advance and dispense with the time and effort that would otherwise be involved in proving compensatory damages at trial.
Rather than litigating a hot mess of damages issues, parties can stipulate to liquidated damages in their contracts. So long as the liquidated amounts are not deemed a “penalty” by the Court, these provisions are enforceable. A few months ago I posted an article to this blog about how Courts seek to avoid imposing similar penalties in construing commercial lease acceleration of rents provisions.
The liquidated damages provisions in the real estate form that came before Fairfax Circuit Court Judge Charles Maxfield presented a new twist on the liquidated damages vs. improper penalty debate. Upon the buyer’s default, these provisions gave the Seller the option of electing the liquidated damages or seeking some other amount of damages.
Judge Maxfield declared the liquidated damages option in the contract to be unenforceable because:
- It isn’t a true stipulation to liquidated damages because of its elective characteristics; and
- Even if it was, it is a “penalty” because it would only be exercised if actual damages were less than the deposit amount.
I think that the drafters of the form (leaving aside for a moment the changes made by Sagatov and Hunt) contemplated that an escrowed deposit would become a potential source for payment of damages in the event of default. These default terms seem focused on avoiding a scenario where the escrow agent would have to release the deposit, only to watch an aggrieved party chase after those released funds in court. They seem to have tried to create a right to draw on an escrow in the event of a breach.
Virginia Lawyers Weekly reports that Sagatov will have an opportunity to re-draft its pleadings based on the Court’s ruling. It will be interesting if this case ultimately goes up on appeal to the Supreme Court of Virginia.
If the $50,000 deposit had been actually escrowed, would the Court’s interpretation and application of these Default terms be any different? If actual damages were less than $50,000, would drawing the whole amount constitute a “penalty?” What if expenses dealing with the dispute, such as attorney’s fees, were incurred by the seller?
