July 5, 2017
Property owners are frustrated when their builder fails to properly complete the agreed upon work for the purchase price. Sometimes these difficulties are relatively minor. Perhaps only a timely warranty claim letter to the builder will get the problems fixed. Not all disputes can be resolved amicably. For relatively simple matters, the owner may be able to sue pro se in small claims court. Many construction disputes require greater commitment of time, know-how and resources to resolve. When the relationship between the contractor and the owner breaks down, it may not be clear to whom should owners turn with contractor complaints. This blog post highlights various options owners may have for obtaining assistance with builder problems.
The Contracting Company’s Leadership:
Owners should first seek to amicably resolve disputes over a contractor’s performance with the company’s representatives. If the concerns can be effectively communicated and negotiated, the owner may avoid having to go to court, arbitrator or governmental agency. Sending a certified letter to the contractor may be necessary under the provisions of a statutory or contractual warranty. Check out my previous post about “Construction Defect Warranty Claims.” Communication can be a useful means of obtaining information. The owner may need to contact the leadership if their inquiries to company employees are ignored.
City or County Government Officials:
In Virginia, the city or county has the legal mandate to enforce the statewide building codes. There are offices staffed with experienced officials who conduct inspections and reviews to determine whether the project meets the building codes. The primary purpose of building code enforcement is to protect public health and safety. The code enforcement process begins long before anyone brings a complaint before the local government. Many projects, especially major renovations and new home construction require drawings to be submitted and a permit granted before work may commence. When presented with a complaint, code enforcement will look at the work on the property and consult the approved drawings and the building codes.
While compliance with the building codes is important, it is not the end of the story. If the contractor only builds to the minimum standard required to pass county inspections, the owner may be disappointed. The concept of a “dream home” includes code compliance, but goes significantly beyond that. Owners have rights not simply to a product that passes code inspection but work that conforms to the contract, warranty and drawings. There are quality control issues that aren’t addressed in most contracts, drawings or building codes. Take caution regarding contractors who talk about “dream homes” before the contract is signed and then only in terms of “code compliance” after getting several payments.
It is important for owners to understand what code enforcement is not. While the officials promote a public function, they do not exist to provide pro bono expert services. They will not provide cost estimates to finish or repair the work. Their job is not to make sure that the owners get what they bargained for in the contract with the builder. In some situations, they may enforce the building code against the owner. If the project is shut down because of code enforcement action, this may cause delays and additional expenses to the owner.
In general, the code enforcement offices do a great job within their specific legal mandate of enforcing the building codes. However, owners must understand that the county or city does not have the broad powers of a court to provide remedies and protections.
If a contractor or owner does not agree with a decision made by code enforcement, there is an appeal process available. However, appeals are rare because of the expenses and delays.
State Board of Contractors:
Contractors must be licensed to engage in the construction services they deliver. The state board performs a useful function in the contracting field. Consumers and the public have good reason to expect the government to protect their health and safety. Also, contractors often take large amounts of money from owners who then expect them to perform on the work. Some people lose motivation once they get the money in their bank account. While we don’t usually categorize contractors as “fiduciaries,” in a sense they are such. The Virginia Board of Contractors deals with the application, issuance and suspension of contractors’ licenses. They also have regulations that can be the basis of a professional disciplinary proceeding if violated. The Contractor’s Recovery Fund provides a means for financial recovery for some consumers in egregious suits where the contractor lacks resources to satisfy a judgment. In a previous post I explored the question, “Should Homeowners Bring Complaints Against Contractors Before Courts or Regulators?” As discussed there in more detail, often there isn’t much benefit to owners to go to the state board until they exhaust remedies elsewhere. However, owners and their attorneys should know what the requirements are for recovery against the state fund so that they can meet those requirements in the lawsuit. The state board will look to the records of the proceedings of the lawsuit in the city or county courts in their investigation. Also, the failure to pay a court judgment is a violation of the licensure regulations. For many aggrieved owners, petitioning the state board only makes sense towards the end of the legal process.
In particularly egregious cases of fraud, embezzlement or other wrongful activities, the contractor may have criminal liability. In most cases, inquiring with law enforcement will not result in charges or restitution order. However, owners should not rule out going to law enforcement entirely. Some cases do rise above civil disputes.
As the years go by, more builders put arbitration clauses in their consumer contracts. In many cases, these arbitration clauses do not help owners. Often, they tend to limit or practically eliminate the consumer’s rights to legal remedies. It can be difficult for owners to navigate the arbitration process without legal counsel because of certain delaying tactics that often occur in arbitration. I recently wrote a blog post about a New Jersey case where a consumer overcame obstructionist use of arbitration provisions. Many property owners do not focus on these provisions when they review the contract during the sales process. When a legal dispute develops, the parties should check the dispute resolution provisions of the contract to see if they mandate arbitration, waive the right to a jury trial or limit the courts where claims may be brought.
Judges & Juries:
Last but not least, owners can bring their complaints against builders before state or federal courts. Under our legal system, the judiciary, i.e. judges, have the legal mandate to interpret contracts and statutes and provide remedies for any breach. In Virginia, if the claim is for $5,000.00 or less it may be brought in the Small Claims Division where the parties do not ordinarily have attorneys. However, any party may bring a case out of small claims by retaining an attorney and filing for removal. Claims for money for $25,000.00 or less (not including court costs, attorney’s fees or interest) may be brought in the General District Court for the city or county where the property is located. The General District Court has the advantage that proceedings there tend to be faster and cheaper for consumers. Claims over $25,000.00 may be brought in the Circuit Court where cases may take up to a year to be resolved. Litigation in the Circuit Court tends to have lots of motions, discovery and other pretrial activities. Some of my readers say that consumers and owners should not go to litigation because it can be expensive and uncertain. In my view, there are reforms that the general assembly or the judiciary could take to reduce the laboriousness of litigation. I do not believe that creating an alternative to the court system within government agencies procedures works for owners or consumers. I explored this in a previous post on this point. That makes it too easy for special interests to gain control over the process through lobbying.
The bank exercises a significant amount of control over the construction process. The builder typically looks to the bank for payment. The bank will send out its own private inspectors to look at the progress on the job site and report to the loan officer whether completion of a phase of construction warrants disbursement of a draw. The purpose of the bank inspector is to protect against fraud and to confirm that the payment would be adequately secured by the bank’s lien on the property. This inspector works for the bank and does not focus on whether the owner would ultimately be happy with the work that is being done. Owners should not impede the bank inspection process and take heed if the loan officer calls to their attention that the inspector raises any questions.
Mechanic’s Lien Agent:
In Virginia and some other states, the law requires that a Mechanic’s Lien Agent be appointed at the beginning of the project. The purpose of the MLA is to accept delivery of notices by subcontractors and material suppliers that they have not been paid so that such issues can be resolved without a mechanic’s lien being filed by anyone working or supplying to the jobsite. The MLA is not there to provide a dispute resolution service regarding any threatened lien but may be a source of information for owners seeking to confirm what is happening with their contractor and its subs.
To whom should owners turn with contractor complaints? That depends upon the facts of the case. One of the problems with all these separate venues, officials or information sources is that an owner might focus on one and miss a deadline to obtain the remedy they are entitled to from another. This consumer protection landscape is ripe for confusion by the people it is designed to protect. Ideally, the owner will not need to resort to any of these options and can negotiate a good deal and obtain a great result without having to bring grievances before an official, judge or arbitrator. Many owners experience this. However, owners are at a disadvantage. While they have the money that contractors want, they don’t have the technical or legal experience needed to get what they want out of the process. Contractors have experience preparing and negotiating written contracts and change orders. They know what to say to sell their services. They know the officials that work at the county inspection offices. They have their own lawyers. Consumers look to the builder for both the service itself and information about how to shop for the service. For most property owners, a custom home is the largest purchase they will ever make. Getting an attorney or other experienced person to review the contract before signing it can go a long way towards getting the bargain they seek. Owners should not rely upon their adversary to provide them with useful legal counsel. Seeking legal counsel may not require a commitment to a year of litigation. In fact, it may be the best means of avoiding that.
December 12, 2016
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.
Bessant v. Dey Street Properties, LLC (Norfolk Cir. Ct. Nov. 21 2016)(link available to VLW subscribers only)