A Brief Legal Introduction to Home Construction

There are many standard construction contract forms, most of which are strongly pro-builder. This comment educationally considers some of the many legal issues that a contracting buyer/owner should review. Always consult an experienced attorney in specific situations.

1. Develop a checklist from land purchase, location, and zoning through turn-key entry. Checklists prevent vital issues from being overlooked and provide a proper sequence of steps.

2. Consider neighborhood factors. What green space is unlikely to be developed? What might be built next door or across the road from your location? What uses does current zoning allow? What is the soil type and subsurface and is it susceptible to liquefaction or sinkholes? What is the land use history? Was this location used as a dump or could there be toxic waste in the soil? Does the location have any environmental issues and is there an environmental inspection report? Is the location a highly traveled street or a shortcut between thoroughfares? Are streets of appropriate width with parking spaces and sidewalks? Are constructed homes likely to become rentals? Who owns subsurface mineral rights? Is there any possibility of flooding? What is the status of schools, walking paths, libraries, etc.? Is the property subject to deed restrictions and homeowners association rules and fees? Land purchase issues are not addressed in his brief comment.

3. Have you exercised due diligence in the section of the contractor or other engaged parties? Conduct broad-based research concerning reliability, quality, complaints, licensing, etc. Ask the individuals you are researching concerning completed past projects and inquire of the owners of these projects. Be cautious if you discover name changes, corporate reorganizations, and movements from one community to another.

4. What are your legal responsibilities for the payment of an architect, subcontractors, and suppliers in addition to the general contractor? Many of these individuals may be legally protected by lien statutes (Mechanic's Liens) that enforce payment by the seizure and sale of the property. Occasionally there may even be payment claims made by storage facilities where materials and supplies are kept. Some states grant additional remedies under "prompt payment statutes." A waiver (giving up) of legal rights in a contract may not be legally enforceable. An experienced attorney should know what contractual provisions are best for the owner.

5. Be certain that the project and the parties have appropriate licensing, permits, fees paid, bonding, and insurance coverage. A statement, "I'm licensed, bonded, and have insurance," is meaningless. Require and have a professional review of specific documents related to this project. Don't overlook the potential liability for workers who are injured on the job. Consider all the unfortunate events that could occur from contractor insolvency to natural disasters. Are you and the project protected?

6. Financing the project requires a separate set of documents to satisfy the mortgage lender. Carefully consider in consultation with the lender and contractor how progress payments and monetary advances are to be made during construction. Payments may be conditioned upon lien releases from subcontractors and suppliers (indicating that they are satisfactorily paid), inspection reports (both private and public), and timely progress. A percentage of the final payment or construction price may be retained for a specified time after completion to insure that all outstanding claims are paid by the general contractor. What provisions govern in the event of a bankruptcy or death? Lenders will likely require a survey of the property indicating the location of easements and the house. Especially in new subdivisions, sometimes a house is constructed in the wrong location.

7. The construction contract itself may be a lengthy document. Beware if you are told that the proposed document is a "standard form" that "everyone" uses. Beware if you are told that while a provision is not contained in the document, "we'll take care of you." The point is to include everything that must be completed, from site work to the correction of mistakes. Use "incorporated by reference" language to include external specifications, drawings, homeowner association construction requirements, etc. Are there subdivision rules and deed restrictions that must be met? Is the appearance and design of your home a unique item of intellectual property that you own? What provisions address site security and signs? Will you have the authority to approve or deny approval to subcontractors and suppliers and to review and revise their contracts? Time deadlines and damage provisions for missed deadlines should be clear. How much flexibility is allowed in pricing and how are change orders made and approved? Are there custom items that must be obtained from designated suppliers or craftsmen? May materials be substituted and if so, under what circumstances? What written warranties of construction or components are made over what specific items and for what period of time? Are foundation cracking and settling, and potential moisture and mold issues adequately addressed? Will a licensed professional inspector be involved throughout the project? However, realize that a contract does not automatically enforce itself. Well prepared bonding, and structural and warranty insurance (often called "2-10" for its duration) may provide money if the contractor defaults on contractual obligations or defects appear after completion and occupancy.

8. A few states have legislation that specifically regulates home construction contracts. Many states have implied warranties of fitness or quality or deceptive practices consumer legislation. Are these applicable to construction in this state? How do courts in this state define "substantial completion" if a dispute arises concerning unfinished or missing construction requirements? Does the state Attorney General of other public official actively monitor contractors and pursue fraudulent activities? How long does an owner have a right to sue the contractor for defects (statutes of limitation or repose)? What damages are available to an owner in a lawsuit: compensatory for breach of contract, damages to the reputation or sigma to the property, emotional distress, punitive for fraud, attorney's fees and court costs? Note that manufactured homes may have a specific set of statutes and regulations. An experienced attorney will be aware of statutory protections that owners possess and their practical impact.

9. What are local construction customs? Do you agree or disagree with these understandings being a part of this contract? Should they be a written part of this contract? Do courts in this jurisdiction consider trade custom to be part of the contract?

10. Document all problems with logs or diary entries, photographs, video, etc. What dispute resolution provision will be in the contract? Owners frequently favor litigation and contractors desire arbitration. Are there statutory or contractual provisions that provide for the recovery of attorney's fees and court costs? If there is arbitration, how will be arbitrator be selected and what is the scope of her or his authority? What types of monetary damages or other remedies may the arbitrator award?

This comment provides a brief and incomplete educational overview of a complex topic and is not intended to provide legal advice. Always consult an experienced attorney and other professionals in specific construction situations.