Construction Update: New law changes method of handling defect issues

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© 2003 North Bay Business Journal
(Reprinted with Permission)

BY JEFFREY LERMAN
The new Homebuilder Fix It Construction Dispute Resolution law, SB 800, affects all purchasers of new homes or condos closing after January 1, 2003. A detailed review of this extensive statute (covering about 20 pages of fine print) is beyond the scope of this article. However, every homeowner affected by this statute must be aware of the following five traps.

Filing too late

Before this new law, if homeowners wanted to assert a construction defect claim, all they needed to do was figure out which of a few possible theories of liability applied and how long they had to commence legal action based on that theory. SB 800 changes all that.

First, sprinkled throughout the massive statute are 11 separately prescribed time limits for bringing legal action, depending on what type of defect is involved. What happens if you have a defect that falls into more than one category? To be safe, assert your action within the shorter time limit.

Second, the new legislation changes when the clock starts running. Instead of commencing on the date the defect was discovered, as before, all statutes of limitation now start at the close of escrow. Unsuspecting homeowners may inadvertently miss a filing deadline by not realizing this important fact.

Third, the four-year statute of repose for patent (visible) defects and the 10-year statute of repose for latent (hidden) defects no longer apply to actions under this statute. So, whereas before, homeowners could take some comfort that they would have a remedy if they did not (or could not) discover a problem with, for example, the plumbing until many years after taking occupancy, those same homeowners could be prevented from seeking redress for that problem under the new law.

Inadequate documentation

The new law lulls the unprepared homeowner into a false sense of security by requiring the contractor to turn over potentially hundreds of pages of documents such as plans, specifications, soils reports, DRE public reports, and engineering calculations. Homeowners may be impressed and intimidated by the sheer volume. After searching fruitlessly through these documents for smoking-gun proof that the contractor committed some actionable error, weary homeowners may reluctantly agree to a settlement that is significantly less than what they might otherwise be entitled to.

Any experienced construction lawyer knows, however, that the most incriminating documents are hidden where homeowners would never see them under this voluntary production procedure: in the contractor's job or project file, internal notes, and correspondence file. The only way to get these critical documents (assuming the contractor does not turn them over with the other documents) is through formal discovery in the context of arbitration or court action.

Failing to maintain the home

The statute provides that a builder may be excused in whole or part from liability if, among other things, a homeowner fails to follow the builder's or manufacturer's recommendations or "commonly accepted homeowner maintenance obligations," provided the builder gave written notice of these recommendations and guidelines at the time of sale, and they were reasonable.

No doubt numerous disputes will arise as to what recommendations and guidelines the homeowner actually had notice of, and whether they were reasonable. The homeowner's best defense is to keep detailed records of all communications to and from the contractor. Be proactive. Document an inquiry to the contractor upon substantial completion asking him to advise you of any maintenance obligations he believes apply to your home. Then, follow those procedures and document your efforts with a home maintenance journal, receipts, pictures, etc.

Giving an overly-broad release

Surprisingly, the new rules discourage contractors from engaging in one of the most common and successful settlement practices: fixing the problem themselves. Contractors trying to do the right thing under the new law are effectively penalized by a prohibition on their ability to ask for or receive a release for the defect that has been fixed.

Now, the only way a contractor can secure that release is by paying cash. The danger for homeowners is that in many of these repairs, the true cost is unknown until the fix is fully completed. So, unless homeowners want to front the money themselves, they are taking the substantial risk that the cash compromise may fall short of what is actually needed to get the job done. Further, prudent homeowners must be on guard to make sure that any release given is drafted as narrowly as possible. Otherwise, there may be a rude awakening when it is discovered that the release covers a portion of the home that is not part of the affected area and that later requires repairs.

Failing to assert available remedies

The statute repeatedly characterizes its dispute resolution procedures as nonadversarial. It is anything but.

To the extent the law mandates a forced alternative dispute resolution procedure that is pre-arbitration and pre-court action, it is nonadversarial. However, it is folly to think that, when tens or hundreds of thousands of dollars are at stake, the name of the game is anything other than shifting as much of the responsibility of paying for the necessary repairs to the other party. And that is about as adversarial as it gets.

Homeowners involved in significant claims should be neither hypnotized nor fooled by the word "nonadversarial" in the statute. Rather, they should recognize that even under this new law, the odds are that to recover the maximum remedy for construction defects, they will be well-served by retaining competent counsel early in the process to help guide them through the maze of construction defect litigation -- a maze that this new law has just made even more confusing and perilous.