Buyers Beware! Avoiding Adverse Builder Contracts

For many people, buying a home is one of the biggest and most expensive decisions they’ll ever make. Unfortunately, it can often be a lengthy and stressful process. Here in Texas, the housing market has been increasingly difficult to manage. As a result, many consumers are turning to builders with the hopes of building their dream home for themselves. While custom homes can be a beautiful and worthwhile investment, many of these consumers soon find themselves navigating complex contracts that contain harmful clauses. To help, we’ve provided some clauses that can cause conflict later on.

Before you sign a contract with a builder, it’s important to recognize that this is your chance to negotiate. You have the most leverage before you commit to the transaction. Once the contract is signed, the builder doesn’t have to agree to changes, so it’s important that you understand and agree with the terms.

Scope of Work

The contract should be thorough in describing the scope of work. Aside from a description of the work to be done, the scope should also, at minimum, describe permits, materials, labor and who’s responsibility it is to ascertain those things. The scope should also address change orders and what happens if there are any conflicting terms regarding the scope. It is best to make sure that the contract you signed will rule all conflicts with any other documentation or plans. In addition, should you ask for additional work, it should be accompanied by a change order with the both the change in price of the project as well any project timeline changes.

Increase in Price or Materials

Most builder’s contracts stipulate that any increase in the price of materials will be passed along to the you as the buyer. These costs can be anywhere from a few thousand dollars to six figure increases. While many builders won’t allow for the removal of this stipulation, it provides an opportunity to negotiate. We encourage every buyer to request that the contract mandate an itemized list of cost increases, to verify the price jump. This assists in dissuading dishonest builders from arbitrary price increases.

Termination for Convenience

Termination for convenience clause, otherwise known as cancellation clauses, are also common in builder contracts. These clauses allow a builder to terminate the contract by providing notice to the buyer. These clauses often allow the builder to terminate for any reason or no reason at all, thereby leaving the buyer high and dry.

Timeline for Work Completion

Builder contracts rarely allow a concrete date for completion. This ambiguity is rightly a concern for most buyers. The failure to list a concrete timeline within the contract can affect when you can bring a strong case against a builder. In contract law, when a timeline for completion is not specified, a court will consider what a reasonable time for performance is. Since there is no specific amount of days that constates a reasonable time, the best course of action is to get the builder to provide an end date of the project to avoid any gray areas. In addition, it is important to view any extensions for which the contract may allow. These will typically include changes in scope, inspection or permitting delays, acts of God, labor shortages and payment delays. Builders may include a statement that excuses any circumstances out of the builder’s control. As a buyer, it’s important to know that these delays can be a few days, months, or even years. It is imperative that this clause be as limited as possible to ensure that the project is complete within a reasonable period.

Contractor Default

Most contracts define what constitutes breach and the rights of the buyer should breach occur. If the contract fails to do so, you should request that a specific provision be added that addresses contractor default. While it is reasonable to allow the contractor to fix the issue, the contract should allow for you to be able to hire another contractor to fix the work, if the repairs are not done in a timely fashion. To avoid gray areas, consumers should allow for a set number of days for a breach to be rectified. You should also retain the right to suspend work or terminate the contract in the event of uncured default.

Limitation of Damages

A limitation of damages clause will typically limit the buyer’s ability to cloud title to the property (as well as) and limit the ability of a buyers to receive additional damages other than the down payment they provided to the builder. By signing this a contract with a limitation of liability clause, a consumer may be giving away the opportunity to ask for additional monetary damages.

Arbitration

Some disputes simply cannot be resolved with a simple conversation. You may have an issue with costs or the quality of the work. You may immediately want to sue the builder for all of the trouble; however, you may find that you are precluded from doing so. It is common for builders to include a binding arbitration clause, which requires a consumer to submit their complaint to an arbitrator, who will issue a binding ruling. This ruling cannot be appealed, so it is imperative that you understand that you are giving up your ability to initiate court proceedings.

Summary

In short, there are several pitfalls that you should be aware of and careful to avoid when reviewing a builder contract. While these are some of the more dangerous clauses, there is no substitute for an attorney’s review of the contract itself. A professional review can help you avoid overcompensating for underwhelming services.

ABOUT THE AUTHOR

Zecharias Embaye
Zecharias Embaye
Attorney

Zecharias is an attorney within the Business Law Division of the firm. He’s a fan of all the Dallas sports teams and enjoys collecting antique books. In his free time he enjoys frequenting small bookstores and exploring local coffee shops. On the weekends, you’d likely catch him at brunch or Half Price Books.