New Construction Contracts July 2007 Legal Presentation
Contracts – New Construction on Builder’s Lot • TAR New Home Construction (Incomplete Construction) AND • GHBA Residential Sale and Construction Contract – For construction of a residence on the Builder’s Lot • Builder owns lot • Builder finances construction of home • Ownership transferred at closing after substantial completion • Buyer pays for home upon closing.
Contracts – New Construction on Buyer’s Lot • GHBA Residential Construction Contract – For Construction Projects on a Homeowner’s Property – • Buyer owns the lot • Buyer finances construction of home • Draw Requests • “Builder’s Indemnity Against Liens and Affidavit of Bills Paid.” • May be used with TAR Unimproved Property Contract • Broker’s Fee Agreement for construction part
Earnest Money v. Nonrefundable Deposits • TAR contract – earnest money is deposited with title company – no other upfront fees • GHBA contracts – NONREFUNDABLE Construction Fee payable directly to Builder • Nonrefundable fee may be approximate cost of customization • Apprise Buyer of risks • Add provision that it will be refunded if Builder defaults
TAR v GHBA – When Buyer Owns the Lot • GHBA - Buyer hires engineers for: • Soil testing • Prepare foundation plan • Prepare structural framing plan. • No Builder liability for foundation/structural problems • GHBA – Buyer must ensure compliance of plans with building codes and deed restrictions • GHBA –Builder released for personal injury occurring on the property due to Builder’s negligence, for damages to trees and vegetation, for environmental hazards , etc…
Substantial Completion • What is substantial completion? • TAR –final inspection and approval by all governmental authorities and any lender • GHBA contract – when construction is sufficiently complete to allow Buyer to occupy and use the home for its intended purpose • Substantial completion under GHBA contract could occur prior to final inspections
Date for Substantial Completion • TAR – Definite date for substantial completion (P 7E) • Extension for construction delays caused by acts of God, fire, nonavailability of materials • Failing to substantially complete is a default • If due to factors beyond Builder’s control, Buyer may extend closing up to 45 days or terminate and receive earnest money • If for any other reason, Buyer may enforce specific performance, seek such other relief as may be provided by law, or both, or terminate and receive earnest money • GHBA – Builder gives an estimated date for substantial completion, but Builder does not guarantee completion on any specific date.
Allowances, Change Orders, Punch List • Allowances • Should be specific – exactly what is included? • Make sure allowances are sufficient for what Buyer wants – otherwise, Buyer will end up having to do a change order (more $) • Change Orders – contract should specify whether these will be paid when agreed or added to purchase price • Punch List – Contract should say Buyer and Builder will have final walk through and preparation of punch list a few days before closing
Payment of Subcontractors • Retainage – Tx Property Code gives buyers the right to retain 10% of the total contract price until 30 days after closing. GHBA contract waives right to retainage. • Buyer’s lender will often require • All Bills Paid Affidavit – Builder submits this at time of final payment - says either that all subs have been paid or specifies amounts still owed to subs • Subs who have not been paid must send prompt notice to buyer re: amount unpaid.
New Construction Warranty • Statutory warranty, set forth in Chapter 430 of the Texas Property Code, applies • Description of warranty: www.trcc.state.tx.us • 1 year workmanship & materials • 2 year mechanical delivery systems • 10 year structural • 10 year warranty of habitability • Builder has option of purchasing a limited warranty from a third party warranty company which has been approved by TRCC
Dispute Resolution • TRCC requires that all problems be submitted to the dispute resolution process set forth in TRCC, which involves complaint, inspection by a TRCC approved inspector, report, appeal • GHBA contract requires binding arbitration and waiver of right to jury trial • TAR contract – no waiver of jury trial, no binding arbitration