Category Real Estate, Construction and Land Use

Ruling Limiting Right to Repair Act Benefits Homeowners Dealing with Defective Construction

Striking a blow to developers and their insurance carriers, a state appellate court has ruled that California’s Right to Repair Act is not the exclusive remedy for homeowners for actual damages resulting from construction defects. Although the issues were raised in the context of a subrogation action in which an insurance carrier sought to recoup from a developer relocation expenses it paid a homeowner, the decision has wide-ranging implications.

In its ruling on August 28, 2013, the California Court of Appeal, Fourth Appellate District put to rest the construction industry’s claim that the Right to Repair Act (Civil Code section 895 et seq.) eliminated many common law-based construction defect theories favorable to homeowners, including strict liability, and that it substituted new and much shorter statutes of limitations. An increase in residential construction defect litigation is expected in response to the ruling.

Enacted in 2002, the Act, which is sometimes referred to as SB 800, only recently became the subject of appellate review, due in part to the fact that its application was limited to homes sold after January 1, 2003.

Viewed with relief by attorneys representing homeowners in construction defect actions, the court concluded that the Act was never intended to, and does not, establish exclusive remedies for claims for actual damages for construction defects. In effect, the court held that homeowners who suffer actual damages as a result of a construction defects have a choice of remedies. Further, the ruling makes clear that common law claims are still governed by the longer statutes of limitations, up to 10 years for latent construction defects.

The case is Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC, No. G046731, 2013 Cal. App. LEXIS 687.

If you have any questions about what to do in response to this decision in terms of policies and procedures, or due to a claim, contact David Frenznick.

Recent Developments in Construction Law

Construction law is constantly changing. A savvy contractor keeps abreast of those changes and adapts his or her business methods to conform to new requirements. Here are some recent legislative updates and court decisions that may affect your business.

Economic Loss Doctrine Does Not Bar Contractor’s Claim Against Architect for Tortious Interference with Contract
A Delaware court recently allowed a contractor’s claim to proceed against an architect for intentional interference with contract despite the argument that it violated the economic loss doctrine. In Commonwealth Construction Co. v. Endecon, Inc., 2009 WL 609426 (Del. Super. Ct. 2009), a church hired a contractor to perform renovation work under a contract that provided that in the event of a dispute, the matter would be submitted to the architect, who would then decide the dispute in good faith and without partiality to either party.

A dispute arose concerning payment. Based upon the architect’s advice, the church refused to pay and a mechanics’ lien was filed. Ultimately, a judgment was entered in favor of the contractor, who then sued the architect for tortious interference with contractual relations.

The architect moved to dismiss arguing that the claim was barred by the economic loss doctrine, which bars recovery in tort for damages unrelated to a claim for personal injury or damage to other property.

The court allowed the contractor’s lawsuit to proceed holding that the economic loss doctrine did not apply to claims for intentional torts such as defamation, fraudulent inducement of breach of contract, intentional misrepresentation and intentional interference with contractual relations. While the architect argued that his advice was truthful, honest and within the scope of his duties, the contractor’s complaint alleged the opposite. Ultimately, the court found that early dismissal of the case was improper because the court, in a motion to dismiss, is required to accept the allegations of the complaint as true.

Contractor Cannot Recover Compensation Unless Licensed At All Times During Performance
In Goldstein v. Barak Construction (2008) 164 Cal. App. 4th 845, plaintiff homeowners filed an application for a Right to Attach Order and an Order for Issuance of a Writ of Attachment against a contractor and his business. The court granted the application against the business and ordered the contractor not to sell, encumber, or diminish the value of his residence until further order of the court. The contractor appealed.

The court concluded that the homeowners’ claim against defendants was one on which attachment could issue. The homeowners provided evidence that the defendants were unlicensed at the time a home improvement contract with the homeowners was executed, and performance under the contract commenced while the defendants were still unlicensed. The record also showed it was not until several months afterwards that defendants obtained their license. The Court found that the homeowners presented a prima facie case under Bus. & Prof. Code, § 7031, subd. (b), of the Contractors’ State License Law justifying the issuance of a right to attach order. In addition, because defendants were not licensed at the time performance under the contract commenced, they were not entitled to any recovery for work performed even if they obtained their license during construction. “Extras” undertaken in furtherance of the contract were subject to the licensing requirements. That defendants may have undertaken work for the homeowners not strictly listed within the four corners of the parties’ written contract would not forestall application of the licensing law to such “extras.”

The Ins and Outs of SB 800, California’s “Fix-It” Statute

In an effort to streamline or prevent construction defect litigation and with the aim of promoting affordable housing by reducing the cost of such litigation, the California Legislature enacted SB 800 (California Civil Code section 895 et seq.) in 2002. The so-called “Fix-It Bill,” amongst other things, adds notice, repair, and mediation procedures to residential construction defect claims. It must be noted from the outset that in order for a builder to avail itself of the pre-litigation procedures provided by SB 800, it must provide notice of those procedures. To provide effective notice, a builder must record on title a notice of the SB 800 pre-litigation procedures along with a notice that those procedures impact the legal rights of the homeowner. Further, this information must also be included in the original sales documentation and must initialed and acknowledged by both the purchaser and the builder’s sales representative. Failure to provide the required notice eliminates the builder’s right to compel compliance with SB 800 procedures.

Written Notice of Claim Required
The pre-litigation procedures created by SB 800 begin with the homeowner providing written notice to the builder which describes, in reasonable detail, any alleged defects. The builder must acknowledge receipt of the homeowner’s claim within 14 days and it may then conduct an inspection within 14 more days. A second inspection by the builder may be conducted within an additional 40 days. After completion of these inspections, the builder has 30 days in which it may offer to conduct repairs or to make a cash payment in lieu of any repairs.

After receiving the builder’s offer to repair or to make payment, the homeowner then has 30 days to accept the offer, request the names of three additional contractors to conduct the repair, or to request mediation. If mediation is requested, it must occur within 15 days and, unless the homeowner agrees to pay for half of the cost of the mediation, the mediator is chosen and paid for by the builder. If the homeowner chooses to pay for half of the mediation costs, then the mediator is chosen jointly. This mediation is limited to four hours unless extended by the parties. At the end of the mediation, the homeowner and builder either agree to a resolution or the homeowner must allow the repair to be performed. The repairs must be completed as soon as is reasonably possible with every effort made to complete the repair within 120 days. Alternatively, the builder may offer a cash payment in lieu of any repair and it may obtain a reasonable release in exchange for that payment.

Hidden Cost if Homeowner Chooses Alternative Contractor
One hidden cost to builders under SB 800 involves the homeowner’s right to request the names of three alternative contractors to complete the repair work. Often, the original subcontractor is obligated to repair defects without cost to the builder. However, if the homeowner chooses an alternative contractor to complete the repair, then the builder will have to come out-of-pocket for that alternate contractor instead of obtaining the repairs from the original subcontractor without cost.

In any event, after the repair has been completed under SB 800, and if no prior mediation has taken place, then the homeowner must request mediation with the builder if they wish to bring further action. The statute of limitations to bring such further action is generally extended during the repair and mediation process until 100 days after they are completed. If a homeowner ultimately sues under SB 800, then damages are limited to the reasonable value of repairing any SB 800 violation, any damages caused by the original repairs, the cost of removing and replacing any improper repairs completed by the builder, reasonable relocation and storage expense, lost business income if the residence is used as a principal place of business licensed to be operated from the residence, reasonable investigative cost, and all other costs or fees recoverable by contract or statute.

Statutory Defenses Available
If a builder is sued under SB 800, there are a number of defenses available to it pursuant to California Civil Code section 945.5. These defenses include (a) unforeseen acts of nature such as weather and earthquakes and manmade events such as war, terrorism, or vandalism; (b) failure by the homeowner to reasonably minimize or prevent damages including failure to give timely notice of the alleged defect; (c) failure to follow builder’s or manufacturer’s recommendations or commonly accepted maintenance obligations which were provided at the time of sale; (d) ordinary wear and tear, misuse, abuse or neglect; (e) statute of limitations; (f) defects for which the builder obtained a valid release; (g) successful repairs which corrected the defect; and (h) all other available affirmative defenses.

While well intentioned, the “protections” afforded by SB 800 have been a mixed blessing for builders. These protections can lessen the burden of construction defect litigation in the right circumstances, but the cumbersome and rigid mechanism it puts in place is difficult to comply with and can often lead to wasted effort for even the most conscientious builders.

Strict Compliance Required
SB 800 requires strict compliance to both notice and time requirements. Any failure allows the homeowner to immediately bypass the SB 800 procedure and file his or her lawsuit. Because the time limits are so short and the consequences of a mistake so devastating, builders who wish to avail themselves of the pre-litigation protections of SB 800 may want to consider consulting a construction attorney immediately upon receipt of notice of an SB 800 claim.

Construction Business in Trouble? Is Bankruptcy Right for You?

With the declining economy, bankruptcy filings are on the rise. The bankruptcy trend in the past few years has hit both residential and commercial developers, as well as general and subcontractors. This trend has impacted all facets of the construction industry—virtually all trades, vendors and suppliers. Frequently, businesses find themselves in trouble because their own clients fail to pay their bills timely or themselves filed bankruptcy. Cash flow is key in any business, but it is particularly important in construction businesses. Those in the construction industry faced with slow paying customers, receivables that become non-collectible, pressure from banks and reduced demand for their services, often find themselves considering bankruptcy.

You should be aware of the various options that businesses have in connection with bankruptcy. Generally, businesses can file for two types of bankruptcy protection: Chapter 7 and Chapter 11. When a business files bankruptcy, either Chapter 7 or Chapter 11, an automatic stay is created which prohibits creditors from pursing any actions against the business debtor to collect a debt or pursue a claim.

Chapter 7 Bankruptcy 
In a Chapter 7 bankruptcy, a trustee is appointed and typically immediately shuts the business down. Thereafter, the trustee may perform a liquidation of the business assets and pay creditors from the liquidation proceeds. Once the trustee has liquidated the business and paid creditors, the bankruptcy case is typically closed but the business debtor does not receive a discharge of its remaining debts. However, the business is usually dissolved following the liquidation as there is nothing left for the benefit of creditors. The length of a business Chapter 7 bankruptcy varies depending on the trustee’s analysis of the case, the time to sell assets and time to pay creditors, but could range from 6 months to a year.

Chapter 11 Bankruptcy
In a Chapter 11 bankruptcy, the business debtor can often stay in control and avoid the appointment of a trustee. The goal of a Chapter 11 bankruptcy is to get the court to approve a Plan of Reorganization that provides new terms upon which the business debtor will pay back its creditors, often at a fraction of the original amount. In the Plan, Chapter 11 debtors can extend matured loans; pay certain creditors less money than is owed; reject leases; and even possibly adjust interest rates on loans to the current market rate. Once the court approves the Plan, it rewrites the deal with the businesses’ creditors and the business emerges from the bankruptcy intact. Keep in mind that a Chapter 11 bankruptcy is a complicated, expensive and time consuming process. As a result, it is important to consult a bankruptcy professional and consider all of your options before filing a bankruptcy.

Indemnity Provisions in Construction Contracts–Asset or Liability?

Construction contracts often contain indemnity provisions. Indemnity provisions generally allow one party to a contract who, if found liable in a lawsuit, may then seek reimbursement from the other contracting party. Indemnity provisions are commonplace in the construction industry, most significantly in contracts between general contractors and their subcontractors. When a developer or general contractor is sued by a commercial or residential property owner, they may seek indemnity, or reimbursement, from the subcontractors, who typically do most, if not all, of the actual work.

Indemnity Rights Can Be Assigned 
However, developers and general contractors are not always the only persons who can end up with indemnity rights. The law allows a person to assign their indemnity rights. While unusual, it is possible for a developer or general contractor to assign his or her indemnity rights to the plaintiff as part of the settlement of the lawsuit. Indemnity rights can be a valuable asset, but they can also be a liability.

Indemnity rights can become a valuable non-cash part of a settlement between a general contractor and a homeowner, for example. In a construction defect action, the homeowner may name the general contractor and certain subcontractors as defendants. The general may then, in turn, sue the subcontractors for indemnity, bringing them into the lawsuit as cross-defendants. If the homeowner settles with the general, he is relieved of liability, but the non-settling subcontractors are not. If, as part of the settlement, the general assigned his indemnity rights, the homeowner basically “steps into the shoes” of the general and may continue the lawsuit against the non-settling subcontractors for additional amounts and also based upon the indemnity rights in the contract between the general and the non-settling subcontracts.

For example, assume a homeowner sues a general contractor for negligence and breach of contract, and the subcontractor for negligence. The homeowner settles his lawsuit against the general contractor for $1.6 Million cash and an assignment of the indemnity rights in the contract. Further assume that the assignment has an estimated value of $200,000. The total settlement amount is thus $1.8 Million. The homeowner then continues the negligence lawsuit against the subcontractor and obtains a $3 Million judgment. At the same time, the homeowner also brings the general contractor’s indemnity action against the same subcontractor (based on the general contractor’s contract with the subcontractor) and the jury awards $1.5 Million. The homeowner’s $3 Million direct judgment against the subcontractor will be reduced by his earlier settlement amount, leaving the homeowner with $1.2 Million in his negligence action. The judgment based on the indemnity provision in the contract will not be reduced. The total judgment for the homeowner is $2.7 Million ($1.2 Million + $1.5 Million), which is less than the $3 Million in negligence damages the jury awarded him. Yet, when the homeowner adds the $2.7 Million judgment to the $1.6 Million cash from the settlement, the homeowner’s total recovery is $4.3 Million, or $1.3 Million more than the jury awarded him. Furthermore, if the assigned contract with the indemnity rights included an attorneys’ fees provision, the homeowner may also be entitled to attorneys’ fees.

Attorney Fees May Be Part Of The Claim
Consider however, that if the homeowner loses the lawsuit, the general contractor would not have been held liable for the work of the subcontractor. Therefore, the homeowner will not prevail on the assigned indemnity lawsuit making the indemnity provision worthless to the homeowner.

Although worthless to the homeowner, the indemnity rights may be quite valuable to the prevailing subcontractor since many contracts contain attorneys’ fees provisions that are also assigned with the contract. Attorneys’ fees provisions give the prevailing party, whichever party that is, the right to reimbursement for reasonable attorneys’ fees. When the lawsuit is based on a contract that contains an attorneys’ fees provision and other non-contract causes of action, the attorney fees can generally only be recovered for the contract cause of action. However, a court may grant attorney fees for the entire lawsuit, not just the contract cause of action, when the legal issues were common to the contract and non-contract causes of action.

Losing Party May Be Forced To Pay Attorney Fees Twice

Consequently, the losing homeowner may be liable for attorneys’ fees both in his negligence action and in the indemnity action against the subcontractor based upon the indemnity provision in the assigned contract. The indemnity provision required the general contractor to be found liable for negligence so that the general contractor could indemnify the subcontractor for the subcontractors’ defective work. In other words, the subcontractor was not liable unless the general contractor was liable. Therefore, when the homeowner brought his negligence and indemnity causes of action, both causes of action were intertwined and the court had discretion to award attorneys’ fees to the subcontractor in defending itself against both the negligence and indemnity claims. This result occurs even though the homeowner was not a party to the original contract.

In conclusion, contractual indemnity provisions can provide protection to developers and general contractors who are later sued for defective work. In the event of a lawsuit, the indemnity rights may be assigned and become part of a negotiated settlement. When accepting indemnity rights, the risks and benefits associated with any attorneys’ fees provision must be considered.

Know How to File and Enforce Your Mechanic’s Lien

A mechanic’s lien is a remedial mechanism by which a contractor or subcontractor on a private work project can guarantee payment for services and work provided. The reasoning behind this is that since the contractor or subcontractor provided services which increased the value of the private property, they should have an enforcement tool toward guaranteeing payment for those improvements. Take, for example, a not-uncommon scenario in today’s economy: a general contractor contracts with a roofer but fails to pay and files bankruptcy. A valid mechanic’s lien held by the roofer will likely require the homeowner to pay the roofer for his or her services even though the homeowner may have paid the general contractor in full.

The law provides this remedy to a very broad spectrum of claimants, essentially any person or business entity who at the request of a private owner, or his agent, has furnished labor, material, leased equipment or furnished any special skills and/or services to a project for improving real property may be entitled to record a lien against that property. (See Civil Code §3110.)

Step 1: Preserve Your Right To A Mechanic’s Lien By Recording And Serving A Preliminary Notice
Pursuant to Civil Code section 3114, before you can enforce a mechanic’s lien a preliminary twenty (20) day notice must be served. The notice must be in writing and must contain at least the following information:

(1) A general description of the labor, service, equipment, or materials furnished, or to be furnished, and an estimate of the total price thereof.

(2) The name and address of the person furnishing that labor, service, equipment, or materials.

(3) The name of the person who contracted for purchase of that labor, service, equipment, or materials.

(4) A description of the jobsite sufficient for identification.

(5) A heading, set forth in boldface type, stating “Notice to Property Owner,” and the subsequent statements as spelled out in Civil Code section 3097(c)(5).

Any tradesperson that provides services to a general contractor who in turn is providing services to a private landowner must serve a preliminary notice within twenty (20) days of the time services are first provided on the project. A general contractor and/or a subcontractor with a direct contractural relationship with the owner is not required to provide preliminary notice. Additionally, this preliminary notice must be served upon the owner or reputed owner, the original contractor, or reputed contractor, and to the construction lender within the twenty (20) day time period. A preliminary notice must be served either personally, by registered or certified mail.

Step 2: Record And Serve The Lien
If you are not timely paid during the course of the project or at the end of the job, the recordation of a mechanic’s lien is a powerful remedy. Often, payment follows shortly thereafter. It is important to understand, however, that the lien must recorded within ninety (90) days after the completion or cessation of the work on the project. However, if the owner of the property records either a notice of completion or a notice of cessation, the contractor has only thirty (30) days from the time the notice is recorded to record his mechanic’s lien. The lien should be recorded in the County in which the real property is situated. Pursuant to Civil Code section 3084, the mechanic’s lien must include the following:

(1) A statement of the amount owed, after deducting all just credits and offsets.

(2) The name of the owner or reputed owner, if known.

(3) A general statement of the kind of labor, services, equipment, or materials furnished by the claimant.

(4) The name of the person by whom the claimant was employed or to whom the claimant furnished the labor, services, equipment, or materials.

(5) The location or a description of the site sufficient for identification.

(6) The claimant’s signature and verification that the claims made in the mechanic’s lien are true and accurate.

Frequently, the mere recordation of a mechanic’s lien will motivate payment of any outstanding balance. If not, then the lien must be perfected by filing a lawsuit in the Superior Court.

Step 3: Perfect the Mechanic’s Lien
If the contractor remains unpaid after the recordation of the mechanic’s lien, the claimant must file a lawsuit to foreclose the lien within ninety (90) days from the date the lien was recorded. A lawsuit is commenced by the filing of a complaint in the Superior Court. Failure to meet the filing deadline will result in the loss of your ability to enforce the lien.

While a contractor always retains the ability to proceed with a breach of contract action against the person or entity that actually hired you, (the homeowner or general contractor in most cases) the loss of lien rights through failure to file the preliminary notice or to perfect the lien may mean that you won’t get paid if the primarily responsible party has filed for bankruptcy protection or is otherwise judgment-proof. That is why it is always a good idea to have an attorney draft the paperwork and ensure that the filing deadlines are met. However, to save money, some contractors fill out the forms themselves and simply have the attorney review them before mailing or filing.

Recent Developments In Construction Law

Construction law is constantly changing. A savvy contractor keeps abreast of those changes and adapts his business methods to conform to new requirements. Here are some recent legislative updates and court decisions that may affect your business.

Notice of Mechanic’s Liens Now Required 
As of January 1, Civil Code section 3084 now requires that lien claimants provide written notice to the property owner that the lien is recorded. The new law contains specific language and font size requirements. Most importantly, failure to provide the notice as required renders the lien unenforceable.

Notice of Pendency of Action to Become Mandatory
As of January 1, 2011, Civil Code section 3146 will mandate that a Notice of Pendency of Action (Lis pendens) be recorded within 20 days of the filing an action to foreclose a mechanic’s lien. Current law does not require the recordation of a Lis pendens. It is unclear if a failure to timely record the notice will affect the validity of the lien.

Unlicensed Contractors Ordered to Disgorge 
In White v. Cridlebaugh (2009) 178 Cal. App. 4th 506, the court of appeal recently held that an unlicensed contractor was required to reimburse an owner more than $80,000 for construction work performed while unlicensed. The appellate court found that Business & Professions Code section 7031(b) was designed to treat consumers consistently, regardless of whether or not they already paid the contractor for unlicensed work. Section 7031(b) protects an owner from suit for payment by an unlicensed contractor. This case now makes clear that unlicensed contractors cannot avoid the effect of the statutes by collecting prepayment before undertaking work or by retaining progress payments for completed phases of work.