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All You Need to Know About Residential Construction Law In An Hour DBA Construction Law Section May 1, 2008 J. Paulo Flores Flores & Figueroa, P.C. Founders.

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Presentation on theme: "All You Need to Know About Residential Construction Law In An Hour DBA Construction Law Section May 1, 2008 J. Paulo Flores Flores & Figueroa, P.C. Founders."— Presentation transcript:

1 All You Need to Know About Residential Construction Law In An Hour DBA Construction Law Section May 1, 2008 J. Paulo Flores Flores & Figueroa, P.C. Founders Square 900 Jackson Street, Suite 550 Dallas TX (214) Fax: (214)

2 I. Owner/General Contractor Relationship Contract between Builder and Homeowner really should be in writing, signed by all owners. Tex. Prop. Code § requires a written contract, signed by husband and wife, if applicable, in order to be able to lien homestead. The same section, as amended in 2007, requires Builders TRCC registration number to be listed. Additional disclosure requirements as outlined below. Contract between Builder and Homeowner really should be in writing, signed by all owners. Tex. Prop. Code § requires a written contract, signed by husband and wife, if applicable, in order to be able to lien homestead. The same section, as amended in 2007, requires Builders TRCC registration number to be listed. Additional disclosure requirements as outlined below. Generally little homeowner bargaining power Generally little homeowner bargaining power Exception – Upper end custom house ($1 million +) Exception – Upper end custom house ($1 million +) Majority of contracts contain an arbitration clause (same as commercial) Majority of contracts contain an arbitration clause (same as commercial) Warranty statutorily set in residential construction – 1 yr/2yr/10yr + 10 year warranty of habitability. Can contract for better warranty, but not for less. Warranty statutorily set in residential construction – 1 yr/2yr/10yr + 10 year warranty of habitability. Can contract for better warranty, but not for less. Prompt Payment Act – no statutory right to stop work for non- payment as there is in commercial construction. Can build, in my opinion, into contract. Prompt Payment Act – no statutory right to stop work for non- payment as there is in commercial construction. Can build, in my opinion, into contract.

3 Statutorily Required Notice Provisions Tex. Prop. Code § – Extensive disclosure in contract – set forth in statute. Tex. Prop. Code § – Extensive disclosure in contract – set forth in statute. Tex. Prop. Code § – Homestead disclosure – Know your rights under the law. Tex. Prop. Code § – Homestead disclosure – Know your rights under the law. HB 1038 (eff. 9/1/07) – Added TRCC registration number disclosure requirement to Tex. Prop. Code §41.007; and arbitration clause disclosure requirement to Tex. Prop. Code § and to Tex. Prop. Code § (2). HB 1038 (eff. 9/1/07) – Added TRCC registration number disclosure requirement to Tex. Prop. Code §41.007; and arbitration clause disclosure requirement to Tex. Prop. Code § and to Tex. Prop. Code § (2). Tex. Prop. Code § – List of Subcontractors and Suppliers – Disclosure of subcontractors used on project – Also, must be updated. Can be waived. Tex. Prop. Code § – List of Subcontractors and Suppliers – Disclosure of subcontractors used on project – Also, must be updated. Can be waived. RCLA disclosure (if RCLA but not TRCCA applies) – Tex. Prop. Code § RCLA disclosure (if RCLA but not TRCCA applies) – Tex. Prop. Code § TRCCA disclosure (if TRCCA applies) – Tex. Prop. Code Chapter 420 (including the arbitration clause disclosure mentioned above, if applicable). TRCCA disclosure (if TRCCA applies) – Tex. Prop. Code Chapter 420 (including the arbitration clause disclosure mentioned above, if applicable).

4 Prompt Payment Act – Owner can withhold 110% of disputed amount (as opposed to 100% in commercial construction context). Prompt Payment Act – Owner can withhold 110% of disputed amount (as opposed to 100% in commercial construction context). Texas Trust Fund Act (Tex. Prop. Code Chapter 162) – In residential homestead construction over $5,000, contractor must have dedicated construction trust bank account, with a number of management requirements. These requirements are set forth in Tex. Prop. Code §§ and Texas Trust Fund Act (Tex. Prop. Code Chapter 162) – In residential homestead construction over $5,000, contractor must have dedicated construction trust bank account, with a number of management requirements. These requirements are set forth in Tex. Prop. Code §§ and

5 II.Subcontractors Rare to see written subcontract agreements. Rare to see written subcontract agreements. Rare to see retainage. Rare to see retainage.

6 III. Typical Causes of Action Breach of Contract – Typical fact patterns same as commercial construction projects – (a) from contractors perspective – failure to pay; (b) from owners perspective – defective, incomplete, and/or slow work. Breach of Contract – Typical fact patterns same as commercial construction projects – (a) from contractors perspective – failure to pay; (b) from owners perspective – defective, incomplete, and/or slow work. Breach of Warranty – Again – statutorily set. Performance of residence will be measured against TRCCs performance standards. Breach of Warranty – Again – statutorily set. Performance of residence will be measured against TRCCs performance standards. Delay Claims – Do not see the delay and impact claims that you encounter in commercial, especially governmental, project claims. Delay Claims – Do not see the delay and impact claims that you encounter in commercial, especially governmental, project claims. DTPA – Historically used much more in residential construction disputes than in commercial ones. Ability to proceed under the DTPA is lessening under case law and the TRCCA. Example – Breach of TRCCA warranties, by itself, will not support a DTPA action – Tex. Prop. Code § (c). DTPA – Historically used much more in residential construction disputes than in commercial ones. Ability to proceed under the DTPA is lessening under case law and the TRCCA. Example – Breach of TRCCA warranties, by itself, will not support a DTPA action – Tex. Prop. Code § (c). Texas Prompt Payment Act (Tex. Prop. Code Chapter 28) – As stated above, owner can retain 110% of disputed amount; and there is no statutory provision for demobilizing on project for non-payment, like there is in the commercial context. Texas Prompt Payment Act (Tex. Prop. Code Chapter 28) – As stated above, owner can retain 110% of disputed amount; and there is no statutory provision for demobilizing on project for non-payment, like there is in the commercial context. Uniform Declaratory Judgments Act – Use in voiding mechanics liens (see below)(same for residential and commercial, just even easier in residential). Uniform Declaratory Judgments Act – Use in voiding mechanics liens (see below)(same for residential and commercial, just even easier in residential).

7 IV. Mechanics Liens – Placing The trapping notice period is shortened for those involved in residential construction to the 15th day of the second month after the performance of labor and/or delivery of materials. Tex. Prop. Code §53.252(b). The trapping notice period is shortened for those involved in residential construction to the 15th day of the second month after the performance of labor and/or delivery of materials. Tex. Prop. Code §53.252(b). For residential construction subcontractors and suppliers, regardless of in which tier they fall, they must give notice to the original contractor in addition to the owner(s). Tex. Prop. Code §53.252(b). One simplification is that since the subcontractor or supplier is required to copy the original contractor with the notice anyway, it does not matter what tier claimant they are. In other words, if one is involved in residential construction, and their contract is not directly with the owner, they need to send a trapping notice regarding their claim by the 15th day of the second month to the owner, with a copy to the original contractor. For residential construction subcontractors and suppliers, regardless of in which tier they fall, they must give notice to the original contractor in addition to the owner(s). Tex. Prop. Code §53.252(b). One simplification is that since the subcontractor or supplier is required to copy the original contractor with the notice anyway, it does not matter what tier claimant they are. In other words, if one is involved in residential construction, and their contract is not directly with the owner, they need to send a trapping notice regarding their claim by the 15th day of the second month to the owner, with a copy to the original contractor. If the property is homestead property, must have the additional disclosure in the trapping notice found at Tex. Prop. Code §§ If the property is homestead property, must have the additional disclosure in the trapping notice found at Tex. Prop. Code §§

8 Mechanics Liens – Placing cont. Any contract for work on a homestead must contain the notice required by Tex. Prop. Code § Any contract for work on a homestead must contain the notice required by Tex. Prop. Code § Residential construction claimants have to file their mechanics lien affidavit by the 15th day of the third month, as opposed to the 15th day of the fourth month. Tex. Prop. Code §53.052(b). Residential construction claimants have to file their mechanics lien affidavit by the 15th day of the third month, as opposed to the 15th day of the fourth month. Tex. Prop. Code §53.052(b). Additional requirements for the lien affidavit if liening homestead property. Tex. Prop. Code § Additional requirements for the lien affidavit if liening homestead property. Tex. Prop. Code § The time period in which to file suit to foreclose a residential mechanics lien is, within one year after the last day a claimant may file a lien affidavit under Section or within one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed, whichever is later. Tex. Prop. Code § This as opposed to two years on non- residential construction projects. The time period in which to file suit to foreclose a residential mechanics lien is, within one year after the last day a claimant may file a lien affidavit under Section or within one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed, whichever is later. Tex. Prop. Code § This as opposed to two years on non- residential construction projects.

9 V. Mechanics Liens – Removing No difference in procedure from commercial context. However, typically removal is even easier than in commercial context due to the many additional grounds for lien removal, as we have reviewed.

10 VI. Texas Residential Construction Commission Act Residential construction is governed by Title 16 of the Texas Property Code. Residential construction is governed by Title 16 of the Texas Property Code. Extensive changes to the TRCCA were made in last legislative session. These are charted in Appendix A to the paper. Extensive changes to the TRCCA were made in last legislative session. These are charted in Appendix A to the paper.

11 VII. TRCCA – Registration Have to register as a Builder with the TRCC. Have to register as a Builder with the TRCC. Have to register houses (projects). Have to register houses (projects).

12 VIII. TRCCA – Statutory Warranties and Performance Standards Warranties are set by statute – 1 yr/2 yr/ 10 yr & 10 yr warranty of habitability. Warranties are set by statute – 1 yr/2 yr/ 10 yr & 10 yr warranty of habitability. TRCC has published standards to which home must perform – Tex. Admin. Code Chapter 304. TRCC has published standards to which home must perform – Tex. Admin. Code Chapter 304.

13 IX. TRCCA – State-Sponsored Inspection and Dispute Resolution Process For post-construction, defective work claims, Builder and Homeowner must go through state sponsored dispute resolution process before litigation or arbitration can be filed.

14 X. Residential Construction Liability Act Understand the difference between applicability of RCLA and TRCCA. Understand the difference between applicability of RCLA and TRCCA. The RCLAs scope is larger than that of the TRCCA. Therefore, not all RCLA claims will be subject to the TRCCA. Conversely, for claims covered by the TRCCA, some TRCCA procedures will supplant or supplement those under the RCLA. The RCLAs scope is larger than that of the TRCCA. Therefore, not all RCLA claims will be subject to the TRCCA. Conversely, for claims covered by the TRCCA, some TRCCA procedures will supplant or supplement those under the RCLA. The RCLAs definition of Contractor is more expansive than the TRCCAs definition of Builder. See, Tex. Prop. Code §27.001(5) and Tex. Prop. Code § The RCLAs definition of Contractor is more expansive than the TRCCAs definition of Builder. See, Tex. Prop. Code §27.001(5) and Tex. Prop. Code § As examples, claims against roofers, licensed plumbers or electricians who contract directly with the owner, or interior-only remodelers whose work costs less than $10,000, would fall under the RCLA, but not under the TRCCA. As examples, claims against roofers, licensed plumbers or electricians who contract directly with the owner, or interior-only remodelers whose work costs less than $10,000, would fall under the RCLA, but not under the TRCCA.

15 X. RCLA Cont. The TRCCA and the RCLA, albeit indirectly, also differ in their definition of who is a Homeowner. The TRCCA defines a Homeowner as, a person who owns a home or a subrogee or assignee of a person who owns a home. TRCCA § (7). Home is defined as, the real property and improvements and appurtenances for a single-family house or duplex. TRCCA § (6). Although the RCLA does not define Homeowner, it states, under its definition of Residence, that it applies not just to the owners of single- family houses or duplexes, but also to, triplex, or quadruplex or a unit in a multiunit residential structure in which title to the individual units is transferred to the owners under a condominium or cooperative system. Tex. Prop. Code §27.001(7). As such, these units other than single-family residences and duplexes fall under the RCLA, but not under the TRCCA. The TRCCA and the RCLA, albeit indirectly, also differ in their definition of who is a Homeowner. The TRCCA defines a Homeowner as, a person who owns a home or a subrogee or assignee of a person who owns a home. TRCCA § (7). Home is defined as, the real property and improvements and appurtenances for a single-family house or duplex. TRCCA § (6). Although the RCLA does not define Homeowner, it states, under its definition of Residence, that it applies not just to the owners of single- family houses or duplexes, but also to, triplex, or quadruplex or a unit in a multiunit residential structure in which title to the individual units is transferred to the owners under a condominium or cooperative system. Tex. Prop. Code §27.001(7). As such, these units other than single-family residences and duplexes fall under the RCLA, but not under the TRCCA.

16 X. RCLA Cont. Finally, the RCLA contains a more expansive definition of construction defect, than does the TRCCA (although in the 2003 amendments, the RCLA definition was amended to include the TRCCAs definition). See, Tex. Prop. Code §27.001(4) and Tex. Prop. Code § Finally, the RCLA contains a more expansive definition of construction defect, than does the TRCCA (although in the 2003 amendments, the RCLA definition was amended to include the TRCCAs definition). See, Tex. Prop. Code §27.001(4) and Tex. Prop. Code § Attached as Appendix B to the paper are examples of situations in which the TRCCA SIRP process will not apply, but the RCLA will apply. Also in Appendix B are examples of when neither will apply. Attached as Appendix B to the paper are examples of situations in which the TRCCA SIRP process will not apply, but the RCLA will apply. Also in Appendix B are examples of when neither will apply.

17 XI. Complaints to the TRCC, TRCC Discipline, and State Office of Administrative Hearings (SOAH) Practice and Procedure The TRCC has extensive jurisdiction and disciplinary powers over Builders. These can be found at Tex. Prop. Code § (expanded definition of Builder); § (new TRCC injunctive powers); § (grounds for disciplinary action); § (TRCCs disciplinary powers); § (TRCC jurisdiction over actual Builder and Builders majority owners); and § (maximum fines raised from $5,000 per day per violation to $10,000 per day per violation, and up to $100,000 for certain fraud and trust fund violations).

18 Statutory Grounds for Disciplinary Action After the 2007 Amendments to the TRCCA [15 – 18] - TRCCA § , as amended effective September 1, GROUNDS FOR DISCIPLINARY ACTION. A person, including a builder or a person who is designated as a builders agent under Section , or a person who owns or controls a majority ownership interest in the builder is subject to disciplinary action under this chapter for: GROUNDS FOR DISCIPLINARY ACTION. A person, including a builder or a person who is designated as a builders agent under Section , or a person who owns or controls a majority ownership interest in the builder is subject to disciplinary action under this chapter for: (1) fraud or deceit in obtaining a registration or certification under this subtitle; (2) misappropriation or misapplication of trust funds in the practice of residential construction, including a violation of Chapter 32, Penal Code, or Chapter 162, if found by a final nonappealable court judgment; (3) naming false consideration in a contract to sell a new home or in a construction contract; (4) discriminating on the basis of race, color, religion, sex, national origin, or ancestry; (5) publishing a false or misleading advertisement; (cont.)

19 Amended TRCCA § Cont. (6) failure to honor, within a reasonable time, a check issued to the commission, or any other instrument of payment, including a credit or debit card or electronic funds transfer, after the commission has sent by certified mail a request for payment to the person's last known business address, according to commission records; (7) failure to pay an administrative penalty assessed by the commission under Chapter 419 or a fee due under Chapter 426; (7) failure to pay an administrative penalty assessed by the commission under Chapter 419 or a fee due under Chapter 426; (8) failure to pay [nonpayment of] a final nonappealable court judgment arising from a construction defect or other transaction between the person and a homeowner; (8) failure to pay [nonpayment of] a final nonappealable court judgment arising from a construction defect or other transaction between the person and a homeowner; (9) failure to register a home as required by Section ; (9) failure to register a home as required by Section ; (10) failure to remit the fee for registration of a home under Section ; [or] (10) failure to remit the fee for registration of a home under Section ; [or] (11) failure to reimburse a homeowner the amount ordered by the commission as provided by [in] Section (d);

20 Amended TRCCA § Cont. (12) engaging in statutory or common-law fraud or misappropriation of funds, as determined by the commission after a hearing under Section ; (12) engaging in statutory or common-law fraud or misappropriation of funds, as determined by the commission after a hearing under Section ; (13) a repeated failure to participate in the state-sponsored inspection and dispute resolution process if required by this title; (13) a repeated failure to participate in the state-sponsored inspection and dispute resolution process if required by this title; (14) failure to register as a builder as required under Chapter 416; (14) failure to register as a builder as required under Chapter 416; (15) using or attempting to use a certificate of registration that has expired or that has been revoked; (15) using or attempting to use a certificate of registration that has expired or that has been revoked; (16) falsely representing that the person holds a certificate of registration issued under Chapter 416; (16) falsely representing that the person holds a certificate of registration issued under Chapter 416; (17) acting as a builder using a name other than the name or names disclosed to the commission; (17) acting as a builder using a name other than the name or names disclosed to the commission; (18) aiding, abetting, or conspiring with a person who does not hold a certificate of registration to evade the provisions of this title or rules adopted under this title, if found by a final nonappealable court judgment;

21 Amended TRCCA § Cont. (19) allowing the persons certificate of registration to be used by another person; (19) allowing the persons certificate of registration to be used by another person; (20) acting as an agent, partner, or associate of a person who does not hold a certificate of registration with the intent to evade the provisions of this title or rules adopted under this title; (20) acting as an agent, partner, or associate of a person who does not hold a certificate of registration with the intent to evade the provisions of this title or rules adopted under this title; (21) a failure to reasonably perform on an accepted offer to repair or a repeated failure to make an offer to repair based on: (21) a failure to reasonably perform on an accepted offer to repair or a repeated failure to make an offer to repair based on: (A) the recommendation of a third-party inspector under Section ; or (A) the recommendation of a third-party inspector under Section ; or (B) the final holding of an appeal under Chapter 429; (B) the final holding of an appeal under Chapter 429; (22) a repeated failure to respond to a commission request for information; (22) a repeated failure to respond to a commission request for information;

22 Amended TRCCA § Cont. (23) a failure to obtain a building permit required by a political subdivision before constructing a new home or an improvement to an existing home; (24) abandoning, without justification, any home improvement contract or new home construction project engaged in or undertaken by the person, if found to have done so by a final, nonappealable court judgment; (24) abandoning, without justification, any home improvement contract or new home construction project engaged in or undertaken by the person, if found to have done so by a final, nonappealable court judgment; (25) a repeated failure to comply with the requirements of Subtitle F; or (25) a repeated failure to comply with the requirements of Subtitle F; or (26) otherwise violating this title or a commission rule adopted under this title.

23 XII. Arbitration Important to understand that TRCCA actually has very little to do with arbitration Important to understand that TRCCA actually has very little to do with arbitration TRCC tasked to report on arbitration to 79th and 80th Legislative sessions. This has been done. TRCC tasked to report on arbitration to 79th and 80th Legislative sessions. This has been done. TRCCA provides for venue of arbitration in county in which project is located. Tex. Prop. Code § TRCCA provides for venue of arbitration in county in which project is located. Tex. Prop. Code § TRCCA added a manifest disregard for Texas law ground for vacating a residential construction arbitration award. Tex. Prop. Code § TRCCA added a manifest disregard for Texas law ground for vacating a residential construction arbitration award. Tex. Prop. Code § TRCCA imposes a requirement for recording a residential construction arbitration award if it is filed with a court for enforcement. Tex. Prop. Code § TRCCA imposes a requirement for recording a residential construction arbitration award if it is filed with a court for enforcement. Tex. Prop. Code § TRCCA provides for the voluntary registration of arbitrators with the TRCC. TRCCA provides for the voluntary registration of arbitrators with the TRCC. One rather substantive change – arbitration clause conspicuousness requirement, as added by HB 1038 – Although I believe unenforceable under the United States Supreme Court opinion in Doctors Associates, Inc. v. Casarotto, 517 U.S. 681 (1996). One rather substantive change – arbitration clause conspicuousness requirement, as added by HB 1038 – Although I believe unenforceable under the United States Supreme Court opinion in Doctors Associates, Inc. v. Casarotto, 517 U.S. 681 (1996). This is a prime example of why any discussion of arbitration needs to begin with an understanding of federal preemption under the Federal Arbitration Act. This is a prime example of why any discussion of arbitration needs to begin with an understanding of federal preemption under the Federal Arbitration Act.


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