Residential Construction Defects

Residential Construction Defects by R. Scott Alagood

With a hopefully improving economy, our State and local community should see an increase in new housing development. If our past history is a good indicator of the future, then the increase in new construction will necessarily increase the number of construction defect claims between the Buyers of these new homes and the Contractors who constructed them. This article will briefly discuss the history of residential construction claims in Texas and set forth the current legal framework for home owners and builders who may soon find themselves on one side or the other of a residential construction defect claim.

History

Prior to 1999, residential construction disputes in Texas were primarily dealt with through general contract principles and consumer protection statutes. As a result of a real or perceived increase in the number of claims brought by owners against builders and the large damage claims potentially available under certain State consumer protection statutes, the Texas legislature enacted the Texas Residential Construction Liability Act in Chapter 27 of the Texas Property Code (“RCLA”). RCLA framed construction defect claims into specific procedural and damage limitation considerations. However, it seemingly did little to reduce the number of suits and arbitrations or to reduce the large damage claims sought by home owners against builders. In response to a very powerful Texas builders’ lobby (with input from a somewhat less influential consumers’ lobby), the Texas legislature enacted the Texas Residential Construction Commission Act (“TRCCA”) in 2003. The general purpose of TRCCA was to 1) provide a builder registration program, 2) provide a mandatory administrative state-sponsored inspection and dispute resolution process for construction defects, and 3) set forth minimum building standards and warranties for residential construction. Without getting into the details of TRCCA, it should be noted that an owner’s failure to follow the mandatory state-sponsored inspection and dispute resolution process could result in the owner losing the ability to prosecute a claim in court or through arbitration.

The mandatory and harsh effects of TRCCA when combined with the economic downturn effectively resulted in litigated and arbitrated construction defect claims virtually ceasing to exist between 2003 and 2009 in Texas. However, TRCCA was subject to the sunset laws governing administrative agencies, and as part of the sunset process TRCCA was repealed in 2009. Now that TRCCA has been repealed, owners and builders face going “back to the future” when dealing with construction defect claims under traditional contract principles, consumer protection statutes, and the Residential Construction Liability Act.

Implied Warranties

When TRCCA was dissolved in 2009, one of the consequences was the removal of the minimum building standards and warranties for residential construction. With TRCCA out of the way, the common law of Texas which existed at the time of TRCCA reappeared. Through several former Texas Supreme Court decisions, two common law implied warranties once again set the standard for residential construction defects in Texas.

The first implied warranty is the” warranty of good and workmanlike manner”. This warranty requires a Contractor to construct a residence in the same manner as would a generally proficient Contractor engaged in similar work and performing under similar circumstances. Any express warranty must equal or exceed the performance required by the implied warranty of good and workmanlike manner, and it cannot completely disclaim the implied warranty by providing performance standards which do not meet or exceed those required by the residential construction industry.

The second implied warranty is the warranty that the home is suitable for human habitation and only extends to defects that render the home unsuitable for its intended use as a home. This warranty is only applicable to latent defects, that is, those defects that are not disclosed or clearly known to the Buyer of the home. This warranty may not be generally disclaimed. If fully disclosed by a builder to a Buyer, those defects which are knowingly and voluntarily accepted will not be subject to the implied warranty of habitability.

Deceptive Trade Practices: the Home Owner’s Sword

The Deceptive Trade Practices – Consumer Protection Act (Section 17.41 et. seq. of the Texas Business and Commerce Code, herein “DTPA”) applies to the sale of homes. The DTPA expressly allows a consumer to maintain an action where the breach of an express or implied warranty produces economic damages or damages for mental anguish. Where a builder has not built the home in “a good and workmanlike manner” or to be “habitable”, such builder has breached either or both of the two warranties implied by law on a new residence, thus making such “breach” actionable under the DTPA.

The benefits that the DTPA provides over general contract principles are primarily two-fold. First, the claimant only has to show that its damages were “produced”, rather than “proximately caused”, by the builder’s breach of the implied warranty. This means that the claimant need not prove that any resulting damages were reasonably foreseeable. Any damages, no matter how remote, may be proven by the claimant, so long as they result from the builder’s breach of the implied warranty. Secondly where the claimant can prove that the builder intentionally or knowingly “breached” the implied warranty, the claimant may also be awarded mental anguish damages and up to three times the claimant’s actual or economic damages.

Residential Construction Liability Act: the Builder’s Shield

Since the expiration of TRCCA, RCLA continues to provide builders with a statutory filter through which construction defect claims must navigate. While RCLA does not in and of itself provide the home owner with a separate cause of action against a builder, failure to comply with the Act has consequences for both the home owner and the builder.

First, RCLA makes it clear that to the extent of any conflict between RCLA and the DTPA, the provisions of RCLA will control. Second, RCLA limits the liability of a Contractor for defects caused by several statutory acts which are deemed to be outside of the Contractor’s control. Third, RCLA requires that the home owner give the Contractor at least sixty (60) days prior written notice by certified mail of the specific construction defects that are the subject of the complaint prior to filing suit or invoking arbitration proceedings. Fourth, RCLA allows the Contractor during the first thirty-five (35) days following receipt of the home owner’s RCLA notice to inspect the home and construction defects by supplying the home owner with a written request for inspection.

Second, RCLA allows the Contractor to provide a written offer of settlement to the home owner by certified mail that may include an agreement by the Contractor to repair or have repaired any of the applicable construction defects and may describe the kind of repairs to be made. Additionally, under certain specific circumstances, the Contractor may also make an offer to repurchase the home. Any offered repairs must be made not later than forty-five (45) days after the Contractor’s receipt of the home owner’s written acceptance of the Contractor’s offer, unless delayed by the home owner or by other events beyond the Contractor’s control.

Third, if the home owner believes that the Contractor’s initial offer of settlement is not reasonable, then the home owner must advise the Contractor in writing of such fact and provide details why within twenty-five (25) days of receipt of the Contractor’s initial offer. In such instance, the Contractor has an additional ten (10) days from receipt of such notice from the home owner to make a supplemental written offer of settlement to the home owner.

Fourth, if the home owner rejects a reasonable offer from the Contractor or fails to permit the Contractor to perform under such offer after acceptance, the home owner’s damages are limited to the greater of the value of the Contractor’s repair offer, or monetary settlement offer; and the home owner’s reasonable and necessary attorney’s fees incurred before the offer was rejected. Where a Contractor fails to make a timely reasonable offer, the immediately preceding damage limitations do not apply. Regardless, the current version of RCLA seems to prohibit a home owner from recovering any damages other than the following reasonable and necessary damages which are proximately caused (must be “foreseeable”) by a construction defect: cost of repairs; cost for the replacement or repair of goods damaged in the residence; engineering and consulting fees; expenses for temporary housing; reduction in fair market value related to any structural failure; and attorney’s fees. Note that the heightened causation standard of “proximate cause” is reintroduced, and the limitations on damages supplied by RCLA appear to completely remove the statutory mental anguish and multiplication of damages which would otherwise be allowed by the DTPA.

Finally, under RCLA, either the home owner or the Contractor may force the construction defect disputes to be mediated.

Conclusion

As you can see, construction defect claims can be extremely complicated for both the home owner and the builder. Failure to follow the statutory requirements of RCLA may have serious consequences for either or both parties. Therefore, if you find yourself in such a situation, it is always advisable to seek the advice of a competent attorney who regularly deals with construction defect cases.