REAL ESTATE ARTICLES OF INTEREST TO HOMEBUILDERS

1. TIME IS OF THE ESSENCE
2. THE BUILDER'S WARRANTY ON NEW HOUSES
3. THE BUILDER'S WARRANTY ON NEW HOUSES: PART 2
4. NORTH CAROLINA LIEN LAW
5. AFTER THE CLOSING: WORKING WITH AN UNHAPPY BUYER ON NEW CONSTRUCTION

TIME IS OF THE ESSENCE
By James E. Scarbrough, Association Attorney

When a real estate sales contract provides that the buyer will close on a certain date and the buyer does not close on that date, is the buyer in breach of contract? The answer is "no" because usually real estate sales contracts do not contain a phrase providing that "time is of the essence as to the closing date". If such a phrase is contained in a sales contract, then the buyer's failure to close on the date specified in the contract is a breach of contract.

Under North Carolina law, dates are not considered crucial in a contract in the absence of an expressed provision making time of the essence. For an example, if a home construction contract states that the builder will complete the home "on or before November 1" and the house is not completed on November 1, the courts will not declare the builder in breach of the contract unless the parties have expressly provided that "time is of the essence". Where the contract does not have this provision, the courts assume the parties did not consider the closing date or completion date to be a substantial or material element of the contract.

In the absence of a "time is of the essence" provision, when does a delay in closing become a breach of contract? This is difficult to answer. Basically, it depends upon the circumstances of each case. For example, if some third party, such as the lender, attorney, or surveyor, is not ready and causes the delay, then the buyer will not be considered in breach of contract for a delay of one or two weeks. In North Carolina, our Supreme Court has stated that, "When time is not of the essence, the date selected for closing can be viewed as an approximation of what the parties regard as a reasonable time under the circumstances of the sale." Our courts generally allow the parties a "reasonable time" after the date set for closing to complete performance.

In an interesting opinion filed by the North Carolina Court of Appeals on August 7, 2001 in Dishner Developers vs. Victoria Brown, Mrs. Brown entered into a contract to purchase real estate from Dishner Developers. The agreement provided that the closing would take place on or before August 1, 1997. The closing was held July 28, 1997. At the closing, Mrs. Brown was told by the closing attorney that there were three mortgages on the property, one of which had been paid in full, and the remaining two mortgage holders had made oral statements indicating they would release their mortgages from the real estate. Mrs. Brown was unwilling to close under those circumstances. The developer immediately took steps to obtain releases from the mortgages and two weeks later notified Mrs. Brown's attorney that the developer was ready and able to deliver title free and clear of all mortgages. Mrs. Brown's real estate agent then notified the developer that Mrs. Brown considered the contract null and void because the developer could not convey clear title on the closing date. The North Carolina Court of Appeals agreed with the developer and held that Mrs. Brown had breached the contract by not allowing the developer a reasonable time (in this case two weeks) to obtain releases from the mortgage holders. Since the contract did not contain a "time is of the essence" clause, Mrs. Brown forfeited her earnest money deposit because she breached the contract

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THE BUILDER'S WARRANTY ON NEW HOUSES
By Jim Scarbrough, Association Attorney

The new house warranty is an area of law which has been a source of confusion for builders, consumers, and also lawyers.

There are two types of warranties - the express warranty and the implied warranty. These are the only two types of warranties. The express warranty means that the warranty is simply in a written document. The "2-10" warranty is an example of an express warranty but this article is not concerned with those types of warranties. The implied warranty means simply that the warranty is not written at all. Implied warranties are warranties imposed upon builders by the courts. So, what's the difference?

With regard to express warranties, the builder can make the express warranty say whatever he wants. The builder can limit his liability to certain defects and also limit the length of time of the express warranty. Also, in an express warranty the builder can exclude all implied warranties. As you can see, the express warranty can benefit the builder and consumer alike since both parties know exactly where they stand with regard to the warranty.

Implied warranties on new construction were first imposed on builders by the North Carolina Supreme Court in 1974. Implied warranties cover only the basics. Specifically, the implied warranty states that the dwelling must be free from major structural defects and must be constructed in a workmanlike manner. Implied warranties do not extend to defects which the buyer should have seen upon a reasonable inspection. For example, under an implied warranty the builder is not required to repair a hole in the sheetrock that could have been seen by the buyer prior to closing. The implied warranty sounds simple enough, but the problem is that a jury is required to determine whether the implied warranty has been breached. Builders and buyers should not have to resort to a jury trial in order to resolve warranty issues. Builders, and buyers, are better served by express warranties for new home construction.

A widespread, common myth among builders, agents, and also lawyers, is that all new homes come with a "one year warranty." There is no such law. Implied warranties extend for as long as the statute of limitations and that can mean three to six years depending upon the nature of the defect. This is more reason for the builder to use express warranties.

In a future article, we will examine factual cases involving warranties.

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THE BUILDER'S WARRANTY ON NEW HOUSES: PART 2
By Jim Scarbrough, Association Attorney

In a past article I wrote about the confusion surrounding implied and express warranties. I said it is a common myth that all new homes come with a "one year warranty." There is no such law. Implied warranties, ie. those imposed by the courts, extend for as long as the statute of limitations and that can mean three to six years depending upon the nature of the defect. Therefore, I said it may be important for the builder to use express warranties which contain a "waiver" clause that exclude all implied and express warranties other than those expressly contained in the contract.

The recently revised "new construction addendum" form of the N. C. Association of Realtors, however, adds a new twist to the subject. The all important "warranties" section of this form has been revised to remove the "waiver" clause which previously excluded all other warranties. Under the old addendum it was clear that the only builder warranties on the house were those set out in the addendum. The new addendum now seems to bring back all warranties allowed by law whether contained in the addendum or not.

The change in the new construction addendum does not favor the contractor. For example, under the new addendum how long is the builder liable for defects. Is it one year, three years, six years, or what? While the old addendum answered the question, the new addendum does not. As a party to the contract you are entitled to insert the old "waiver" language back into the construction addendum and thereby limit your warranties to those contained in the contract.

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NORTH CAROLINA LIEN LAW
By Jim Scarbrough, Association Attorney

In North Carolina, there are two kinds of liens that can be used to protect those who supply labor and materials for the improvement of real estate. The first type of lien is called a "part one" lien and the second type of lien is called a "part two" lien.

Part one liens are against the real estate itself and arise in favor of those who deal directly with the owner of the real estate. This lien protects any person who deals directly with the owner of real estate and performs or furnishes labor or professional design or surveying services or furnishes materials pursuant to an agreement with the owner of the real estate. The Part One lien must be filed within 120 days from the date of the last furnishing of labor or materials. Then, within 180 days from the date of the last furnishing of labor or materials, the person claiming the lien must file a lawsuit to "perfect" the lien. These time limits are strictly enforced by the courts. If you file your lien 121 days after the last date of furnishing labor and materials, the lien is invalid. Of course, the person supplying the labor and materials still has a suit to collect for the amount owed; however, he no longer has a lien to secure collection of the debt.

One who furnishes labor or materials for real estate but who did not contract directly with the owner is not allowed to file a part one lien. However, this person (usually called a subcontractor) is allowed to file a part two lien that attaches to funds owed to the contractor who hired the subcontractor. However, the subcontractor must give notice to the owner of his part two lien. After such notice, if the owner pays any funds to the contractor without protecting the subcontractor, the owner may then become liable directly to the subcontractor.

Also, by filing a part two lien, the subcontractor may enforce the contractor's lien against real estate under certain conditions. In other words, the subcontractor can become subrogated to the contractor's right to enforce a part one lien. Confused? It becomes more confusing when you consider that the part two lien may be filed after the 120 day period has expired.

If a part one lien is filed against the real estate, will that stop a closing on the sale of the real estate? The answer is no. The part one lien can be removed simply by posting a bond with the clerk of court or by depositing with the clerk of court the amount of the lien. The closing can then take place. After the closing, the previous owner of the real estate and the person claiming the lien can litigate the issue of whether money is owed to the lien claimant and the litigation will not affect the real estate.

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AFTER THE CLOSING: WORKING WITH AN UNHAPPY BUYER ON NEW CONSTRUCTION
By Jim Scarbrough, Association Attorney

After the buyer moves into a new home, typically the buyer will discover some items which need to be corrected. This is to be expected, and the contractor will take care of legitimate complaints at this point in time. However, on some occasions, the buyer may be unreasonable in his demands and his list may contain items which are not defects or he may make unreasonable demands for payment. What course of action should the contractor take when he receives a letter from the buyer's attorney containing a list of unreasonable demands?

First, if the buyer has no attorney then the contractor should always try to work out a reasonable compromise with the buyer. Failing this, if the contractor receives a letter from the buyer's attorney, the contractor should immediately contact his attorney to open a file on the matter. Then the contractor should meet with his attorney and plan a course of action. Typically, the contractor should try to schedule a time to inspect the house and examine the alleged defects. At the time of inspection, the contractor should take with him a third party licensed home inspector. Also, at the time of inspection, the contractor or the inspector should take photographs of the alleged defects. I also advise contractors to take photographs of the rest of the property, especially if the home is a large, expensive home.

A good home inspector will provide the contractor's attorney with an inspection report. The inspection report will also contain an estimate of costs to repair any defects. The contractor should be willing to abide by the inspector's report. Often times, the inspector will side with the contractor, and in such a case, the contractor may be required to litigate the issues. Prior to sharing the inspector's report with the homebuyer, I usually insist that the home buyer obtain his own inspection report. We then swap inspection reports and try to reach a compromise. This process brings in third party home inspectors to assist in resolving the problems.

The home inspectors are invaluable in assisting the attorneys. Based on these home inspections, the attorneys will soon realize whether it is the contractor or the buyer who is being unreasonable. Usually at this stage, the attorneys can then advise their clients with regard to the facts. If a compromise cannot be reached after this process, then at least you are prepared to defend against unreasonable allegations.

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