Consider Building? The Thing About Builder Contracts

Contracts for the sale of new construction are generally prepared by the builder or builder’s attorney. Unlike the relatively balanced buy-sell contract forms prepared by the Colorado Real Estate Commission, many such builder contract forms are quite one-sided, favoring the builder. Some of the commonly encountered concerns with builder contracts include the following:

1. Non-refundable deposits (for example, for changes/option items; sometimes the contract may purport to say the seller retains certain deposits even in the event of a seller default)

2. Lack of specificity of what is being constructed and/or broad seller rights to make changes/substitutions

3. No meaningful deadline for completion/no “bounding” of (or fixed parameters for) completion or closing dates

4. Closing based on a temporary Certificate of Occupancy and/or substantial completion

5. Lack of escrow for post-closing punch list or other significant obligations to be performed by seller after closing; and/or unreasonable language regarding creation of punch list

6. Limited inspection rights

7. Limited title/survey evaluation rights and limited or poor quality of title/deed and title insurance (e.g., “standard” title insurance policy rather than so-called “extended coverage;” and special warranty deed rather than general warranty deed)

8. No meaningful buyer remedy for seller default, especially in an appreciating market (such contracts will often state that the sole buyer remedy for a seller default is termination of the contract and the refund/return of some or all of buyer’s deposits – with an explicit waiver by the buyer of specific performance and any other rights/remedies)

9. Prohibitions on recording the contract

10. A warranty that is unreasonably limited in scope and/or subject to unreasonable procedures for enforcement

11. Unreasonably broad disclaimers and/or buyer releases (and occasionally also buyer indemnity provisions)

12. Lack of authority of sales staff

13. Seller repurchase options (sometimes exercisable if a post-closing dispute arises)

14. Broad seller rights to terminate the contract (for example, in event of dispute, or if “unforeseen circumstances” or conditions prevent seller from performing), with the return/refund of some or all of buyer deposits as buyer’s only right in such event

15. Mandatory arbitration as the sole remedy even for pre-closing disputes

16. Unreasonable buyer maintenance covenants (often to be recorded in applicable Clerk and Recorder’s office)

17. Unreasonable rights for seller to use the property before closing (for example, for seller open houses, tours, etc.)

Current economic conditions have contributed to an increase in bankruptcy filings by builders. While a bankruptcy filing does not, by itself, necessarily allow the builder to avoid closing a sales contract, as a practical matter such a bankruptcy often does lead to a contract termination. A seller in bankruptcy often cannot meet the closing date or other deadlines set forth in the original contract, and if the new residence is not yet completed, the builder in bankruptcy may not have the ability to complete the residence. There is also a risk that earnest money and upgrade deposits paid by the buyer might be lost if the builder files bankruptcy and the transaction cannot be or is not closed. If the seller is able to complete the residence, or if it was completed before the bankruptcy filing, in the evaluation of its options the buyer should be aware of the typical inability of a bankrupt seller to honor warranties or other post-closing obligations contemplated by the original contract.

Evaluating existing soils conditions and a seller’s disclosure in that regard, and the potential for a bankruptcy filing by or against the seller, are additional issues of concern in the purchase of new construction. The presence of so-called “expansive soils,” for example, may require the use of specialized construction techniques to minimize the possibility of subsequent defects resulting from such soils. Colorado law (C.R.S. § 6-6.5-101) requires that, at least 14 days before closing the sale of a new residence, the builder or developer or their representatives must provide the buyer with a copy of a summary report of the soils analysis and site recommendations, and for sites in which significant potential for expansive soils is recognized, also a copy of a publication detailing the problems associated with such soils, the building methods to address those problems during construction, and suggestions for care and maintenance to address such problems. The buyer should monitor a seller’s compliance with these disclosure obligations.

The foregoing is not and does not purport to be a complete list of all concerns or issues that a buyer may want to consider when entering into a contract to acquire new construction.  The Buyer is encouraged and advised to consult with legal counsel before signing any contract for the purchase of new construction.

Prepared and 2014 by Frascona, Joiner, Goodman and Greenstein, P.C. (303-494-3000) legal counsel, for the exclusive use of Urban Luxe Real Estate . All rights reserved.