Five Ways To Protect Your Home And Your Investment
A homeowner who is building or renovating a home puts significant resources into the project, and the results will have a major impact on the homeowner’s life. That homeowner will often spend a great deal of time considering how to design and furnish their new or renovated home. But the ultimate success of the project can often depend on the legal structure of the deal, and many homeowners spend little time reading or considering the contract, and some don’t even have a written contract with the general contractor. Below are some of the important legal protections a homeowner should consider or negotiate into their construction contract.
1. Pick a Good Contractor. Picking a good contractor may not seem like a legal protection, but getting this decision right will avoid many later issues that do clearly involve the legal terms of your contract. By a “good contractor” we mean one that will build or renovate your home in accordance with your design, without defects, on time, and within budget. A homeowner can ask the potential general contractor for references to other homeowners, examples of similar projects, and historical data about how close the contractor has come to meeting budgets and schedules. The homeowner can also research the builder (and its owner, related entities, or previous entities) by looking into the following:
a. Court records about filed lawsuits,
b. Property records showing judgment liens,
c. Entity formation filings with the Secretary of State,
d. Complaints filed with the Better Business Bureau,
e. State or local licensing history and qualifications, when applicable, or
f. Online reviews.
Additionally, the construction contract should include an explicit standard of care provision stating that the contractor will use a certain level of care (i.e. that of an experienced builder, or a builder of premium homes in the particular area, or that level of care that is customary in the area) when building the home. This provision will give the owner something specific in the contract to point to if the contractor is not performing up to the standard.
2. Have a Contract. The most basic step that the homeowner can take to protect itself legally during construction or renovation is simply to have a written contract. A written contract gives the owner an enforceable document on which it can make a claim if there is a problem that arises during or after the project. Without the contract the homeowner is limited to trying to enforce an oral agreement, the terms of which will be difficult to prove, or relying on statutory protection, which in many states (including Texas) is limited. The written contract should, at a minimum, name the parties, describe the work to be done, include a schedule or completion deadline, state the amount to be paid for the work, and be signed by all parties.
A written contract can be created by simply signing an invoice provided by the contractor that likely includes additional terms and conditions attached or referenced. It could also be a complex and complete document written by an attorney, or fall somewhere in between. The homeowner should read the entire agreement, whatever its form, and address any concerns it has up front with the contractor before signing the document or paying a deposit.
3. Get Insurance. Before beginning any construction project, a homeowner should make sure it is adequately protected by insurance. The insurance can be held by either the owner through its typical homeowner’s policy or an umbrella policy, or by the contractor in a builder’s risk or commercial general liability (CGL) policy. If the homeowner is relying on the contractor’s insurance it should ask to see proof of that coverage, typically through a certificate of insurance issued by the insurer or broker, and for significant projects it should be named as an additional insured or loss payee on the policy. The amount of insurance should be sufficient to cover potential losses given either the size of the project (if the insurance is project-specific) or the size of the contractor (if it’s company-wide coverage). Finally, the homeowner should contact its own insurance company to ask whether any specific coverage, endorsement or notice must be given to the insurance company to make sure any construction related loss is covered.
4. Get a Warranty. The contract should provide for a warranty from the contractor to the owner warranting that the work will conform to the design, be free and clear of defects, be done in a good and workmanlike manner, and use new and quality materials and equipment. The warranty period can be unlimited in time, but most contractors will want to limit the warranty to some period of time and may propose a one-year or a two-year period. Homeowners should negotiate for a longer warranty period, especially for major components such as the foundation, roof, and structure. The contract should also require the contractor to transfer any manufacturer’s warranty to the homeowner upon final completion of the project.
5. Protect Against Liens. Under certain circumstances, contractors and subcontractors are entitled to file a mechanic’s lien against the homeowner’s property securing amounts owed to them for work done on the property. For example, if the homeowner pays the general contractor for the cost of the foundation but the general contractor does not pay the subcontractor that poured the foundation, then the subcontractor may be entitled to file a lien against the homeowner’s property for the amount it is owed. In Texas, this process is governed by the Texas Constitution and Chapter 53 of the Property Code. The homeowner can do a few things to protect itself against mechanic’s liens:
a. Retainage – In Texas if the homeowner holds back 10% of every payment due to the general contractor for a certain period of time after completion of the work, then the owner’s property is protected from mechanic’s liens. The homeowner should try to negotiate for the right to hold back 10% retainage throughout the construction contract.
b. List of Subcontractors and Suppliers – The owner should have the right to get a list of all subcontractors and suppliers working on its home so it can confirm all subcontractors and suppliers have been paid in full before it releases the final payment due to the contractor.
c. Waivers – A lien waiver is a document signed by a contractor or subcontractor stating that it has been paid for some or all of the work and waiving its right to claim a mechanic’s lien against the property on which it worked. During the project, the homeowner should obtain lien waivers from subcontractors and suppliers before making each progress payment to the general contractor. The Texas Property Code requires that certain lien waiver forms be used and different types of waivers are needed at different stages during the project. This process can be difficult to manage logistically, but negotiating the contract to require lien waivers is powerful legal protection for the homeowner.
A homeowner who addresses these issues before selecting a contractor, signing a contract, and beginning construction will have set itself up for success. Success might mean a smooth construction process with a beautiful home completed on time and in budget. But success can also mean having the legal protections and tools you need to address an issue that arises so you can get back on track towards that beautiful, completed home.