BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
AGENTS SHOULD USE CAUTION WHEN UTILIZING THE NEW CONSTRUCTION CONTRACT OR APPLYING THE RIGHT TO REPAIR ACT
In 2003, the California Legislature passed Senate Bill 800, which is contained in Civil Code §895-945.5, referred to as “the Right to Repair Act” (“the Act”) and also known generally as SB 800. The real estate and construction industry advocated for the passage of the Act to address and limit ongoing and pervasive construction defect litigation. However, agents need to be cautious when using the CAR New Construction Purchase Agreement (NCPA) in the sale of a newly constructed home, as that form applies the requirements of the Act to the sale transaction.
The Act was passed as a result of extraordinary litigation filed against real estate developers by plaintiffs. Plaintiffs’ attorneys were lining up homeowners and filing massive construction defect cases against contractors, subcontractors, and large developers. The Act was passed in an effort to limit that litigation and allow a builder an opportunity to remedy any defects or issues at a property prior to the filing of a lawsuit.
If applicable, the Act requires a buyer, after the close of escrow, to advise the seller/developer of any defects or material issues with the property and give the developer an opportunity to remedy it. If the developer refuses to address the issues, the buyer, at that point, can file suit. However, if the Act applies and a defect is established by the buyer, the Act sets a strict liability standard on the developer. In other words, if a buyer is able to establish a material construction defect and the builder fails to remedy or correct it, the buyer is entitled to damages in the form of the cost to repair against the developer.
On the other hand, if the Act does not apply, under a standard non-disclosure lawsuit, a seller is not necessarily required to pay for the cost of repairs nor remedy any defects. This means that if the Act applies, a seller could be liable for vastly greater damages than the seller otherwise would be under a breach of contract or non-disclosure claim. As a result, agents need to give proper evaluation as to whether to use the NCPA form, thus subjecting their clients to the requirements of the Act.
The Act applies to “Builders” which are defined in the Act as “a builder, developer, general contractor, contractor, or original seller, who, at the time of sale, was also in the business of selling residential units to the public, or was in the business of building, developing, or constructing residential units for public purchase.”
The Act does not apply to homeowners who develop or build a home and subsequently resell it. The Act will likely not apply to a seller who builds a home for speculation or investment purposes, unless that seller is in the business of development and selling homes to the public.
As applied to real estate transactions, agents commonly and mistakenly believe that when selling new construction, irrespective of whether the seller is a developer, the Act applies and advises clients to use the NCPA form. That form automatically applies the Act to the parties by contract, even if it otherwise would not apply. If the Act does not apply to a seller, the agent should use caution in utilizing the form.
At the time of listing the property, the listing agent should advise the seller of the existence of the Act and advise the seller to determine whether the seller meets the definition of “Builder” in the Act, which would subject the seller to the requirements of the Act. If the seller is unclear whether they are a Builder within the definition of the Act, they should be advised to consult with a qualified California real estate attorney. Agents should not advise sellers as to whether the Act applies or how the Act affects sellers, as that involves the illegal practice of law.
A decision should be made by a seller as to whether the Act applies to the seller and, if not, whether the seller wishes to have the requirements of the Act apply to the sale of their property. If the Act does not apply to the seller and the seller declines to be subject to the requirements of the Act, the seller should not accept an offer on the NCPA form without modification. Either the references to the Act in that form can be removed through a counter-offer, or a Residential Purchase Agreement form can be used.
RESOURCES: See the BRM “New Construction Disclosure” accompanying this Tip which can be used by sellers’ agents when the seller and the listed property are subject to the SB 800 Act. It outlines in general terms what the Act does and what the obligations of both Builder/seller and the buyer are under that law.
“New Home Disclosure Chart” at: https://www.car.org/riskmanagement/disclosure-charts/newhomedischart/
“SB 800: California’s Construction Defect Law” at: https://www.car.org/riskmanagement/qa/miscellaneous-folder/sb800-constructiondefect/
PRACTICE TIPS:
- If a listing agent is selling new construction, the listing agent should advise their manager of that listing so the manager is aware of this issue and can properly advise the agent and seller.
- If an agent is listing new home construction and the seller is not in the industry, the agent should discuss the applicability of the Act with the seller at the time of taking the listing. The listing agent should inquire whether the seller wishes to apply the Act to the transaction. The agent should also advise the seller in writing to consult with qualified California real estate attorney to evaluate this issue.
- An agent should not utilize the new home construction contract or apply the Act without consulting with the agent’s manager and referring the seller to an attorney before applying that Act.
- If a seller is not a Builder within the definition of the Act and declines to apply the Act, and an offer is written on the NCPA, the agent should work with their manager and seller to issue a counteroffer removing the references to the Act from the Agreement.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.