Lovein Ribman is a Texas based construction law firm who represents the construction industry in every county throughout the entire state of Texas. Our firm is led by Board-Certified Construction Attorneys (an honor held by only 135 attorneys in the state) who represent residential construction contractors with protecting their company to include reviewing, modifying and/or creating a Residential Remodel or Reroofing Contract that will comply with the Texas Property Code mandatory notice requirements and potentially reduce their liability. If you are looking for a new Contract or would like us to review and modify your current Contract, please contact us for a no obligation consultation by calling (888) 368-2483 or by submitting the Contact Form. Read on to learn more about the benefits of having a well drafted contract, the mandatory Notice requirements, and optional but necessary provisions every Contractor should include in their Residential Remodel or Reroofing Contract.

YOUR CONTRACT MATTERS

It really should go without saying that your Contract is an extremely important document which will impact your rights and obligations during and long after the Project has been completed, terminated or abandoned. Moreover, a Residential Remodel Contract must contain certain mandatory Notices (discussed below) to be in compliance with Texas law. However, it can also contain provisions which limit your liability for poor workmanship, require the Homeowner to waive and cap certain types of damages, and even reduce the time period for a Homeowner to bring a claim. As such, it is surprising how many Contractors don’t have their Contract prepared, modified, or explained to them by a qualified Construction Attorney. Even more surprising, is how many Contractors never read, understand, or follow the terms of their own Contract. It is analogous to playing a complex game without reading or understanding the rules. Bottom line, your Contract matters. It is the starting point for every Project and when properly prepared, understood and followed, it is there to protect you and your company.

MANDATORY RESIDENTIAL CONTRACT PROVISIONS

Texas law imposes strict contractual requirements on Contractors who construct or repair residential Properties. The requirements are even more stringent when the residence is a homestead Property. Failure to follow these contractual requirements can result in voiding the Contract; violating the Deceptive Trade Practices Act (“DTPA”); civil penalties; and loss of the right to record a mechanic’s Lien in the event of non-payment. Therefore, it is important for residential Contractors to understand these requirements and to ensure that their Contract contains the mandatory Notice provisions set forth and discussed below.

Know Your Rights Warning: Pursuant to Texas Property Code, Section 41.007(a)(3), when improvements are made to an existing homestead Property, the Contract must contain the following Notice printed, stamped or typed in a size equal to at least 10-point bold type or computer equivalent. Failure to include this Notice is a violation of the Deceptive Trade Practices Act.

Mandatory Three Day Right to Cancel: Pursuant to Business and Commerce Code, Chapter 601, if: (1) a Contractor solicits business from a homeowner at any location other than the Contractor’s office; and (2) the Contract is executed anywhere other than at the Contractor’s office, then the Homeowner has the absolute right to cancel the Contract within three business days after executing the Contract. If the Homeowner exercises this right, any deposits paid by the Homeowner to the Contractor must be returned within no later than 10 days from when the Contractor receives a formal written Notice of Cancellation. The Contractor is not entitled to compensation for services performed under the Contract; unless the services improved the Property. If the Contractor delivered materials to the Property prior to the cancellation, then the Homeowner must make the materials available to the Contractor; however, if the Contractor fails to recover the materials within 20 days from cancellation, then the materials automatically become the Homeowner’s property. A Contract subject to Chapter 601 must contain the following mandatory Notice in at least 10 font boldface type located just below or above the signature lines:

In addition, the Contract must include a detachable Notice of Cancellation Form containing the following information: (1) the Contractor’s company name and address, (2) the date the Contract was executed, (3) the date within which the customer can cancel the Contract and receive a refund of any monies paid, and (4) the following Notice in at least 10 font boldface:

Failure to include the mandatory Notice and the Notice of Cancellation Form renders the Contract void and unenforceable and subjects the Contractor to actual damages suffered by the Homeowner, if any, and reimbursement of reasonable attorneys’ fees and court costs. Moreover, failure to include the mandatory Notice in the Contract will invalidate an otherwise valid constitutional mechanic’s Lien. (See Texas Constitution Article 16, Section 50(a)(6)(Q)(viii).)

RCLA—Chapter 27 Notice: Pursuant to Texas Property Code, Chapter 27, referred to as the “Residential Construction Liability Act” (“RCLA”), every Contract for either new construction or improvements to an existing residence (even non-homestead Properties), must contain the following Notice in at least 10 point boldface font. Failure to include this Notice entitles the Property Owner to a $500.00 civil penalty from the Contractor.

Conspicuous Binding Arbitration Provision: Binding arbitration is typically the preferred forum for resolving construction-related disputes because unlike our civil courts: (1) there is no public record of the proceeding; (2) there is no docket or backlog in arbitration and the hearing is scheduled according to the arbitrator’s and parties’ availability; (3) the parties can select an arbitrator who is experienced in construction law; (4) possible costs savings as a result of limited discovery; and (5) the decision/award is very difficult to overturn on appeal. If the parties agree or if the Contract mandates filing with the American Arbitration Association (“AAA”), then the parties can take advantage of AAA’s Home Construction Arbitration Rules, which provide special rules and procedures for resolving residential construction disputes in an expediated and cost-efficient manner.

Pursuant to Texas Property Code, Section 41.007(3)(c), for improvements made to a homestead Property, a binding arbitration provision is only valid and enforceable if it is conspicuously printed, e.g., in all caps, or typed in at least 10-point bold font. There are many different ways to draft a valid binding arbitration provision, but at a minimum, an enforceable provision for a Home Improvement Contract might read as follows:

Waiver of List of Subcontractors and Material Suppliers: For new or existing residential construction projects, pursuant to Texas Property Code, Section 53.256, unless otherwise waived as described below, before work begins, the Original Contractor must: (1) provide the Homeowner with a written list that identifies by name, address, and telephone number each Subcontractor and Material/Equipment Supplier who the Contractor intends to hire for the Project; and (2) provide the Homeowner with an updated list not later than the 15th day after the date a Subcontractor or Material/Equipment Supplier is added or deleted from the list. The list must contain the following notice conspicuously printed, stamped, or typed in a size equal to at least 10-point boldface or the computer equivalent:

Most homeowners want to know the identity of the Subcontractors and Suppliers who are providing labor or material to their home; however, complying with this mandatory requirement can become quite onerous for a Contractor. As such, the Contractor may request the Homeowner to waive this requirement (which is actually very common on new construction Projects), by either: (1) including a waiver in the Contract; or (2) by having the Homeowner sign a separate document. Either way, the waiver should be in at least 10-point bold-faced type and substantially similar to the following:

Designation for Both Spouses’ Signatures: One of the primary requirements for obtaining the legal right to record a mechanic’s Lien against a homestead Property, is that the Contract was signed by both spouses, if a married couple. Therefore, the Contract should contain signature lines for two Homeowners and a box for the Homeowner to check confirming whether the home is owned by a married couple.

Confirmation of Homestead Status: Since there are specific rules, restrictions and Notices which apply to a residential homestead Remodel Contract, the Contract should contain a simple one sentence provision/statement which requires the Homeowner to confirm whether the Property is a homestead.

Residential Disclosure Statement: Pursuant to Texas Property Code Section 53.255, before a Residential Construction Contract is executed, the Contractor is required to provide the Property Owner with a Disclosure Statement containing the following information:

KNOW YOUR RIGHTS AND RESPONSIBILITIES UNDER THE LAW. You are about to enter into a transaction to build a new home or remodel existing residential property. Texas law requires your contractor to provide you with this brief overview of some of your rights, responsibilities, and risks in this transaction.

CONVEYANCE TO CONTRACTOR NOT REQUIRED. Your contractor may not require you to convey your real property to your contractor as a condition to the agreement for the construction of improvements on your property.

KNOW YOUR CONTRACTOR. Before you enter into your agreement for the construction of improvements to your real property, make sure that you have investigated your contractor. Obtain and verify references from other people who have used the contractor for the type and size of construction project on your property.

GET IT IN WRITING. Make sure that you have a written agreement with your contractor that includes: (1) a description of the work the contractor is to perform; (2) the required or estimated time for completion of the work; (3) the cost of the work or how the cost will be determined; and (4) the procedure and method of payment, including provisions for statutory reservation of funds and conditions for final payment. If your contractor made a promise, warranty, or representation to you concerning the work the contractor is to perform, make sure that promise, warranty, or representation is specified in the written agreement. An oral promise that is not included in the written agreement may not be enforceable under Texas law.

READ BEFORE YOU SIGN. Do not sign any document before you have read and understood it. NEVER SIGN A DOCUMENT THAT INCLUDES AN UNTRUE STATEMENT. Take your time in reviewing documents. If you borrow money from a lender to pay for the improvements, you are entitled to have the loan closing documents furnished to you for review at least one business day before the closing. Do not waive this requirement unless a bona fide emergency or another good cause exists, and make sure you understand the documents before you sign them. If you fail to comply with the terms of the documents, you could lose your property. You are entitled to have your own attorney review any documents. If you have any question about the meaning of a document, consult an attorney.

GET A LIST OF SUBCONTRACTORS AND SUPPLIERS. Before construction commences, your contractor is required to provide you with a list of the subcontractors and suppliers the contractor intends to use on your project. Your contractor is required to supply updated information on any subcontractors and suppliers added after the list is provided. Your contractor is not required to supply this information if you sign a written waiver of your rights to receive this information.

MONITOR THE WORK. Lenders and governmental authorities may inspect the work in progress from time to time for their own purposes. These inspections are not intended as quality control inspections. Quality control is a matter for you and your contractor. To ensure that your home is being constructed in accordance with your wishes and specifications, you should inspect the work yourself or have your own independent inspector review the work in progress.

MONITOR PAYMENTS. If you use a lender, your lender is required to provide you with a periodic statement showing the money disbursed by the lender from the proceeds of your loan. Each time your contractor requests payment from you or your lender for work performed, your contractor is also required to furnish you with a disbursement statement that lists the name and address of each subcontractor or supplier that the contractor intends to pay from the requested funds. Review these statements and make sure that the money is being properly disbursed.

CLAIMS BY SUBCONTRACTORS AND SUPPLIERS. Under Texas law, if a subcontractor or supplier who furnishes labor or materials for the construction of improvements on your property is not paid, you may become liable and your property may be subject to a lien for the unpaid amount, even if you have not contracted directly with the subcontractor or supplier. To avoid liability, you should take the following actions:

(1) If you receive a written notice from a subcontractor or supplier, you should withhold payment from your contractor for the amount of the claim stated in the notice until the dispute between your contractor and the subcontractor or supplier is resolved. If your lender is disbursing money directly to your contractor, you should immediately provide a copy of the notice to your lender and instruct the lender to withhold payment in the amount of the claim stated in the notice. If you continue to pay the contractor after receiving the written notice without withholding the amount of the claim, you may be liable and your property may be subject to a lien for the amount you failed to withhold.

(2) During construction and for 30 days after final completion, termination, or abandonment of the contract by the contractor, you should reserve or cause your lender to reserve 10 percent of the amount of payments made for the work performed by your contractor. If you choose not to reserve the 10 percent for at least 30 days after final completion, termination, or abandonment of the contract by the contractor and if a valid claim is timely made by a claimant and your contractor fails to pay the claim, you may be personally liable and your property may be subject to a lien up to the amount that you failed to reserve.

“If a claim is not paid within a certain time period, the claimant is required to file a mechanic’s lien affidavit in the real property records in the county where the property is located. A mechanic’s lien affidavit is not a lien on your property, but the filing of the affidavit could result in a court imposing a lien on your property if the claimant is successful in litigation to enforce the lien claim.

SOME CLAIMS MAY NOT BE VALID. When you receive a written notice of a claim or when a mechanic’s lien affidavit is filed on your property, you should know your legal rights and responsibilities regarding the claim. Not all claims are valid. A notice of a claim by a subcontractor or supplier is required to be sent, and the mechanic’s lien affidavit is required to be filed, within strict time periods. The notice and the affidavit must contain certain information. All claimants may not fully comply with the legal requirements to collect on a claim. If you have paid the contractor in full before receiving a notice of a claim and have withheld the 10 percent of the contract price or value of work, you may not be liable for that claim. Accordingly, you should consult your attorney when you receive a written notice of a claim to determine the true extent of your liability or potential liability for that claim.

OBTAIN A LIEN RELEASE AND A BILLS-PAID AFFIDAVIT. When you receive a notice of claim, do not release withheld funds without obtaining a signed and notarized release of lien and claim from the claimant. You can also reduce the risk of having a claim filed by a subcontractor or supplier by requiring as a condition of each payment made by you or your lender that your contractor furnish you with an affidavit stating that all bills have been paid. Under Texas law, on final completion of the work and before final payment, the contractor is required to furnish you with an affidavit stating that all bills have been paid. If the contractor discloses any unpaid bill in the affidavit, you should withhold payment in the amount of the unpaid bill until you receive a waiver of lien or release from that subcontractor or supplier.

OBTAIN TITLE INSURANCE PROTECTION. You may be able to obtain a title insurance policy to ensure that the title to your property and the existing improvements on your property are free from liens claimed by subcontractors and suppliers. If your policy is issued before the improvements are completed and covers the value of the improvements to be completed, you should obtain, on the completion of the improvements and as a condition of your final payment, a ‘completion of improvements’ policy endorsement. This endorsement will protect your property from liens claimed by subcontractors and suppliers that may arise from the date the original title policy is issued to the date of the endorsement.

OPTIONAL RESIDENTIAL CONTRACT PROVISIONS

Responsibility for Obtaining and Paying for Permits: If the work to be performed requires City permitting, it is important to include a provision in the Contract which clearly identifies who is responsible for obtaining and paying for the permits, and the time period for securing permits. Typically, the Contractor obtains the permits because it is more knowledgeable and experienced in the process.

Change Orders—Contract Modifications: Some of the most common disputes arise when the Parties modify the Contract scope, price, or time and fail to memorialize the modification in writing. To avoid these types of disputes, the Contract should contain a strongly worded Change Order provision which expressly requires that any modification to the Contract must be in writing and executed by the Parties to be valid and enforceable.

Express Warranty In Exchange for Release of liability: A contractor can be responsible to a Homeowner for defective workmanship in the following ways: (1) for breach of contract by providing work that is nonconforming to the plans and specifications, work that does not meet code requirements, or is of poor quality. A claim for breach of contact must be brought within four years from when the defect is or would have otherwise been discovered by a reasonable person; (2) for a violation of the implied warranty of good workmanship or habitability, which must be brought within four years of discovery; (3) for a violation of the Deceptive Trade Practices Act, which must be brought within two years of discovery; and/or (4) for a violation of an express warranty, which must be brought within four years of being discovered. All claims for construction defects are ultimately barred by the Statute of Repose if not brought within ten years from substantial completion (regardless of when they are discovered), which is a very long time to be held responsible for your work. One creative way a Contractor might be able to limit its liability for construction defects, is to offer the Homeowner an express limited warranty (one or two years) in exchange for waiving the implied warranties (except habitability which cannot be waived) and a full release of all future claims. Surprisingly, this type of provision is very common with mass home builders.

Reduction of the Statute of Limitations: Most construction-related causes of action must be brought within either four or two years from the date they are discovered or would have reasonably been discovered. However, Texas law allows parties to contractually agree to limit the four-year statute of limitations to no less than two years and one day. Limiting the statute of limitations in combination with offering an express warranty in exchange for a waiver and release, could potentially limit a Contractor’s exposure for construction-related defects to three years or less (one year for the express warranty discovery period, plus 2 years to bring the claim).

Material Cost Escalation Provision: For Contracts where the basis for payment is a lump or stipulated sum, the Contractor assumes the risk of earning less profit if the cost of materials or labor unexpectedly increases during the Project. One way to reduce this risk is to include a material cost escalation provision which allows the Contractor to pass on unexpected increases in material costs to the Homeowner. Provisions of this nature typically identify certain types of materials which commonly fluctuate in price, e.g., lumber, steel, concrete, and drywall and require the price to increase by a specific percentage before the Homeowner becomes responsible for the additionally costs, e.g., “15% above the price paid at the time the Contract was executed”.

Termination for Cause with Notice to Cure: It is important to specifically identify what events constitute a material default of the Contract and the way in which the Homeowner must notify the Contractor of the default and the amount of time a Contractor has to cure the default before the Homeowner can legally terminate the Contract without penalty.

Termination for Convenience: Typically, you cannot terminate a Contract unless the other party is in material breach and has failed to cure the breach after receiving formal written notice of default. However, most mass home builders commonly include a provision in their Contracts which allow them (but not the Homeowner) to terminate the Contract “for convenience”, i.e., for any reason whatsoever and without cause or penalty. These provisions tend to be legally enforceable and allow a Contractor to end a problematic contractual relationship without penalty.

Limitation of Liability: It is possible to legally limit or set a cap on the amount and type of damages a Homeowner can recover for a Contractor’s material default. Such provisions typically limit the amount of damages to the amount paid under the contract (or less) and require the Homeowner to waive certain types of damages like special, indirect, delay, consequential, incidental, punitive, exemplary and mental anguish which typically arise from a Contractor’s breach of Contract.

Recovery of Contractor Attorneys’ Fees, Expert Fees and Costs: Reimbursement of attorneys’ fees and costs is not mandatory unless expressly agreed to by the parties in writing. Moreover, most contractual provisions are drafted in a manner such that a party is only entitled to reimbursement if it is the “Prevailing Party” at trial or in a final binding arbitration hearing. A better approach might be to require the Homeowner to reimburse attorneys’ fees and costs if the Contractor is required to retain counsel to enforce any contractual term, before or after a claim is filed, as opposed to reimbursement being dependent upon being a “Prevailing Party”. Additionally, sometimes it becomes necessary to retain experts or consultants to dispute a claim, which can be expensive. A party is not required to reimburse the other party’s expert/consultant fees unless expressly agreed to in the Contract. As such, in addition to mandating reimbursement of attorneys’ fees and costs, it is also prudent to expressly require reimbursement of expert and consultant fees.

Waiver of Right to Withhold Statutory Retainage (“Reserved Funds): Pursuant to Texas Property Code, Section 53.101, a Property Owner is required to withhold 10% of the overall Contract amount from the Contractor for 30 days after the work is completed. If a Property Owner fails to withhold these funds from the Contractor, then the Property Owner can be responsible for paying up to 10% of the overall Contract amount to any unpaid Subcontractors or Material Suppliers who timely perfecta a Lien against the Property. It is common in residential construction Projects for the Parties to expressly waive withholding retainage by including a provision in the Contract.

Damages for Early Wrongful Termination: It is not uncommon for a Homeowner to wrongfully terminate the Contract before the actual work has begun. This is especially true when the work is covered by an insurance claim and the Contractor has spent numerous hours estimating the claim and working with the insurer. When this occurs, the Contractor may be entitled to recover profits it would have earned if the Contract had not been wrongfully terminated. Most Homeowners do not realize that they could be liable for these damages. As such, it might be a good idea to include a provision in the Contract which warns the Homeowner of its liability for wrongfully terminating the Contract after the 3-day right to rescind has passed and/or to include a liquidated damage provision for early wrongful termination.

The above are just some examples of how a Contractor can use its Contract to protect itself from liability. If you are in need of a new Residential Remodel or Reroofing Contract or would like us to review and modify your existing Contract, please contact us by calling our toll free number at (888) 368-2483 or by submitting the Contact Form.