Building a New Home
by Del Elgersma
This article deals with legal issues that arise when building a new home, and is based on a presentation given by Mr. Elgersma at a Canadian Home Builders Association (Victoria) New Home Construction Seminar.
There are several types of building contracts. They include stipulated price (a.k.a. lump sum) contracts, cost-plus contracts and construction management contracts.
- The stipulated price contract is the most common. It provides that the builder will construct a house for a fixed price.
- Cost-plus contracts require you to pay the builder a percentage of the building costs. These contracts are rare because the client doesn’t know what the final price will be.
- Construction Management Contracts are contracts with a construction manager. The construction manager provides management and consulting services to you but is not the builder. Instead, you contract directly with the various trades, such as the excavator, framer, electrician, plumber, drywaller and painter. The construction manager arranges the contracts but is not necessarily liable if there are problems with them. These types of contracts may be riskier for you because there is not one person that is ultimately responsible to you.
In some cases, the builder owns the property and the contract provides that the property will be transferred to the client upon completion of the home. In these cases, it is wise for the client to register an agreement for sale, a.k.a. right to purchase agreement, at the Land Title Office to secure the payments made by to the builder. Note that the property transfer tax will be higher if the transfer takes place after construction is completed, because the tax is based on the value of the property at the time of transfer.
Some owners don’t have any type of building contract, but “contract their own home”. That means that they act as the general contractor, contracting directly with the various trades, but without even a construction manager. If you are considering contracting your own home, think twice. There are too many things that can go wrong if you don’t have experience, and you may have limited or no warranty protection for the work done. There are also practical reasons for not doing it yourself. One is that the best trades work for builders because builders will hire them again. But you won’t, so you are considered a one-off, and you will receive the trade’s lowest priority. Also, you may not get the discounts on work and materials that are available to a builder or construction manager.
A typical building contract will include these terms:
- First of all, an accurate description of the property and of the parties to the contract, which will require a title search so that the builder knows the legal description of the property and who the owners actually are.
- Second, a description of the house to be built by the builder. This is usually done by referring to detailed plans and specifications that are attached to the contract as a schedule.
- Next, the contract must state when work is to start, and by what date it is to be finished. If the work is not completed by the date promised in the contract, your remedies against the builder depend on the wording of the contract. If the contract says nothing, the builder will normally be responsible for any damages suffered by you as a result of the builder’s delay. This may include the cost of your accommodation during the period of delay. Some contracts set out a specific penalty for each day the work remains unfinished after the date promised, of say $50 or $100 per day. However, most contracts will excuse the builder for delays beyond the builder’s control.
- The contract then sets out the price and how it is payable. Usually a deposit of some kind is payable to the builder, with the balance payable in draws upon the completion of various stages of construction. The most common stages used for determining when draws are payable include lock up (which means the house is framed, roofed and can be locked up), the completion of drywall, and the final completion of the house.
At the completion of these stages, you are required to pay to the builder a pre-determined amount as specified in the contract. However, you are also required to pay 10% of each draw into a special savings account at a bank or credit union as a builders lien holdback. If you fail to do this, the Act says the builder can stop working and sue you for its damages arising from the work stoppage.
Other provisions of the contract are also important.
- For example, the contract should allow for a pre-occupancy inspection by you and the builder and require the builder to remedy any deficiencies noted on the inspection within a certain period of time. You may also want the right to hold back from the builder an amount equal to the cost of fixing the deficiencies, called a deficiency holdback. The builders lien holdback cannot be used to pay for deficiencies unless authorized in the contract and provided that no liens have been, or will be, filed.
- The contract should also give you the right to cancel the contract if the builder goes bankrupt. You would then hire another builder to finish the job.
- The contract should specify that the builder is responsible for clearing off any builders liens that are registered against the property.
- The contract should require the builder to provide proof of third party liability insurance and workers compensation coverage, so that the homeowner will not be liable for accidents.
- The contract should also set out the procedures for dealing with additions to the work, which are called extras. Of the disputes that arise between owners and builders, a large portion of them seem to be about extras. The builder may claim that certain work was extra and on top of the contract price, while the owner may claim that the work is not extra but is included in the original scope of work, or was not authorized. To minimize the chance of this type of dispute arising, the contract should clearly set out the scope of the work through the plans and specifications. The contract should state that no additional work will be done unless you and the builder agree in writing, including agreement on the price.
New Home Warranties
Under the Homeowner Protection Act, all residential builders must be licensed, and provide a warranty on homes they build from a warranty company approved by the government. Builders cannot obtain a building permit unless they can prove they are licensed and that the home they are building has the required warranty.
The warranty must be for:
- 2 years for materials and labour
- 5 years for building envelope (including water penetration)
- 10 years for structural defects
If you build your own home (i.e. without a builder or contractor), you do not have to be licensed or provide a warranty, but if you sell the property within 10 years of completion, you must notify the new owner that there is no warranty.
B.C. has had builders lien legislation in various forms since 1879. B.C.’s latest Builders Lien Act came into force in 1998. The objectives of the legislation are to ensure that construction funds are used for their intended purpose, and to protect those who add value to a building under construction.
To fulfill its objectives, the Act uses two strategies.
- First, it provides a form of security to builders, subcontractors, workers and suppliers who work on a building that is under construction – this is the builders lien.
- Second, it requires you as an owner to hold back from the builder 10% of each payment payable to the builder. This is called the builders lien holdback.
A lien is a charge on property for the payment of a debt. A builders lien is a claim by a person who has supplied work or material to a building under construction. A builders lien may be claimed by a contractor (builder), subcontractor or worker. These are all defined terms under the Act and may also include architects, engineers and suppliers of materials.
Under the new Act, the deadline for filing builders liens is 45 days from the date of substantial completion of the house, although in larger projects it will be more complicated than that. The lien is registered against the property for the amount of money owed to the claimant for the work or material he or she has supplied. If you have an experienced builder there will most likely not be any builders liens, but if any of the trades are nervous about being paid, they will file a lien.
Builders Lien Holdback
The builders lien holdback provides 2 functions.
- First, it ensures that there is a pool of money out of which builders lien claims can be paid.
- Second, it limits your liability for lien claims. If you comply with the holdback provisions of the Act, your maximum liability for lien claims will be limited to the amount of the 10% holdback or the unpaid balance of the price, whichever is greater, EVEN IF the total amount of all builders liens exceeds that amount.
Although lien claimants may have a valid claim against the person who hired them for the full amount owing, the lien claimants can only claim against you as the owner for the amount of the builders lien holdback or the unpaid portion of the purchase price. If you pay the holdback into court, the liens can be cleared from title and it is then up to the builder and the trades to fight over it. It is no longer your problem.
As discussed earlier, you must pay the holdback into a special bank account. The Act requires that the owner and the builder administer the account jointly, so any withdrawals will require the signature of both you and your builder.
There are 2 exceptions to the requirement to set up a bank account for the builders lien holdback. The first is where the total value of work and materials is less than $100,000. For example, renovations and small projects. The second is where you have a construction mortgage and you authorize the lender (and the lender agrees) to disburse your mortgage money. In that case the lender must hold back 10% of the mortgage money from each mortgage draw.
If no liens have been filed within 55 days of the date of substantial completion, the holdback is released to the builder. It cannot be released before that time. If liens have been filed within that period, the holdback must be used to satisfy the lien claims. If a settlement is not possible, the holdback can be paid into court and the court will then order that the liens be discharged from title.
If you are purchasing a new home, it is important that the purchase contract authorize you to hold back 10% from the seller-builder, so that you are protected from any liens filed after the purchase goes through.
For more information about builders liens, click here.
There are many important issues for you to beware of, so a reputable builder, a good building contract and some knowledge of the Builders Lien Act is essential.
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I recently had the experience of selling my condo. As I am not in the habit of frequently buying and selling my home I find the whole process a bit unnerving. To add to my unfamiliarity with home transactions, I was due to be out of the country on the completion date of my sale. Needless to say this was somewhat worrisome to me.
I hired Del to handle the legal transaction of my sale. What a great decision this turned out to be. Del and I got together a week prior to my trip and completed the necessary paperwork. There are a lot of papers to sign when selling a home and Del took the time to explain each document to me and answered all the questions I had. He then assured me that he had everything he needed in order to handle the transaction in my absence.
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Thank you Del for allowing me to let go of the stress and worry around this large, important and infrequent type of event in my life.