Renovating Your Home
by Del Elgersma
This article deals with legal issues that arise when doing a home renovation, and is based on a presentation given by Mr. Elgersma at the Canadian Home Builders Association (Victoria) Renovation Seminar.
There are several types of renovation contracts. They include fixed price contracts (a.k.a. stipulated price or lump sum contracts), cost-plus contracts and construction management contracts.
- The stipulated price contract provides that the contractor will perform the renovations for a fixed price.
- Cost-plus contracts require you to pay the contractor a percentage of the building costs.
- Construction Management Contracts are contracts with a construction manager. The construction manager provides management and consulting services to you but is not the contractor. Instead, you contract directly with the various trades, such as the 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.
Many homeowners don’t have a contract with a general contractor, but “contract their own home”. That means that they act as the general contractor, contracting directly with the various trades, and without even a construction manager. If you are familiar with the Builders Lien Act and with construction generally, this is fine. However, there are some practical reasons for having a contractor. One is that the best trades work for contractors because contractors will hire them again. But you won’t, so you are considered a “one-off”, and so you will probably receive a trade’s lowest priority. Also, you may not get the discounts on work and materials that are available to a contractor or construction manager, and the work may not be covered by a warranty.
I will now review the most common terms of a fixed price contract:
- First of all, a detailed description of the renovations to be done by the contractor. This is usually done by referring to certain plans and specifications that are attached to the contract as a schedule.
- Next, the contract will 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 contractor 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 contractor’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. However, most contracts will excuse the contractor for delays beyond the contractor’s control.
- The contract then sets out the price and how it is payable. Often a deposit of some kind is payable to the contractor, with the balance payable in draws upon the completion of various stages of the work.
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 hold back 10% of each draw as a builders lien holdback.
Other provisions of the contract are also important.
- 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 by any of the trades or suppliers.
- The contract should include a warranty for the work done, so that the contractor is required to fix any deficiencies that show up.
- 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 contractors, a large portion of them seem to be about extras. The contractor 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 contractor agree in writing, including agreement on the price.
New Home Warranty Issues
If your renovation is to repair a leaky building envelope, your contractor may need to prove that it is licensed with BC’s Homeowner Protection Office and that the repair will be covered by a warranty issued by an insurance company.
These requirements do not apply if:
- the building has less than 3 units
- the building is a rental building
- the building is covered by a new construction warranty
- repair costs are less than $10,000 or $2,000 per unit in the building
So these requirements will not apply to single-family homes.
If your home is covered by a new home warranty, check the warranty to ensure that the proposed renovation will not affect the coverage under the 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 contractor 10% of each payment payable to the contractor. 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, 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 work. 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 contractor 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 Holback
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 homeowner 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 contractor and the trades to sort it out. It is no longer your problem.
You may have to pay the holdback into a special bank account. The Builders Lien Act requires that the owner and the contractor 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. So most renovations will not require this special bank account. 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 contractor. 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 your title.
For more information about builders liens, click here.
If you have a mortgage, it will say that you are not allowed to renovate without the bank’s consent.
For example, in the prescribed standard mortgage terms, the borrower/property owner promises:
- not to tear down any building or part of a building which forms part of the land,
- not to make any alteration or improvement to any building which forms part of the land without the written consent of the lender
All mortgages have similar terms, so ensure that you have obtained your bank’s consent before you get started.
In addition, if you are renovating a townhouse or duplex, the Strata Property Act provides that:
- you can’t alter common property or limited common property without written consent of strata council
- you can’t alter certain parts of strata lot without written consent of strata council. This includes:
- renovations that affect the structure or exterior of a building;
- chimneys, stairs, balconies attached to the exterior of a building;
- doors, windows or skylights;
- fences or railings that enclose a patio, balcony or yard;
- floor and wall coverings and electrical and plumbing fixtures, if part of the original construction of the building.
There are many important issues to be aware of. A good contract and some knowledge of the Builders Lien Act is essential.
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