There was a recent article in the media about a North Texas family who instantly lost their dream home based on a clause which was hidden in their building contract. Hard to believe that a few sentences tucked away in the fine print could turn their dream of home ownership into the worst nightmare – but it happened to them. If you are not careful, it could easily happen to you.
The victims of this toxic contract signed on the dotted line and fully complied with all of the terms including making all payments. They watched in anticipation and excitement as their dream home became a reality and even booked the moving company to transport them on the appointed day. All of this came to a tragic end when the builder backed out of the deal based on a provision of the building contract which allowed them to “cancel at their own convenience”. They had the audacity to inform the purchasers in a terse text message and sent them packing in the wrong direction.
An attorney was asked for commentary on what happened and confirmed the obvious – always good to have a construction lawyer review a contract before you sign your dreams away. That is fantastic advice with the caveat that I would have challenged the legal validity of the “cancel for convenience” clause as being unenforceable under Texas law. That aside, the legal advice for attorney review is sound.
Home builder contracts and even commercial construction agreements often contain toxic provisions which allow the contractor to back out of the deal with impunity. Most lawyers will be able to identify these clauses assuming the home purchaser seeks legal advice before moving forward which is always a great idea given the amount of money involved not including the emotional investment and time. When reviewing a home purchaser or commercial contract, here are a few items which I always bring to the attention of my clients.
1. Building Contract Clauses which allow for increase in contract cost.
These provisions were put in building contracts during the Covid Pandemic as builders experienced increased costs and labor due to supply disruption and labor shortages. Typically, builders were confronted with increased product costs due to supply and distribution problems nationwide and needed to pass on those expenses to the purchaser. I had numerous clients bring this to my attention and unfortunately, determined that these clauses were enforceable assuming the provisions were inconspicuous meaning in bold and large print so they could be easily spotted. That was the best angle I came up with as Texas Supreme Court cases do require that critical provisions in a contract cannot be tucked away or disguised such that a consumer would never spot the restrictions. Absent this caveat, the provisions were enforceable.
My advice to home purchasers is to not sign a building contract that includes the above provision. If the builder refuses to take it out, find another contractor.
Curiously, I wonder whether the North Texas family in the article at the head of this blog considered challenging the builder’s cancellation of the contract based on a failure to make the clause conspicuous. It might be an angle to consider if the clause was inconspicuous given that the statute of limitation on asserting a breach of contract claim against the builder is four years in Texas! I would go after them if there is a legal claim.
2. Waiver of Damages against Builder.
This is a very serious concern and included in most contracts. I always recommend taking it out. These clauses restrict the right of the purchaser to sue the builder for wrongful acts or breaches of their obligations under the building contract. As an example, the homeowner may suffer a range of damages resulting from construction defects caused by a negligent home builder. In my construction law practice, I have almost seen it all from collapsing roofs, defective foundations, cracks in the floors and cement, holes in the walls – you name it! A waiver of damage clause in a building contract will restrict the right of the injured homeowner to recover damages from the builder for the damages they caused. Although these provisions are reprehensible, they are enforceable in most instances, so be on the lookout! Always have an experienced construction law attorney review your homebuilder contract before signing on the dotted line.
3. Restrictions on Filing a Lawsuit.
These clauses a very common and enforceable. Typically, they prevent a homeowner from filing a lawsuit in court and restrict such action to what is known as arbitration which mandates that a “private judge” be utilized to resolve the dispute. There are numerous legitimate arbitration companies in Texas and nationwide including the American Arbitration Association or AAA. The problem is that once a decision is rendered, it is binding on the homeowner and cannot be appealed which is a huge departure from rights available in the regular court system. The worst abuse relates to the choice of arbitrators which can be gerrymandered to select an arbitration company which is biased towards the builder. This is rare, but I have seen it in practice, and it cannot be challenged. Always have a construction lawyer review your proposed contract for the inclusion of these provision.
4. Cancellation for Convenience Clauses.
Admittedly, I have not seen these clauses in construction contracts before and appreciate the Fox article on the subject. However, as above stated, I would have challenged the enforceability of this provision assuming that it was inconspicuous. Upon further reflection, I would also argue that the clause was unconscionable and potentially a fraudulent or deceptive trade practice.
I recommend that home purchasers seek experienced legal advice before entering into a construction contract with a residential or commercial builder. Given the investment involved, the cost/benefit definitely weighs in favor of hiring a construction law attorney to make sure you don’t suffer the same fate as the North Texas family who lost their home due to a disguised contract term.