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Buyer Beware- All Contracts Are Not Created Equal

December 13, 2018

Buying a home that is being built and sold by a large scale home builder usually requires using a contract that was drafted by in-house attorneys for that builder. These contracts may contain one-sided terms and conditions. The last contract that I reviewed from a large scale builder contained the following terms and conditions:

(a) A loan approval contingency of 15 days with a requirement that the buyer provide a notice of conditional loan approval by that same date; however, delivery of that notice of conditional loan approval constitutes removal of the loan contingency. The dilemma is that there was not an unconditional loan commitment and the contract stated that the buyer would no longer have any right to terminate the agreement or receive a return of the buyer’s deposit, even if the buyer was subsequently unable to satisfy any conditions necessary for the lender to fund the loan, the buyer was unable to obtain final loan approval, or the buyer elected to terminate the loan application and not close escrow. The one sidedness of this provision was compounded by the fact that construction of the residence was not going to be completed for a minimum of six to nine months.

During this time, the buyer was required to maintain the validity of the notice of conditional loan approval from the date it was obtained until closing and the buyer further agreed not to take any action (or fail to act) that would produce consequences which might adversely affect buyer’s loan application or notice of conditional loan approval.

The contract also contained language that the buyer acknowledged that neither seller nor any employee or agent of the seller had made any agreement or representation or given the buyer any assurance that the buyer would be eligible for, qualify for, or receive a loan or any specific loan terms, and that the seller was in no way taking any responsibility with the mortgage company, even though they were an affiliated company of the seller.

Finally, the contract was filled with obligations and timelines on the part of the buyer to notify the seller of various aspects relating to the financing, all of which resulted in a waiver of rights on the part of the buyer;

(b) A right on the part of the seller to extend the closing date in order to either complete construction or obtain a certificate of occupancy with a waiver by the buyer of any claim against the seller for any liability due to a delay or extension of the closing date regardless of the reason. The contract also stated that the seller would not be required to reimburse the buyer for any expenses related to any changes in the timing of construction of the home and/or the closing date;

(c) Broad language justifying any delay in completion and limiting the buyer’s rights and remedies to a return of their deposit in the event of any such delays. There was also a waiver by the buyer of any responsibility on the part of the seller for any inconvenience, loss, expense or other consequences resulting from a delay in the completion of construction. Conversely, a closing delay fee of $300 per day was assessed against the buyer in the event that the buyer did not close escrow on the agreed upon date for any reason;

(d) A clause that the Buyer was responsible for paying all costs associated with the owner’s policy of title insurance, all escrow fees and other charges of the escrow company, all recording fees and documentary or transfer fees or taxes, HOA fees, etc. The Buyer was also responsible for paying all assessments under any community association documents, even if those charges were levied or assessed before close of escrow;

(e) An acknowledgment by the buyer that the transaction was exempt from the Interstate Land Sales Full Disclosure Act, thereby waiving a two year rescission right that might otherwise be available to the buyer;

(f) A clause waving and/or reducing all warranties regarding the property or any components thereof that were completely manufactured off-site. There was also a separate waiver of the warranty that the construction was performed in a good and workman-like manner as well as a waiver of the warranty of merchantability and quality or fitness or use for a particular purpose;

(g) Clauses that the buyer forfeited rights or remedies in the event that the buyer failed to take certain actions. One example included failing to attend a pre-closing inspection of the property, resulting in a loss of any claims regarding readily observable deficiencies. Another example was failing to provide access to the seller after close of escrow for items that the seller needed to complete, resulting in a forfeiture of any responsibility to remedy any of those conditions. Another example was forfeiting the right to either not close escrow or withhold money at close of escrow in the event that unfinished or defective items that had been identified at pre-closing inspection had not been addressed;

(h) A waiver of the buyer’s right to a jury trial for any dispute, including those related to the construction of the home;

(i) Binding arbitration, but with procedures that would make it more difficult and costly for the buyer;

(j) Short time frames in which to provide a notice to the seller in order to preserve the right to demand a return of the buyers deposit in the event of a dispute;

(k) A clause that requires that notice be sent to designated agents and by certified mail rather than by electric communication;

(l) An integration clause that requires the buyer to list in the contract any understanding, agreement, promise, or representation by the seller or its employees or representatives that is not otherwise specifically stated in the contract and upon which the buyer is relying in purchasing the property;

(m) Pre-designated escrow, title, and title insurance companies, all of whom are affiliated with the home builder, but with contractual language indicating that the buyer is not required to use any seller’s suggested or recommended provider;

(n) A clause disclaiming any responsibility on the part of the seller for any actions or inactions of any affiliates or companies recommended by the seller and for any warranties or representations provided by these affiliates or companies for any products or services provided by those companies;

(o) A risk of loss clause that gave the seller the option to either terminate the contract, repair the damage as the seller reasonably determined was necessary, or to rebuild and close escrow. However, while the seller had 90 days to determine what choice they were going to make the buyer had a right to terminate only if the rebuilding was going to exceed 180 days and only if the buyer elected to terminate within 15 days after receipt of the seller’s notice. Any failure on the part of the buyer to give notice constituted the buyer’s election to not terminate the agreement and complete the purchase;

(p) The absence of an attorney’s fees clause to be awarded to the prevailing party. This gives the homebuilder an advantage because they typically have in-house attorneys. This also means that the homebuilder has no exposure to attorney’s fees in the event that the buyer prevails; and

(q) Provisions that require that notice be sent to designated agents and in a specific form (e.g. certified mail/electronic communication was not acceptable).

Contractual language like the foregoing is one sided and creates potential risk for the buyer. This is true whether or not all of these provisions are enforceable under California law. The problem that the buyer faces is there is little or no bargaining strength in dealing with a large home builder in terms of removing any of these provisions. Therefore, it is important that the buyer thoroughly review the contract before it is signed and understand that it may contain clauses that favor the seller, limit the seller’s responsibilities, and either waive or disclaim rights on the part of the buyer. This is critical where you have a party who is going to defend itself using in-house lawyers, and where a buyer will have to retain a qualified California real estate attorney to try to overcome the one sidedness of the contract in the event that a dispute arises.

Most large home builders work with their own in-house sales staff, but their purchase contracts state that these salespersons do not represent the buyer and, as identified in subparagraph (l), the contract attempts to limit any liability for any statements or representations made by the salespersons.

Finally, it is important for the buyer to understand what relationship, if any, there is between the seller of the property, the entity that is providing the financing, and the entity that is building the home. Large scale home builders often offer financing and other integrated services (title, escrow, property insurance, etc.) through separate affiliated companies. They may be separate and distinct entities with no liability for the actions of the other entities even though they share a common name.