Monday, February 8, 2010

3-Day Right to Cancel – Contractors Beware

Every contractor who does residential work knows about a home owner's three-day right to cancel. But what you may not know is how vicious this innocuous little form can be. Here's a short quiz to test your understanding. Answers are below.

True or false?

1. The 3-day right to cancel is a federal notice and isn't required in most states.
2. There no harm in skipping this form. It's safe to leave it out of your contracts.
3. If you decide to include the notice in your contract, one copy is enough.
4. The 3-day right to cancel is required only on major home improvement jobs.
5. The 3-day right to cancel is required only if you extend credit to the owner.

First, something that should be obvious: Don't start work, don't deliver materials, don't schedule crews until three business days after the contract is signed. When a contract is cancelled under federal law (12 C.F.R. 226.15), you have to undo the deal at your own expense. Any lien you thought you had is cancelled. You're liable for twice any finance charge up to $1,000 plus costs and attorney fees.

Answer to Question 1 – Not required in most states.
False. The 3-day right to cancel is a federal right. But it's a right granted in all states any time you do work on the principal residence of the owner. Even if your state has its own 3-day right to cancel, you still have to deliver the federal form, filled out with the date of signing, your mailing address and the last day to cancel.

Answer to Question 2 – It's safe to skip this form.
False. It's not safe at all. Omitting the 3-day notice gives the owner three years to cancel (§ 226.15-b).After cancellation, you have the right to take materials back. But you have to make a full refund! Imagine making a full refund on a home improvement job three years after completion. More on that later.

Answer to Question 3 – One copy of the form is enough.
False. 12 CFR 226.15-b requires that each owner receive two copies of the cancellation notice. If two adults are living in a home, it's safe to assume that both are owners. Delivering less than four copies of the 3-day right to cancel is like delivering none at all. See Weeden v. Auto Workers Credit Union, Inc., 1999 U.S. App. LEXIS 5272.

Answer to Question 4 – Required only on major jobs.
False. The federal 3-day notice is required on every job that qualifies as the principal residence of the owner, whether a custom home, home improvement or home repair. There is no threshold dollar amount. Even replacing a water heater gives the owner 3 days to cancel. In a true emergency, the owner can waive the right to cancel with a written statement.

Answer to Question 5 – Required only if you extend credit.
False. The 3-day right to cancel exists on every job that could result in a lien on the owner's property. And that's every job because all states give contractors a construction lien for their work.

Don't let this happen to you.
A few years ago Alma and Robert Johnson needed a little work done on their front porch at 65 Stanford Street, Providence, Rhode Island. Interstate Contractors got the job. They finished the work and got paid -- $12,400. Unfortunately for Interstate, their work was better than their contract. I'll explain.

Two years later, the Johnson's had some financial reverses. Their home fell into foreclosure and the Johnsons filed for bankruptcy. One of their creditors had a smart attorney with the good sense to pull out the contract for that front porch job. Turns out, Interstate's contract wasn't quite right. There wasn't any federal 3-day cancellation notice. That was Interstate's Mistake One. The Johnson's could still cancel the job, two years after completion, and get a full refund under federal law. Great! But it gets better.

Rhode Island gives owners a 3-day right to cancel – but only if the owners don't get the federal right to cancel notice. Well, the Johnsons never got their federal notice. So Rhode Island's law applied. Interstate must have known that. Interstate's contract with the Johnsons included the Rhode Island 3-day cancellation notice. Unfortunately, the Rhode Island notice wasn't quite perfect. It wasn't in 10-point bold type. And one part of one paragraph was missing. Bingo! Interstate's Mistake Two.

So the Johnsons canceled under Rhode Island law. Interstate now had 20 days to refund the full $12,400. Too bad. They didn't make it. And that was Mistake Three. Failure to make a full refund in 20 days made Interstate liable to the Johnson's creditors for double the contract amount -- $24,800. And that was the award of the court. (I'm not making this up. See 239 B.R. 255.)

Like I said, that federal 3-day notice can be full of nasty surprises.

My recommendation: Don't be an Interstate. Use quality contracts that comply with both your state law and federal law. You'll find plenty here and here.


  1. I am a consumer in Maryland that has read your blog with great interest. I am told, but not sure that I believe it, that this Federal law (12 C.F.R. 226.15) does NOT apply to a (in my case Maryland) renovation or construction contract and this federal law only applies only to the extension of credit when there is a security interest. This seems to go against the point you make in Question 5. Can you clarify?

    1. The Federal 3-day right to cancel (rescind) applies any time work is done on the principal residence of the owner. This federal right of rescission applies in all states even if there is no loan on the project.

      The Federal Truth in Lending Act is entirely different. TIL applies to every business (not just construction)::
      (1) If credit is extended to a consumer, and
      (2) If there is a finance charge or payments are due in more than four installments after work is completed, and
      (3) If the credit is primarily for personal, family or household purposes.

      TIL requires extensive disclosure of loan terms but does not include a right of rescission.

  2. My brother and his wife just entered into a TEXAS residential construction contract with a general contractor/builder.
    There will NOT be a bank loan involved.
    Rather, they will be using the proceeds of an insurance settlement received because a tornado destroyed their house.
    Since no lender will be involved, are you sure that 12 CFR 226.15 will still apply as regards the 3-day rescission period?
    The reason that I am having difficulty understanding your position regarding your ANSWER to Question 5 above (i.e., "The 3-day right to cancel exists on every job that could result in a lien on the owner's property. And that's every job because all states give contractors a construction lien for their work.") is because the title of Part 226 is "Truth in Lending," but as I stated in my brother's case there is NOT any bank lender.
    I apologize for asking this question, but I really do NOT understand and need your help. Thank you, and have a very nice day! Best regards, Sissy

  3. Hello again, Mr. Moselle!
    I forgot to tell you one important thing, it seems - the builder/contractor is a Texas company, i.e., NOT from another state.
    Best regards,

    1. Hi Sissy.
      Truth In Lending (12 Code of Federal Regulations Part 226.1(c)(1)) gives borrowers three days to rescind any loan agreement which results in a security interest on the primary residence of the borrower. This is commonly called “Regulation Z.” TIL also requires extensive disclosure of loan terms such as interest rate, number of payments, etc. Since there is no lender on your brother’s job, there is no loan agreement and Reg Z does not apply to any lender. But your brother will sign a construction contract. Texas mechanics’ lien law will give the prime contractor a security interest on your brother’s new home while under construction. That prime contractor won’t have to make TIL loan disclosures because there is no loan. But since the contractor gets a security interest (lien) in the project, the contractor has to comply with the Reg Z three-day right to rescind.

      Texas law requires a second three-day right to rescind notice if the construction contract is negotiated and signed at some location other than the office of the prime contractor. That’s Texas Business & Commercial Code § Section 601.052. Omitting the 3-day right to cancel form (1) voids the contract under § 601.201 and (2) gives an owner the right to collect actual damages plus attorney's fees and court costs under § 601.202. Section 601.152 requires that the prime contractor mention this right to cancel at the time the contract is signed. The domicile of the contractor doesn’t affect any of these obligations.

      Sorry this is so complex.

  4. So if I am unhappy with my roofing contractor, I can cancel our contract since I was never offered orally and/or written a 3-day cancellation notice? I am in Texas. My roofer is doing an awful job, to say the least. I've looked through the paperwork signed; we have no cancellation notice at all. Does this allow me to void the contract and hire a better contractor?

  5. Firing a contractor in the middle of a job is asking for trouble. Certainly a defective contract doesn’t give you the right to terminate the contract. Anyhow, better options are available. Courts in most states won’t give the owner a windfall simply because the contract is defective – or even completely void. A court will award the contractor some amount, usually less than the contract price. But you don’t want to win a lawsuit. You want a good roof. To get that, you’ll need some leverage with this contractor. Here’s my recommendation. (1) As soon as possible, describe the defects you see. Follow up with a letter to the roofing contractor. No threats needed. Just identify the problems. Essentially this is a warranty claim. For example, “The job does not comply with the code, does not reflect good workmanship, etc. Here are the details . . .” Then explain that you don’t want to file a complaint with the Attorney General. You just want a good roofing job. (2) Assuming that doesn’t get results, try plan B. Explain that legal counsel has advised that the roofer’s contract does not comply with Texas law and is not enforceable. Specifically, the contract does not comply with Texas Business & Commercial Code § 601.001 to § 601.205. Section 601.052 of the Act requires that the contract include a notice of the three-day right to cancel. Section 601.053 requires that duplicate Notice of Cancellation forms be attached to the contract. Omitting the cancellation form (1) voids the contract under § 601.201 and (2) gives an owner the right to collect actual damages plus attorney fees and court costs under § 601.202. (I’m assuming work is being done on your residence and that the contract was negotiated and signed at some place other than the office of the contractor.) That will drive your roofing contractor to legal counsel – who will probably recommend that the roofer settle up with you double-quick.

  6. I have entered into a contract in the state of Rhode with a contractor on 7/7/16. It is for the removal of a non load bearing wall and 2 bathrooms. While taking down the wall, the employee who did the demo decided to completely cut some electrical wires without a permit and consulting an electrician. Subsequently, the electrician made it very clear during a follow up conversation that nothing should have been cut without a consult and permit. I also paid 500 Dollard towards remedying the electrice that has been done, and feel I shouldn't have given any. 2 months later (after a verbal "3-5 days will be resolved") my power isn't on, holes have been cut in multiple places to remedy the situation and 3/4 of my house is uninhabitable. Also, finishing touches that were said would be finished on the wall removal haven't been. Additionally, they have moved forward with the demo of the first floor bathroom. I gave an additional $4500 toward the bathroom, and paid in full for the wall. Regarding the bathroom, They spent 2 days on the demo and haven't shown up in nearly 2 weeks to move forward. Someone either doesn't show, or there is an excuse as to why progress isn't being made. I want to abandon the contract and have consulted an attorney. I was never given the Federal 3 day right to cancel notice as well. What are my rights? I have 3 children, am a single parent and have lost all patience. Any feedback would be greatly appreciated. Thank you.

  7. You could terminate the contractor and hire a replacement contractor. That tends to be expensive -- paying the new contractor (almost certainly at a higher price) while defending against the claims of your first contractor. Remember, Rhode Island provides lien rights to all who improve real property. Your first contractor has advantages in court. I don't recommend relying on the federal right of rescission to resolve this dispute. I've never seen a case where Reg Z has helped resolve a case like this. Basically, the law is a blunt tool poorly designed to resolved what you've described. There are better choices, such as mediation or arbitration. Start with the Rhode Island Contractors' Registration and Licensing Board: You're entitled to an administrative hearing. Prepare your case carefully -- pictures, witnesses, statements. The hearing officer has authority to assess fines, order work to be completed or even suspend the contractor's registration. That's a heavy incentive for any contractor. The threat of an administrative hearing should help focus the attention of your contractor on the job at hand.

  8. In California, from a contractual standpoint, what differentiates a residential job from a commercial job?

    1. "Residential" is defined in Section of the California Residential Code as any space intended for regular use as a sleeping accommodation (with exceptions). California Civil Code Sections 895 to 945.5 set standards for residential "dwellings". California breaks "residential" into sub-categories for contract purposes. For example, contracts for construction of four units or less must meet specific requirements. Contracts for improvement of owner-occupied dwellings must meet other requirements.

  9. Gary, thank you for this blog. It is very helpful. So even if there is no loan, any contractor that may have a security interest in the property via a lien has to provide the Reg Z disclosures? Does Reg Z's "four installment rule" effect whether the disclosures are required?

  10. Correct. Reg Z disclosures (3-day right to cancel forms) are required any time you do work on the primary home of your client. That's true even if there is no loan and payment is due in full on completion. Every state gives lien rights. So you always have a security interest. Thus, Reg Z disclosures are required by 12 Code of Federal Regulation § 226.15(b). Truth in Lending disclosures are required by 12 Code of Federal Regulation § 226.1(c) and are entirely different. TIL disclosures are required in the contract only if there is loan on the project -- either (1) a loan extended by the contractor, or (2) a loan arranged by the contractor with some other lender. TIL considers it a "loan" by the contractor if payments will be made in more than four installments after work is completed. This "four installments" rule is part of TIL, not Reg Z.

  11. My husband signed a contract with a MN roofing company several weeks ago. Due to the contractor's poor communication (wouldn't return phone calls or e-mails even to tell us when he might have time to speak), we looked into another local company. When we e-mailed the contractor we'd signed with, he immediately responded with: "We have a contract. You will use us, or pay 25% of whatever insurance approved for the job". A nasty note from his lawyer stated the same. After reading through this blog, we realized that the 3 day cancellation notice was missing all together from his contract. When we pointed this out to his lawyer, he rudely replied "Their policy is to paperclip a copy to each contract. However, this is irrelevant". Why would a lawyer have that response? From what I've gathered from others, the 3 day notice is a LEGAL requirement. Is there some strange loophole we don't know about in the state of MN? We didn't even receive a paperclipped notice!

  12. The owner has three years to cancel any home improvement contract for improving the primary residence of the owner if the owner does not receive the 3-day federal notice. That's black letter law in all states, including MN. Anything to the contrary is just blowing smoke.

  13. Our contractor mentions the Notice of Cancellation is his contract but doesn't actually include it. On the front of the contract it says, "You may cancel this transaction at any time prior to midnight of the third business day after the date of this transaction. See the Notice of Cancellation included in form for an explanation of this right." On the back it says, "20. Section 7159 of the California Business and Professions Code as reproduced on the last page of this form, is incorporated hereby in these Terms and Conditions. In case of any lawsuit, customer is responsible for all legal fee (sic) that may accrue."

    There was no Notice of Cancellation included. Does this mean the contractor can still sue us for not moving forward with our kitchen remodel after he botched our bathroom remodel?

  14. Quoting the statute in your contract is not enough. California Business and Professions Code § 7159(e)(6) and (7) require that the full-page notice of cancellation appear in home improvement contracts if the deal was negotiated some place other than at the contractor's office or store. Failure to deliver the cancellation form does not void the contract. But it gives you the right to cancel the agreement after the three days has passed. Just tell the contractor by email, letter mail or by phone that you're cancelling. At that point, work should stop. You may have to pay for work done to the date of cancellation. But you're no longer obligated under the kitchen remodel contract. I would not be too concerned about liability for legal fees. If your contract requires payment of legal fee of the contractor, California law makes that obligation reciprocal. The contractor will have to pay your legal fees if you prevail in court. Last point: Don't rely on courts to settle this dispute. It takes too long and costs too much. Better choice: negotiate a settlement with the contractor. If not possible, file a complaint with the Contractors State License Board. An investigator will review the facts and make a recommendation -- quicker and far cheaper than getting a decision in court.

  15. I am a residential siding and roofing contractor. There has recently been a crew labor shortage and we have noticed that homes affected by a June 2017 storm are still without repairs. We would like to reach out to these homeowners to offer our services but need to make sure we are having a fact supported conversation with a homeowner about their rights to cancel a repair contract prior to any work starting. I understand that if they did not receive the cancellation notice forms, they can cancel easily. But is there an argument about timely repairs that is assumed with a repair contract?
    thank you.

    1. My June 30, 2012 blog post explains what you need to know about an owner's right to cancel residential repair contracts.

      No state has any special rule on timely performance of repair contracts. If you specify a completion date, that's the best completion date. If you don't specify a date, the job should be completed in a "reasonable time". But note that many states require a completion date in home repair or improvement contracts.

      Eighteen states have adopted special rules on cancellation of jobs at least partially funded by the proceeds of insurance. See my blog post of November 20, 2012 for the first 13 states,
      Since then, UT, SC, WI, MS & WV have adopted similar laws.

  16. My husband signed the 1 page commit form with a storm chaser. Long story short, the claim was approved for $26,000. The roofer was wanting to rush and do the roof right away but I asked to hold off until spring time due to the cold winter and snow we have. They roofer threatened the 1 page contract I signed, that has no price or scope of work in it. And if we canceled with them I would need to pay 25% of claim. After doing more research, I uncovered many things I did not like about this company. They did a new roof for a neighbor of mine but the stack of shingles sat on the roof for over a month along with the roll off sitting in the driveway over a month as well. Sounds like they fired a the sub contractor doing the work, but then hired a new one. I then realized they hire other roofing companies to do the work for them and all they are as a company are a bunch of sales guys going door to door with hopes of landing a large claim to collect a nice commission check. Their attorney sent me a nasty letter as well, threatening the 25% or to allow them to do the roof. At this time, I do not trust them. I don't have a contract in place for the scope of work, what materials will be used, and what the cost is on this 1 page document. I received other bids and those documents do have scope of work and price all on it. How do I get out of this contract because I clearly will not be using this company who I do not trust.

  17. You don't mention your state. So I can't quote any state law that may apply. Eighteen states give owners extra protection on insurance jobs. If you're in one of these 18 states, you can cancel the work without penalty up to three days after the claim is approved. Other states offer special protection for home improvement work. For work on the primary residence of an owner, delivery of a 3-day right to cancel notice is required. Without that notice, you have three years to cancel and get a refund. If your roofer makes demands, refer the issue to your state license board or attorney general.

  18. This three day rule sounds serious, I take it that it implies to the state of Florida as well?

  19. Yes. Every Florida construction contract which will result in a lien on the principal residence of an owner has to include a right of rescission - the right to back out of the deal. Since every private (as opposed to public works) construction contract in Florida can result in a construction lien on the property, this federal right of rescission is required on nearly every home improvement and custom home job - even if there is no loan on the project. In a genuine emergency, the owner can waive the right to rescind.