3-Day Cancellation -- State vs. Federal Notices

“If I give my state’s 3-day cancellation notice, do I also have to give the federal 3-day notice?”

A simple question. And a good one. But the answer gets complex.

Here’s the easy part. The federal 3-day cancellation notice is always required when any improvement to a primary residence will create a lien on that property. Since all states grant mechanics' lien rights for improvements to private property, the federal cancellation notice is always required. But note the word primary. The federal notice is not required on a secondary residence, such as a vacation home.

Now, let’s talk about state cancellation notices. Nearly all states require a 3-day cancellation notice when home improvement services are sold at the project site. That’s a home solicitation sale. But thirty-one states waive their state 3-day home solicitation notice if the contract includes the federal 3-day home improvement notice. So, in those thirty-one states, no state notice is required if you give the federal notice.

Caution: Be careful in these 31 states when work is not on the primary residence of your client. The state notice may be required even if the federal notice is not. Note also that wording of the notice varies from state to state.

Law is different in the remaining 20 states (including the District of Columbia):

Fourteen states (FL, GA, HI, IN, MI, MO, NH, NJ, NY, ND, OK, VT, WV and WY) waive their 3-day home solicitation notice if the deal is signed at the office of the seller or if the sale started with an invitation from the owner. I call this the big box store exception. This is why most Home Depot and Lowes home improvement contracts skip their state cancellation notice but include the federal notice.

Rules vary in the other states:

• Alaska requires a 5-day notice unless the deal was initiated by the owner.
• Connecticut always requires the state notice.
• District of Columbia never requires a home solicitation sales notice.
• Texas waives the state notice if the contract includes the 3-day notice required by the Federal Door-to-Door Sales Act. Since the federal door-to-door notice isn’t required when a federal 3-day home improvement notice is in a contract, Texas home improvement contracts need both the Texas home solicitation notice and the federal home improvement notice.
• Washington requires a state cancellation notice only on roofing and siding jobs.

Now the fine points

Federal law considers Saturdays a business day. So, an owner who signs a home improvement contract on Friday has until midnight the following Tuesday to cancel. Most state laws don’t count either Saturday or Sunday as business days. The same owner would have until midnight the following Wednesday to cancel if the state notice is required. This is an important distinction. Contractors have to write on the cancellation form the last day the contract can be rescinded.

An entirely different set of rules apply if you offer a credit term or recommend a lender. Better to leave the lending to others.

Eighteen states (AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, OK, SC, SD, TN, UT, WI, WV) have different 3-day cancellation rules if any part of the cost will be covered by insurance.

In an emergency, the owner can waive the right to cancel under federal law. Some states offer the same option. But you still have to deliver the 3-day cancellation notice.

Finally, be aware that the penalty for a faulty 3-day notice is severe. Under federal law, the owner has three years to bring suit for a refund. Many states label it “consumer fraud” when a contractor omits the state cancellation notice.

If all this has your head swimming, don’t worry. Construction Contract Writer sorts out all the details. With CCW, you’ll write letter-perfect contracts that comply with both state and federal law every time. The trial version is free.

Do I Really Have to Give the 3-day Notice?

Arguments for skipping the 3-day notice go something like this.

“I get paid in full when the job is done. I’m not a lender. So why do my jobs need a federal truth-in-lending notice? That notice just bulks up my contracts. Makes it harder to get a signature. Anyhow, my clients know what they want. And that’s NOT waiting three days for me to get started.”

Every home improvement specialist knows about the 3-day notice – an owner’s right to cancel a home improvement contract during the first three days after the agreement is signed. What may not be so clear is how important that notice can be.

I’ve written about the 3-day notice at least 5 times on these pages:

February 2010 -- 3-Day Right to Cancel – Contractors Beware

June 2012 -- Waiving the 3-Day Right to Cancel
April 2013 -- The 3-Day Right to Cancel: A Contractor’s Checklist
March 2014 -- Home Solicitation Sales
November 2017 -- Bad Faith 3-Day Rescission

But I still get asked, “Why bother with the 3-day notice?”

That’s a good question, especially if you understand where the 3-day notice came from. It’s part of the federal Truth-in-Lending Act, a law written to regulate lenders, primarily banks. How did it happen that contractors get the same treatment as mortgage lenders? Most contractors expect to be paid on completion and most don’t arrange financing for their clients. Contractors like that are not lenders in any sense of the word.

A Little History

When T-I-L was written (1968), many assumed contractors would not be affected. Not so the Federal Reserve Board. The Fed has rule-making authority under T-I-L and wanted contractors covered by the law. They wrote regulations, including Regulation Z, that required home improvement contractors to give the same 3-day notice that mortgage lenders give when making a loan. The 3-day notice had to be part of the construction contract even when a lender is required to give their own notice as part of the loan agreement.

Several years after the Fed wrote Regulation Z, A group of home improvement contractors filed suit against the Fed, seeking a declaratory judgment that contractors weren’t covered by T-I-L and didn't have to give the 3-day notice. In district court, the contractors won. The court ruled the Fed Governors had exceeded their authority. In the opinion of the district court, T-I-L was not intended to cover future statutory liens such as mechanics liens. All states grant mechanics liens to tradespeople. But those liens don’t arise until well after completion and may never happen. So the district court enjoined the Fed from enforcing Reg Z against contractors. No more 3-day notice.

Naturally, the Fed appealed. The case was Freed Co. v. Board of Governors, decided in 1973. The appellate court reversed the district court, finding clear congressional intent in T-I-L to protect consumers from loss of their home under security interests granted by state lien law. Once again, the 3-day notice was required on most residential jobs.

The Freed case stands today. It’s never been challenged. And until it is, no attorney is going to advise a client to skip the 3-day notice when doing work on an owner’s primary residence.

But be aware. The 3-day notice isn’t needed on all residential jobs. And there are perfectly legal ways to start work on a job the same day a contract is signed. Construction Contract Writer helps you decide what's right for each job. The trial version is free.