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.

Changes in Minnesota Construction Contracts

Every contractor who builds, repairs or remodels homes or apartments in Minnesota knows about One, Two, Ten.

One: Contractors have to provide at least a one year warranty on materials and workmanship.

Two: Plumbing, electrical and HVAC work require a two-year warranty.

Ten: Any "major construction defect" is covered for ten years.

All this is courtesy of the Housing Statutory Warranties Act, Minnesota Statutes § 327A.01 to 08. Nearly all residential construction, repair and improvement work is covered, whether a home, an apartment or a condominium. Install roofing, siding or flooring, a window or a door and you've written a one year warranty. Install a water heater, a furnace or a lighting fixture and your warranty runs for two years. On new construction, room additions and conversions, your warranty runs for ten years.

Both the first owner and later owners are covered by the warranty. After being notified of a claim, a contractor has 30 days to do an inspection and make an offer to repair. A contractor who refuses to make good on the warranty will be liable for the cost of repairs and can be found in contempt of court.

Changes

Minnesota's One, Two, Ten law changed in August 2009. Governor Pawlenty signed a bill that affects every home construction and home improvement contract in the state. Minnesota's statutory warranty now has to be written into your contract – three paragraphs of very precise language – one warranty for new construction and a different warranty for repair or home improvement work. A copy of the warranty has to be left with the property owner.

Omit the warranty from a contract and you've got trouble: On new construction, leaving the warranty out is considered a false statement and makes the contractor liable for a fine up to $10,000. Leaving the warranty out of a repair or home improvement contract can draw an invitation to discuss your license with the CCLD (Construction Codes and Licensing Division).

Minnesota's statutory warranty law has a few exceptions. For example, yard improvements such as walkways, walls and fences don't require a written warranty. The warranty can't be waived. But there are options if you offer protection underwritten by a Minnesota home warranty company.

A breach of warranty is anything that doesn't comply with Minnesota's building code (the IRC). That's a curious definition. The building code says almost nothing about cosmetic defects or how long materials have to last or water leakage. Those and other performance issues are the most common construction defects. The IRC is concerned primarily with selection of materials and safety, not durability and habitability. Warranty law in most states is based on consumer expectations. Not so in the Gopher State.

If you're serious about drafting construction contracts that comply with Minnesota law, I can recommend another site.

Maryland Custom Home Contracts

If there's a load limit on construction contracts, Maryland must be getting close. The legislators in Annapolis require 21 distinct notices and disclosures in custom home building contracts. As a class, buyers of custom homes in Maryland must be among the best protected anywhere. Omitting any of these disclosures carries heavy consequences. More on that later.

If you're a custom home builder in Maryland, check your contract against this list of required notices.

• · A draw (payment) schedule – Real Property Code § 10-505(1)
• · The names of the primary subcontractors – Real Property Code § 10-505(2)
• · Notice on change orders – Real Property Code § 10-505(3)
• · Statement of warranty coverage (in bold) -- Real Property Code § 10-505(4)
• · Disclosure on payment of subs & suppliers -- Real Property Code § 10-505(4)
• · Waiver of lien notice -- Real Property Code § 10-505(6)
• · Mechanics' lien laws notice - Real Property Code § 10-506(a)
• · Certification of no judgments or violations - Real Property Code § 10-506(b)(3)
• · Escrow account notice - Real Property Code § 10-506(c)
• · Sales representative notice -- Business Regulation Code § 4.5-307(c-1)

But that's just the beginning. Real Property Code § 14-117(j) is a piece of work. Required notices and disclosures include the following:

• · The builder's registration number.
• · A commitment that construction will comply with the building code.
• · Identification of the performance standards that apply (NAHB or HUD).
• · A buyer's right to receive the Home Builder Registration Act pamphlet.
• · A notice of the maximum loan interest rate acceptable to the buyer.

And then we get to Maryland's New Home Warranty Act, Code of Maryland Regulations § 09.01.09.01 to 09.01.09.09. You have to disclose either participation or non-participation in a warranty plan. If you participate, the buyer may have the choice to opt out. If that's the case, the contract has to include a waiver of coverage notice (Real Property Code § 10-607) as well as a blank rescission of waiver form (Real Property Code Annotated § 10-607(c)). Whether you participate in a warranty plan or don't participate, the contract must include a statement about any known hazardous or regulated materials on site.

It pays to be careful about compliance. Omission of any disclosure or notice required by the New Home Warranties Act can result in a fine of up to $50,000 and two years in prison. Violation of the Act is also treated as an unfair and deceptive trade practice under Maryland's Consumer Protection Act, giving an owner the right to sue for damages and collect attorney fees.

Failure to include an accurate "Certification by Builder" statement in a contract is a felony and makes the contractor eligible for a fine up to $10,000 and 15 years in prison. Omission of any disclosure required by Real Property Code § 14-117(j) or Maryland's Custom Home Protection Act is a misdemeanor punishable by a fine of up to $1,000 and a year in prison. If omitting a disclosure or notice results in a financial loss to a home buyer, a court may order the defendant to stop working as a construction contractor. Violation of the Custom Home Protection Act gives a home owner the right to sue for damages and collect attorney fees.

If you're serious about drafting construction contracts for work in Maryland, I recommend another site.

Construction Contracting in Hawaii

Hawaii has a reputation for making life difficult for contractors who don't toe the line. Sometimes the results border on the ridiculous, at least from a contractor's perspective. Just ask Michael Sakatani, a Honolulu contractor doing business as 808 Development LLC. 

A few years ago Mike's company landed a $1.8 million contract to build a 9,000 SF home at 4902 Kahala Avenue in Honolulu – in the shadow of Diamond Head and just a block from the blue Pacific. That should have been good work for Mike. But costs ran a little more than expected and relations with the owner soured. Payments stopped and you can probably guess what happened next. A team of lawyers stepped in to sort things out. 

The case dragged through Hawaiian courts for several years, eventually landing in the Hawaii Supreme Court. Like many other states, Hawaii requires specific notices and disclosures in construction contracts. What's required depends on the type of work. Mike's Diamond Head job was residential. 

For residential work: · Hawaii Revised Statutes § 444-25.5 voids any contract which omits specific notices and disclosures. · Omission of the same disclosures is also considered a deceptive act under Hawaii Revised Statutes § 480-12, making the contractor liable for a $5,000 fine (§ 444-23). · 

Failure to provide the disclosures required by Hawaii’s Code of Rules, Title 16, Chapter 77, Subchapter 12, § 79 and § 80 can result in suspension or revocation of a contractor's license. That's Hawaii Revised Code § 444-17. · Hawaii’s Contractor Repair Act, § 672E-11, requires that contracts include a notice of the contractor's right to repair construction defects.  

Once Mike's lawyers took over, they discovered a problem. One of Hawaii's required notices was missing from Mike's contract -- the mechanics' lien notice in § 444-25.5. Mike claimed the lien notice had been delivered as part of the contract. But he couldn't find a copy and neither could the property owner. So the contract was void under Hawaii law. 

 In most states, that leaves the contractor with two choices. Either collect under the theory of "unjust enrichment" or file a mechanics' lien. Neither will get you the full contract price. But at least Mike could recover his sunk costs. And that's what Mike's legal team argued. In their words, anything else would be "absurd and unjust." That's not how Hawaii's Supreme Court saw it. No matter how absurd and unjust, a contractor who omits even one required notice from a construction contract has no right to collect, period. When it comes to construction contracts, Hawaii takes no prisoners. 

If you plan to collect, the contract better be perfect. But the court's decision wasn't all bad news for Mike. He wasn't assessed the $5,000 fine, didn't have his license revoked and didn't have to pay the owner's attorney fees. And if he ever finds that missing mechanics' lien notice, the court offered to reconsider their decision. That was in 2006 (808 Dev., LLC v. Murakami, 111 Haw. 349). There's no later appellate decision. So I guess Mike is still looking for that missing lien notice. 

If you make a living as a construction contractor in Hawaii, here's the best tool available for drafting Hawaiian construction contracts. The trial version is free.

Sunset of the Texas RCCA

The Texas Residential Construction Commission Act (TRCCA) has joined the Alamo as a memorable episode in Texas history. Like defenders of the Alamo, defenders of TRCCA went down swinging. But the result was about the same: A commendable effort that came up a little short.

TRCCA was basically a good idea: Provide every new home and every home improvement project over $10,000 with a detailed statutory warranty against defects – what's covered, what's not covered and for how long. Get an independent third-party opinion if the property owner and the contractor can't agree on a defect claim. Then identify what a contractor has to do about any true defect.

The essential element in this scheme was the TRCCA performance standards – 47 pages developed by knowledgeable professionals with the help of the Construction Science Department at Texas A&M. These standards took most subjective opinion out of the equation, leaving less room for dispute. I like that. And courts do too – freeing up dockets for more important work.

The rap on TRCCA was that the claim process took too long (5 months) and didn't resolve enough disputes (only 12%). Worse, TRCCA didn't give anyone authority to enforce decisions that go against Texas builders (or Texas home owners).

Like defenders at the Alamo, the Commission is gone. They aren't accepting new complaints, aren't making inspections and aren't registering builders and remodelers.

But even with TRCCA gone, Texas still has plenty of construction defect law on the books. The Texas Residential Construction Liability Act of 1989 gives builders the right to inspect and repair after a claim of defect. There's a heavy incentive for builders to make a reasonable offer of settlement. If the dispute ends up in court, Texas may throw in attorney fees and the cost of temporary re-settlement if the owner has to relocate during repairs.

I believe the legacy of TRCCA will be their performance standards. These standards won't be the law in Texas after August 31, 2010. But they're still the best authority on residential construction defects. Texas is the only state that's made a conscientious effort to develop residential performance standards. Expect to see these standards recycled the next time legislators in Austin re-visit ways to protect Texas home owners.

With TRCCA gone, Texas builders and remodelers need to make a few changes in their contracts. Title 16 notices and disclosures are obsolete. These include registration (§ 420.001), registration number (§ 420.002), arbitration (§ 420.003) and dispute resolution (§ 426). But the right to repair notice in Texas Property Code § 27.007 must now appear in residential contracts because the exemption in Texas Property Code § 27.007(c) no longer applies. And, of course, the statutory TRCCA warranty is now optional.

If you need a little help sorting all this out, the Texas edition of Construction Contract Writer drafts post-TRCCA contracts. If you've already installed Texas Construction Contract Writer, the update is free. Click Help on the program Menu bar. Then click Check for Updates.

Checklist for New York Contractors

Staying legal in the New York construction contracting business begins with licensing.

New York State licenses only asbestos contractors. But that doesn't make licensing a trivial issue in New York. Cities and counties in New York are free to require a license for any type of construction activity. And many municipal governments do exactly that. For example, New York City licenses home improvement contractors. The site is here.

A word to the wise. Don't sign a contract or begin work without checking into license requirements. New York State may be a little casual about licensing of contractors. But New York courts are ruthless in enforcing licensing laws. Where a contracting license is required, unlicensed contractors may have no right to collect for work completed. Nassau County and Westchester County enforce their license laws by impounding construction vehicles.

But even if you don't need a license, New York State jumps with both feet into your construction contracts. You need to know about several statutes.

If the contract price is $150,000 or more for commercial work or if the job is a larger residential project, New York's Construction Contracts Act dictates many key terms: payment dates for both contractors and subcontractors, grounds for stopping work, termination of contract and arbitration (required). That's New York General Business Law § 756-a. But that's just the beginning. New York General Business Law Section 756-b sets penalties for violation of Albany's contract terms – maybe not what you wanted at all.

New York General Business Law, Section 771 is even more explicit on what has to be in residential construction, home improvement and home repair contracts.
(1) The name, address, telephone number and license number, if applicable, of the contractor.
(2) The dates when work will begin and be completed, including any contingencies that could delay completion.
(3) A description of the work including makes and model numbers
(4) A disclosure in bold type that subs and suppliers have lien rights.
(5) A notice that the contractor has to deposit payments in a trust account or supply other security for payment of subcontractors and suppliers.
(6) A progress payment schedule by job phase in dollars and cents.
(7) A 3-day right to cancel.
For technical violations, the penalty is $100. For substantial violations, the penalty is the greater of $250 or 5% of the contract price up to $2,500.

New York General Business Law, Section 771 also requires the same information in every amendment to a residential construction, home improvement or home repair contract. That makes for lengthy change orders.

New York General Obligations Law Section 5-322.2 requires that every construction contract for residential work of less than five units (1) identify who owns the property and (2) include a property address adequate for lien law purposes. Subcontracts have to include the same information.

If you have better ways to spend your time than deal with all this legal gibberish, I can recommend a couple of web sites.

Construction Contract Writer drafts letter-perfect New York construction contracts and subcontracts for residential and commercial work. The trial version is free.

Directions to the New Jersey Supreme Court

Not many home improvement contractors get their day at the supreme court. But it happened in New Jersey earlier this year. And there's a lesson here for residential contractors in many other states. I'll explain.

Jo Anne and Tom Heath selected Czar, Inc., a Patterson, NJ cabinet shop, to install kitchen cabinets and woodwork in their new home. The Heaths weren't happy with the cabinets Czar installed and refused to pay. Czar filed suit to collect. To this point, it's a story you've heard many times. But this is where the case got interesting.

The Heaths knew a thing or two about New Jersey home improvement contract law. They knew Czar didn't have a legal contract. They didn't have to complain about the job. Instead, they could counter-claim over the contract. The Heaths filed suit in Morris County for damages, alleging violation of the Home Improvement Practices Act.

New Jersey Administrative Code sections 13:45A-16.1 to 16.2 (Home Improvement Practices) and New Jersey Administrative Code sections 13:45A-17.1 to 17.14 (Home Improvement Contractor Registration) require that all home improvement contracts for more than $500 be in writing and include very specific disclosures. Failure to include those disclosures in the written contract is a violation of New Jersey's Consumer Fraud Act. Penalties include a full refund (New Jersey Statutes Annotated Section 56:8-2.11) or treble damages plus legal fees (New Jersey Statutes Annotated Section 56:8-19).

The Heath's counter-claim put the case under New Jersey's Consumer Fraud Act. The Heaths were in line to collect treble damages and their attorney fees – not because of any defect in the cabinets but because of a defect in the contract.

What should have been in that contract?

• The legal name, business address and registration number of the contractor.
• A certificate of commercial general liability insurance.
• The total price including any finance charges.
• A notice of the right to cancel.
• Disclosures: start date, finish date, phone numbers, etc.

Omit any of those from a home improvement or home repair contract and you've dropped into New Jersey's Consumer Fraud Act: full refund, triple damages plus attorney fees.

Unfortunately for contractors, New Jersey isn't unique in this respect. Many states give owners the right to collect for a defective home improvement or home repair contract: Texas, Oklahoma, Arkansas, Illinois, Indiana, Tennessee, Ohio, Maryland, Pennsylvania, Connecticut and Massachusetts come to mind.

As for Czar, Inc. I doubt they got much satisfaction out of their day at the Supreme Court. The Heaths won, of course. It was an expensive lesson for Czar, Inc. Legal fees on the way to the New Jersey Supreme Court can run many times the cost of kitchen cabinets. Which proves a point I've made more than once on these pages: When a job goes bad, you better have a good contract.

What to do? Easy. Construction Contract Writer drafts home improvement and repair contracts that comply precisely with New Jersey law. The trial version is free.