Home Improvement Surprises in Maryland

Eugene Uzoukwu owned an older home in Baltimore City, Maryland and needed some work done -- a “total renovation”, in Eugene’s words. Kevin Servance agreed to start the job. Kevin wrote up the contract. He would furnish all materials, labor, and permits necessary for a new rubber roof and also remove an existing fire escape. The contract price was $14,000. At the top of the contract, Kevin listed a Maryland Home Improvement Commission license number.

That was a good start. Maryland contractors have to toe the line when writing home improvement contracts. Maryland's Business Regulation Code sets a high bar:

• Section 8-501 lists several pages of notices and disclosures that have to be in home improvement contracts.
• Section 8-617 limits advance payments to one-third of the home improvement contract price.
• Section 8-605 prohibits deviation from the terms of a home improvement contract.
• Sections 8-607 and 8-608 prohibit false promises, misrepresentations and fraud.
• Section 8-620 authorizes the Maryland Home Improvement Commission to collect a civil penalty of $5,000 for violation of Maryland Home Improvement Law.
• Section 8-623 makes violation a misdemeanor punishable by a fine of $1,000 and 6 months in jail.
• Code of Maryland Regulations section 09.08.01.26 requires three more disclosures in home improvement contracts.

Next Came the Surprises

Work proceeded normally until it came time to remove a fire escape from the rear wall of the building. Kevin or his crew tied a line between the fire escape and his truck – without bothering to detach the fire escape from the rear wall. When the truck pulled away, part of the rear wall came down with the fire escape. That was Surprise One.

Eugene estimated the damage to the rear wall at $17,051.61 and filed a complaint against Kevin with the Maryland Home Improvement Commission. Then came Surprise Two. Kevin didn’t have a Maryland contractor’s license. He had listed someone else's license number on the contract.

Kevin pleaded guilty in Baltimore City Circuit Court to acting as a home improvement contractor without a license and got a 6-month sentence. But the circuit court denied Eugene’s claim for restitution on the ground that removing the fire escape was demolition, not home improvement. Eugene appealed. The appellate court had to interpret Maryland’s Business Regulation Code Section 8-601 which defines home improvement.

No Surprise Here

Nearly all states set standards for residential construction contracts. Many states, including Maryland, set higher standards for home improvement contracts. In most states, the definition of home improvement is broad enough to include nearly any type of construction. Only routine maintenance, warranty repairs and new home building are excluded.

In the case of Uzoukwu v. State of Maryland (decided 9/2/2021), the appellate court gave Eugene a second chance to prove his claim. Reversing the circuit court decision, Judge Nazarian suggested the term home improvement “covers all alterations to a home undergoing renovation, including removing unsightly or dangerous parts of a residence”.

If you’re a construction contractor working on an existing residence with four units or less, avoid surprises. You need a contract that meets state standards for home improvement work. Drafting a perfectly valid, fully enforceable contract is easy. Get Construction Contract Writer. The trial version is free.

 

Selecting A Pig in a Poke

Pandemic times have created a new problem for many contractors. The subs they know and trust aren’t taking on more work. That can be both bad and good. I’ll explain.

Many residential contractors negotiate their sub-trade work. They do just fine using the same subs on job after job -- seldom putting work out to bid and usually starting without a formal contract. They’re comfortable using a small number of specialists, trust them to do nothing but first-class work and are perfectly content with the prices they charge. This is construction contracting based on trust and mutual respect – as it should be. Unfortunately, COVID-19 has trashed many of these close relationships.

When your favorite subs won’t bid, the only option is to expand the pool of prospects. The down-side is that trying a new sub is like selecting a pig in a poke. So many questions:

• Can they do the work?
• Are their prices fair?
• Will they work well with our other tradesmen?
• Will their schedule fit my schedule?
• Are they good at call-backs?

Almost essential when trying any new sub: A written contract. More on that later.

Now the up-side

Open bidding nearly always attracts more prospects. The more bidders, the lower the contract price. The lower the contract price, the greater the risk of sub-standard results. Your task is finding the best balance between cost and risk.

On public works projects, state and federal law usually require that bid competitions be open to everyone qualified. There’s no such requirement on private jobs. You can award the job on any grounds you select. There’s a spectrum of choices:

• Negotiate with a single sub at your “usual” price.
• Ask for bids from a selected list of subs.
• Open bidding to any sub qualified to do the work.

If you decide to open competitive bidding, it’s good practice to screen prospects early in the process. Don’t solicit a bid from a sub obviously unqualified to take on the work – regardless of the price. Select subs the same way you select any professional –- by reputation and recommendations from satisfied clients.

The fact that you’re asking for bids on a project doesn’t necessarily mean you’ve ruled out awarding the contract on a time and materials (cost plus) basis. Even T&M contracts can be awarded to the lowest responsible bidder. If your choice is T&M, ask for bids based on the sub’s hourly labor rates, markup and, perhaps, a guaranteed maximum price.

Any time you’re dealing with new subs, get a written agreement. Nothing heads off misunderstandings better than a good subcontract -- especially important in new business relationships. Every sub has a unique set of norms and expectations. Be sure that what the new sub expects is aligned with your way of doing business. The best source I know for subcontracts is Construction Contract Writer. The trial version is free.

No matter how you select a subcontractor, there’s an easy way to check the new sub’s charges. National Estimator Cloud has thousands of labor and material cost estimates for nearly all construction trades – well-organized, well-indexed, up to date and available on the Cloud anywhere you need a price. The cost is only a few dollars a month and you can quit at any time.

Collecting Final Payment

Every construction project ends with a walk-through – at least it should. Too often, final inspection is the start of something else, such as a legal battle. The owner isn’t going to let the contractor skip out with work yet to finish. The contractor wants payment for work completed.

Here are a few good ways to get past confrontation when the job is nearly done.

Courts recognize an obligation to pay when any construction project is substantially complete. Even if a few items aren’t finished, the owner should pay what’s due less the cost of wrapping up defects. So, when is a job substantially complete?

Occupancy is the best evidence of substantial completion. If the job has passed final code inspection and the owner is moving in, the job is substantially complete. That’s the easy case. Some cases aren’t so clear cut.

Substantial completion doesn’t have to be an all or nothing affair. If the job includes distinct parts, one part could be substantially complete while the other isn’t. In exchange for payment, offer to note what’s accepted and what’s rejected. For example, suggest that the owner exclude some portion of the job (such as appliances or fixtures) from acknowledgement of completion.

Partial completion can be a problem when some equipment serves several parts of the project – some complete and some incomplete. HVAC and electrical systems are obvious examples. By convention, payment is due on any equipment that serves a part of the project that’s complete even if that equipment also serves an incomplete part of the job.

If the owner is eager to take up occupancy, offer to have incomplete work handled as warranty repair to be done later. That’s clearly the best choice when defective equipment is covered by a manufacturer’s warranty.

Your Punch List

Before starting the walk-through, hand the owner a punch list of known issues. By implication, the job will be substantially complete when an owner approves your list. Your punch list should show:

• Each defect. To make corrections easy to find, walk the project with a roll of blue painter’s tape. Stick a short piece of tape on each defect. Write a pencil number on the tape, the same defect number as on your punch list.
• What’s needed to complete the work.
• The subcontractor or trade responsible.
• Your estimate of when work will be finished for each item.
• The estimated cost to complete or correct each defect. Use these estimates to figure how much of the final payment can be withheld, usually 125% of your estimated cost.

If the owner approves your punch list, the next steps are easy.

• Final payment is due, less the estimates on your punch list.
• Later inspections will be limited to items on your list. Everything else is accepted.
• Roles change. The owner can enter and use the site at any time. The contractor loses the right to enter the property at will.
• Get punch list items worked off in a week or two. The longer work drags on, the more time an owner has to accumulate grievances.

A good contract can make project close-out almost automatic. Have a look at Construction Contract Writer. The trial version is free.

Home Improvement California Style

Anna-Becky Redlich needed some work done on the bedroom, sitting room, closet and bathroom of her Hillsborough, California home. Nothing structural. The only changes would be cosmetic. Reliance Management Group offered to do the work on a cost-plus basis. The estimated initial contract price was $250,000. The down payment would be $1,000 plus a "retainer" of 10%.

If you’ve done any home improvement work in California, you probably see a problem already. California home improvement contracts have to show the cost of work in dollars and cents. Cost-plus-fee (time and material) contracts for home improvement work are legal only if there’s a guaranteed maximum price (GMP). OK. Reliance had that covered. As recited in the contract, the GMP was $5 million.

Second problem: The 10% “retainer” came to $25,000. California limits initial payments to $1,000.

These issues aside, Anna-Becky signed the contract. During construction, six written change orders added $160,000 to the job. Eventually, work was completed to Anna-Becky’s satisfaction -- at a total cost of $459,000. If that seems a little high for a bathroom remodel, there’s something else to understand about this job.

Reliance’s manager on the Redlich job was Paul Burton. According to Judge Banke, Burton and Anna-Becky “became personally and romantically involved”. Another issue: According to Judge Banke, Burton was taking large cash kickbacks from subs, rigging the bidding process to favor specific contractors.

In the end, Anna-Becky wasn’t happy. She wanted her money back, $459,000 to be exact. To drive the point home, Anna-Becky’s legal counsel pulled out all the stops.

1. The contract was void.
2. Reliance didn’t have worker's compensation coverage.
3. Reliance didn’t have a "responsible managing employee or officer" on the job.

In short, Anna-Becky was entitled to a refund.

At Trial

The court disposed of the second and third points with little effort. Facts simply didn’t support either claim. The first point presented a more difficult issue for the court. True, Anna-Becky’s contract was "void, and unenforceable." Did that entitle her to recover the full amount paid without any offset for the value of work done?

In the court’s words, “the public importance of discouraging prohibited transactions outweighs equitable considerations of possible injustice between the parties”. In other words, contractors who draft bad agreements are on their own. But the court refused to order a full refund, awarding Anna-Becky only $40,689.68, including $25,000 for the overcharge on initial payment. Redlich v. Reliance Mgmt. Grp. (June 9, 2021).

Take-away from this case: Write a bad contract and you’re on your own. Don’t expect any help enforcing a bum contract if the job turns bad. Apparently, Reliance learned their lesson. Counsel for Reliance stipulated their client would never again use the Redlich contract form.

Word to the Wise

All residential contracts have to meet standards set by state and federal law. It’s easy to draft a perfectly legal construction contract in any state and for nearly any job. Get Construction Contract Writer. The trial version is free.

 

Breach of Contract in Pennsylvania

Neal Navitsky bought a lot on Plum Run Road in New Oxford, PA, and started planning his new home. William A. Mcintyre & Sons, LLC, agreed to build a 4-bedroom, 2.5 bath, 2,843 SF home on the site for $290,521. Under the contract, signed change orders were required for any work not in the agreement. Navitsky and his bank set up a draw schedule for the job and work started.

During construction, Navitsky asked for three changes. Mcintyre quoted a price of $9,375 for the changes, wrote up change order forms and did the extra work. Navitsky accepted the written change orders but didn’t sign or return any of the forms. Why not? Because Navitsky had a complaint. He figured work done on the house so far was worth far less than the $159,786 McIntyre had already been paid. Navitsky wanted to negotiate change orders when the home was complete

To keep the project moving, Mcintyre did the extra work even before change orders were signed. Mcintyre figured getting signed change orders from Navitsky was only a formality. But when reminded about the un-signed orders, Navitsky refused to sign or pay for the extra work. Mcintyre demanded payment.

Navitsky knew how to handle that. He directed his lender to pay the $41,318 fourth draw to himself, Navitsky, rather than his contractor.

Owed over $50,000, with no prospect of getting paid, Mcintyre pulled off the job and filed suit.

Now What?

Any time a construction project runs off the rails, the contract comes front and center.

• Is the contract legal in every respect?
• If so, what does the contract require?
• Was there a material breach of contract?
• If so, who was the first to commit that breach?

The court had no trouble finding a valid contract. But did the contract require that Navitsky sign change orders and pay when each change was complete? The court didn’t find anything in the contract on that. But every contract requires good faith and fair dealing. In the court’s opinion, “Navitsky’s conduct did not comport with this obligation.” Navitsky should have signed the change orders and paid for changes when done. But was that failure by itself a material breach of contract?

A material breach by one party to a contract entitles the non-breaching party to suspend performance. Who breached first is important. Breach by Mcintyre would void the agreement, leaving the contractor with no profit on the job.

Was failure to sign change orders a material breach of contract that gave Mcintyre a right to stop work? Or did McIntyre breach the contract by demanding payment for changes before doing more work?

In the court’s opinion, Mcintyre’s demand for payment on changes was not material breach of contract. Navitsky was told that work would resume when Mcintyre received payment for the changes. I agree with the court. Any contractor can delay work when payments are late.

But refusing to pay for changes and diverting the fourth draw to himself were material breach by Navitsky. The court awarded Mcintyre $50,693, a judgment affirmed last week by the Superior Court of Pennsylvania.

A Final Point

With the right contract, Mcintyre would have saved two years of litigation. Good construction contracts require payment for changes when each change is complete. It’s easy to draft nothing but good construction contracts. Get Construction Contract Writer. The trial version is free.

 

Three-day Notice in Virginia

The HVAC system in Elise Theyer’s historic Norfolk, Virginia home needed an update. Elise saw an ad for ductless mini split systems and called Norfolk Air Heating and Cooling to get a bid. Norfolk Air made a sales call. They quoted a ducted system on the first floor and six mini-splits on the second floor. Elise signed their agreement on November 21, 2017.

So far, so good. But as I’ve said many times: “When the job goes bad, you better have a good contract.” In Elise’s case, Norfolk Air didn’t. Their quote omitted the notice of a buyer’s right to cancel, as required by Virginia’s Home Solicitation Sales Act (HSSA).

Problems started when Elise wasn’t satisfied with her new HVAC system. Norfolk Air did what they could to make repairs. After several attempts, Elise gave up, called another contractor and filed suit against Norfolk Air.

The question for the court: Was Norfolk Air’s sales call on Elise a “home solicitation sale” as defined by Virginia law? If it was, omitting the cancellation notice gave Elise the right to collect damages and attorney fees from Norfolk Air.

A little history: Starting in the 1950s, most states adopted home solicitation sales acts. The intent was to curb abuses common in door-to-door sales. Contracts had to include a notice of the owner’s 3-day right to cancel. Any home solicitation contract that omitted the 3-day notice could not be enforced in court. Worse, consumer protection laws labeled violating the HSSA “consumer fraud” and imposed appropriate penalties.

If you’ve worked in home improvement contracting for a while, you’re sure to see a problem here. Every home repair or improvement job requires a visit to the site. Is every one of those a “home solicitation” sale?

You Decide

Did omitting the 3-day notice give Elise the right to collect damages and attorney fees?

Many states exempt specific transactions from their home solicitation sales acts. For example, several states have what I call the “big box” exception: If the contract is signed at the place of business of the vendor, even if after an on-site visit, then it isn’t a home solicitation sale.

Virginia’s HSSA exempts sales made at the buyer's residence after "prior negotiations" elsewhere, such as at a trade show or at the vendor’s store. But there weren’t any prior negotiations in this case. Elise simply called Norfolk Air and asked for a quote.

Other states exempt from their HSSA any sales calls made after an invitation from the owner. For example, Mississippi’s HSSA excludes sales made at the owner’s home if the vendor was invited on site. By court decision, Michigan has adopted a similar exception to their HSSA.

Virginia law has no such exception. Every sales call at a residence that results in a sale must include an express notice of the buyer's right to cancel. Va. Code § 59.1-21.3(1).

What the Virginia Court Decided

Fortunately for Norfolk Air, Virginia’s Attorney General has a written opinion on point. According to the AG, it’s not a home solicitation sale if, for example, an owner calls a plumber, gets a quote on the spot and has the plumber do the work. Virginia’s HSSA is not "intended to apply to sales that are initiated by the buyer and that are conducted in the home . . .” In the case of Theuer v. Norfolk Air Heating & Cooling, Inc., the court adopted the AG's logic. 

Would the same rule apply if the work were installing a new roof or remodeling a bathroom? In my opinion, that would be a stretch. Black letter law: There’s risk in omitting any contract notice required by law in your state.

So what’s a contractor to do? My answer is simple. Write bullet-proof contracts. That’s easy with Construction Contract Writer, no matter the site, no matter the type of work. The trial version is free.

Indiana Insurance Contract

A severe spring storm damaged the home of Jason Jenkins in Boone County, Indiana. On June 11, 2017, Jenkins agreed to have Mcgraw Property Solutions make repairs. Mcgraw promised to complete all storm remediation work for the price approved by Jenkins' insurer. The contract provided that "[i]f the insurance company does not approve your claim, this agreement automatically terminates." The contract also required Jenkins to pay Mcgraw 20% of the replacement cost as liquidated damages if Jenkins refused to allow Mcgraw to finish the work.

After the contract was signed, Mcgraw did a nine-page scope of loss estimate, setting the repair cost at $170,559.63. A month later, Jenkins' insurer approved the claim, but only for $109,371.97. Jenkins got a check for $64,597.37. Obviously, this wasn’t working the way Jenkins had hoped. 

Before work started, Jenkins decided to sell out, take the insurance money and move to Florida. That left Mcgraw out in the cold. Mcgraw wanted to either do the work at the agreed price or collect from Jenkins for breach of contract

Jenkins checked over the June 11 contract and found some problems. It didn’t comply with Indiana’s Home Improvement Contracts Act (HICA):

• The starting and completion dates were listed as “TBD”.
• There was no notice of the 3-day right to cancel on insurance jobs.
• There was no written signature by Mcgraw.
• The signature date was missing.

The Replacement Cure Contract

Jenkins wanted out of the deal with Mcgraw. But the 3-day right to cancel had expired long ago. So Jenkins demanded that Mcgraw submit a corrected contract. On August 24, Mcgraw wrote up a new agreement – but relating back to the June 11, 2017 agreement. This new contract included the Indiana cancellation notice that should have been in the original agreement:

You may cancel this contract at any time before midnight on the third business day after:

• (A) The date of this Agreement.
• (B) You have received written notification from your insurance company that all or any part of the claim or contract is not a covered loss under the insurance policy.

Jenkins accepted the replacement cure contract on August 27, 2017 – and on the same day sent Mcgraw a notice of cancellation. That didn’t end it. Mcgraw filed suit for breach of contract.

You Decide

The original June 11 contract was defective. Everyone agreed on that. And no one disputed that the August 24 agreement was valid as an entirely new agreement. The question for the court: Did Jenkins still have the right to cancel two months after the original contract was signed? 

Boone County Superior Court Judge Petit heard the case, ruling in favor of Jenkins:

The original contract entered into between the parties improperly and in violation of statute omitted the right to cancel within three (3) days of receiving notice of insurance denial. That right was contained within the 'cure contract' and [Jenkins] exercised that right. The [c]ontract was not voided, it was cancelled pursuant to its terms.

The appellate court agreed: Mcgraw Prop. Sols. v. Jenkins, Nov. 18, 2020. Mcgraw lost out. 

But there’s another point here. What if the original June 11 contract had been letter-perfect – including the 3-day right to cancel? Would Mcgraw have had a case for breach of contract? I believe Mcgraw would have won that case. Mcgraw agreed to do the work for the price approved by Jenkins' insurer. The insurance carrier approved the claim and paid Jenkins $64,597.37. Failure to have Mcgraw proceed with the work would probably have been breach of contract. Mcgraw could have collected damages.

I’ve said more than once in this space: When a job goes bad, you better have a good contract. Mcgraw didn’t. That was an expensive mistake. If you need letter-perfect contracts the first time, no matter where you work, have a look at Construction Contract Writer. The trial version is free.