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Contractor For New Construction Pulls Out Of Area

Ask the Real Estate Lawyer: Real Estate Law Q&A

REM #LAW 649

By Ilyce R. Glink and Samuel J. Tamkin

Summary: A reader has been working with a contractor to build a new home. After the plans are set, the contractor decides to pull out of the area. The reader is stuck finding a new contractor at considerable cost. Sam and Ilyce explain their legal recourse and what would be the best strategy to get their house built.

Q: We signed a contract and placed deposit with a contractor in our area. The contractor hired a surveyor, and then met with us to choose colors and the placement of the home on the lot.
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We were under the impression they were also in the process of obtaining a building permit for the home.

A couple of days ago the contractor called and said they decided not to build our house. They’re pulling out of the area, except for specific lots they own in certain communities.

Since signing the contract, the cost of building homes in our area has shot through the roof. The same house now would cost us about $60,000 more to build it. The builder just wants to give us our deposit back, and give us the plans to build with someone else.

This seems unfair. Do we have any legal rights protecting us? The contract says if we break the contract they can collect damages, but if they break the contract they give us $1,000.

Can we recover from them the difference between what it is now going to cost us to build a house and the price they promised us?

A.: You’re right: It doesn’t seem fair. The builder should honor its obligations under the contract. You can try to plead your case with them that you have relied on their expertise and that they, as reputable builders, should honor the agreement. Your plea would be made to their sense of honor, however, rather than from the legal perspective.

If your request to have them honor the agreement doesn’t work, you’ll need to seek legal help. Some states have consumer protection laws that may help. For example, if the builder entered into the contract knowing that there was a likelihood that they would be closing down in your area, you may be able to pursue an action against them for consumer fraud. There may be other statutes in you state that can help you as well.

Your contract sounds as though it is written to be quite biased against the consumer. Many contracts written by developers are like this. In effect, you’re left at the mercy of the builder in case the company defaults.

If your case had to be litigated, your only chance to prevail under the contract is to have a judge declare the provision of the contract that limits your remedies void. That provision would be void either because it is unconscionable, or the relative bargaining power between the parties was unreasonable, or enforcing that provision would be contrary to the public’s best interests.

To achieve any of these results you’d have to spend thousands of dollars – perhaps more than it would cost to simply build the house today. You’d need a litigator who specializes in commercial litigation to pursue your claim.

Here’s one suggestion: if the plans are done and other work has been completed to get the job started, such as getting permits, there is value in all of that. It may be worthwhile to interview other builders in the area to see what it would cost to complete your project with what you have left to do.

Although the entire construction part of the process is left, you have made some progress, in that you have a plan you like, and have made other design decisions. You’ll have to balance the benefits of receiving the work that has been done and not having to pay for that with the increased cost of hiring a new builder.

If you can get someone to build your house within your budget, even if it’s a tad higher than what you were planning to spend, you’re probably better off with a builder that has his heart and mind set on helping you rather than one that just wants out. It’s also possible that the builder realized that he underbid your job and it might have wound up costing you the additional $60,000 – without being able to properly plan for the expense.

Finally, if you are able to prevail in a lawsuit against the builder under the contract and you’re able to get more than the $1,000, you should be able to get the difference between what you would have paid to get your home built by the first builder and what it actually cost you to build that same home.

Good luck and make sure that you get references from the new builder -- and then call them! Next, contact your local building department to make sure they have worked well with that builder in the past. You should also check out the licensing requirements for builders and contractors in your state, then make sure your builder and contractor have done everything they need to do to be legal. Make sure they carry enough insurance (you should call the insurance company to check out their policy) and be sure to visit at least one or two projects that the builder has under construction.

Finally, go to the Better Business Bureau (bbbonline.org) and your state’s Attorney General’s office, to check if any complaints have been filed against this builder.

Samuel J. Tamkin is a Chicago-based real estate attorney. Ilyce R. Glink’s latest book is 50 Simple Steps You Can Take To Sell Your Home Faster and For More Money In Any Market. If you have questions for them, write: Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact them through Ilyce’s website www.thinkglink.com