by Benny L. Kass

Question: We signed an agreement with a builder in May of 2003 to purchase a single-family house. The contract stated that the house would be delivered in October, but certainly no later than December. Needless to say, December came and went. Now, we have just received a letter from the developer's President stating that they will not be able to deliver the house by May of 2004, and by contract they can nullify the contract. Their excuse for the delay is "market conditions, price increases in construction and permit fees."

We can, however, purchase the house if we increase the price by $70,000. We have been given 10 days to respond or they will nullify the agreement and return our deposit, with interest.

This is devastating to us. What should we do?

Answer: This is one of the many reasons why I do not like consumers to purchase houses which have not yet been constructed.

I suspect -- but obviously cannot state for a fact -- that the builder is looking at the current market and realizes that he can get a lot more money for your house now. I can assure you, however, that if sales were slow, and prices were declining, you would still be able to buy the house at its contract price.

The first thing you should do is carefully read your sales contract. In fact, this is something you should have done before it was signed. Unfortunately, it is my experience that too many consumers fall in love with the new house and just do not take the time to read the sales contract.

New construction sales contracts are traditionally one-sided. I have often joked that if there is anything in those contracts which protects the consumer, it is because the builder's attorney forgot to take it out of the contract.

Most of these new construction contracts contain language which may allow the developer the right to cancel the contract if the house is not constructed within a certain period of time. Here is language from one contract which I recently reviewed:

Force Majeure: If Seller is delayed in completing and settling on the property for reasons beyond the control of Seller, then the time for completion shall be extended for the period of such delay. Reasons beyond the control of Seller shall include, without limitation, impossibility of performance, acts of God, fire, war, terrorism, earthquake, flood, explosion, condemnation or acts of Governmental agencies asserting jurisdiction over the property, and any other legally supportable justification under the laws of the State which would excuse Seller from completion and settling on the property within the time periods set forth above. If Seller is unable to complete settlement within 24 months from the date this contract is ratified because of force majeure, the Seller shall have the right to terminate the contract and return the deposit, with interest, to the Purchaser.
Force Majeure? That's a French word for "superior or irresistible" force -- something which is outside the control of the builder.

Your builder has referred to a particular section in your sales contract which, he claims, gives him the right to terminate your contract. Read that clause carefully. Do the conditions which the builder has given you as justification that the house cannot be completed really fall within the language of your contract?

What does he mean by "market conditions?" Clearly, the market for new-home sales has been booming in the past couple of years, but that's not an excuse for terminating your contract.

And the fact that construction costs or fees for permits have increased is also, in my opinion, not an element of force majeure. The fact that the builder will have to pay more money to construct your house is not -- and should not -- be a reason to cancel your contract, or to ask you to pay a lot more money. Construction costs should have been anticipated by the builder when he set the contract price. It is not "outside the builder's control," since he should be able to absorb the additional costs, even if he loses money on the job.

I recommend that you take the following steps:

First, send a strong letter to the builder, advising him that you intend to hold him to the contract price, and will take all appropriate legal action if that is not possible. You should demand to have a face-to-face meeting with the builder; no lawyers should be present. Perhaps there is some ground for compromise, whereby he would add something extra to your house and in return you would pay a little more money (but clearly not $70,000 more).

Second, if this does not succeed, you should file an immediate complaint with the appropriate Consumer Affairs Office in your state or county. Some jurisdictions have specific Offices of Consumer Affairs; in other jurisdictions it will be the Attorney General's office.

Third, you should consult with your mortgage lender to determine if you will be able to borrow a little more money should you be able to reach a compromise with the builder.

And finally, you should retain a local attorney who can try to assist you.

As indicated earlier in this column, there are many things that I do not like about purchasing a house which has not yet been built. Here are two other issues:

Contingency on financing: Most contracts contain a provision that you can terminate the contract and get a refund of your earnest money deposit if you are unable to obtain appropriate mortgage financing. However, in many new-construction sales contracts, you must apply for financing immediately, and let the builder know if you have a loan commitment within a short period of time after the contract has been signed -- often 30 days. But if your house will not be ready for nine months or more, what happens if mortgage interest rates spike, which may very well happen right after this year's Presidential election? If the rate available to you when you are supposed to go to settlement is beyond your financial capability and the lender rejects you at that later date, will you still be able to cancel the contract and get your deposit returned? Under most new-construction contracts, the answer is probably no.

What will the house look like? Every new-construction contract I have reviewed will contain a clause to the effect that the builder reserves the right to make changes to the design of the house, and also reserves the right to substitute equipment, such as refrigerators, washer/driers, and the like. I was involved in a case where the builder installed the cheapest dishwasher instead of the high quality one which was in the model home. And, in recent years, I have even heard that some builders do not even have model homes to assist consumers.

Perhaps the main reason I do not encourage consumers to buy unbuilt houses is that you cannot see or feel the property on which you are signing a large sales contract. If the finished product is not to your satisfaction, you really have little or no recourse.

I recognize that many consumers do, in fact, sign contracts for houses which have not yet been built. If that's what you want to do, my advice is: check out the builder's reputation, inspect other projects developed by that builder, and read your sales contract very, very carefully.

Published: April 19, 2004








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Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.
Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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