If issues arise, the best way to resolve them is usually through honest, logical and calm communication. Discuss the issue early, before it becomes something bigger and starts affecting the rest of the project. However, in some unfortunate cases where this doesn't resolve the issue, the homeowner may have to take the next step.

Legal

Note: I am not an attorney and nothing in this guide is meant to serve as legal advice. If you have questions, please contact legal counsel.

New home construction projects are big, complicated, and include a variety of players, from workers to neighbors and others. This means there is real potential for problems to arise that may lead to legal proceedings. This could include lawsuits and other remedies that resolve issues like:

• Failure to Pay
• Breach of Warranty
• Breach of Contract
• Fraud
• Negligence
• Building Defects
• Liability
• Permitting
• Zoning
• Property Usage

As a homeowner, these are expensive and time-consuming issues you do not want to address during the project. A helpful way to avoid them is to be aware of the contractual and legal relationships involved and to what degree they are designed to account for and address potential problems.

One of the most important documents in this process is the GC's contract with you.

GC Contract

Your GC is likely to provide a contract that creates a shared understanding of the project and provides specific information about responsibilities, costs, timelines, etc.

For example, a contract should state how and when the GC will bill for the work and at what rate. If the project has any unique elements, like alternative payment methods or shared responsibilities, these should be listed in the contract. 

View a sample contract from Upcounsel.com

It may be a good idea to have an attorney review the GC’s contract and provide any changes that help protect you. You may also consider drafting your own agreement. Unfortunately, building projects can occasionally become litigious and a strong contract can be your best defense in court. 

Homeowner Jake:

Alternative Dispute Resolution (ADR)

Be aware that there are methods for resolving conflicts that may be quick and affordable compared to court proceedings. These solutions involve a neutral third party who helps with resolution. In some cases, a court may order the parties to use ADR instead of the courts. Two options:

• Mediation - Mediation usually involves the parties and a mediator, who facilitates the agreement. In this case, the parties decide the outcome.
• Arbitration - Arbitration has the same goal, but the final decision is made by a neutral third party.

Subcontractors, Vendors, and Liens

In most cases, the GC has relationships with sub-contractors that govern the legal aspects of the work. This may or may not include a contract. It may be worth your time to ask the GC about their legal relationship with subcontractors.

The Risk: A Property Lien

Imagine a situation where a subcontractor completed bathroom tile, but was not paid by your GC. Or, a vendor delivered materials without payment. These professionals deserve to be compensated and their recourse can be putting a lien on your property.

A lien is a legal claim on assets (your property) that allows the lien holder (the unpaid pro) to take ownership of your property if the debts are not paid. Your property essentially becomes collateral in the dispute.

Needless to say, this is a serious situation that can arise when GCs don't manage money effectively, or homeowners are not able to keep up with the construction bills.

Types of Liens

Because you are the owner, you are likely to be notified of the lien. If a "Notice of Lien" arrives in the mail, this could be a serious issue - talk with the GC about it right away.

However, this is not the case with a "Preliminary Lien Notice", which is more common and less concerning. Here's the difference:

Preliminary Lien Notice vs. Notice of Lien

Preliminary Lien Notice: This informs the owner that work is being done on the property and if they are not paid, they have a legal right to place a mechanic's lien against the property. This is common practice and is not a sign of bad business practices. It's more of a CYA.

Notice of Lien is different and more serious. This is a notice that workers or vendors on the property were not paid, and a lien will be/is being filed against the property. A Notice of Lien can be a red flag and needs to be addressed with the GC promptly.

Insurance

Your project may be required to have a “builders risk” insurance policy. These policies insure against injuries, accidents, or property damage suffered on the job along with the potential for theft, property damage, etc. Your GC may have a policy in place. You can get a policy that covers the entire project and protects you until you move in. Be sure to discuss this with the GC and get the policy in place for the first day of construction. 

The need for insurance also applies to any subcontractors the GC brings onto the project. An injury involving the work of electricians, roofers, and plumbers, for example, can lead to liability. For this reason, it’s important to be sure that subcontractors are insured, whether it’s through the subcontractors, GC, or your own insurance policy. Ask about insurance before the work begins. 

State Licensing and Registration Resources

It's important to know that you are working with licensed professionals. If you have any doubts or concerns, you can usually look up a GC's current status using your state's website.

Most, if not all, US states have agencies that handle issues related to labor, industries, and related licensing and registrations. For example, these agencies provide resources that allow the public to look up a licensed contractor and verify that they meet the state's requirements in terms of licensing other factors like insurance and bonding.

A web search, like "Verify a Contractor in [State Name]" will likely lead you to the appropriate sites.

Vendor or Product Warranties

In reviewing building materials, you’ll see that manufacturers will warranty their products for a specific amount of time. This is meant to provide a sense of confidence that the material will last as long as you expect. 

An example might be a skylight that is warranted against leaks for five years or a water heater that is warranted for eight years. This warranty means that if the material or product fails, within specific parameters, the manufacturer will replace it at their cost. 

When reviewing materials and products, it is important to understand the warranties and their parameters so that you can use that information in your decision-making process. You may find that opting for a more affordable product comes with a less favorable warranty. 

Construction Bonds

A construction or “surety” bond serves as a kind of guarantee that the contractor's work will be accomplished as communicated in the contract. If it’s not, it provides the homeowner a way to seek a remedy. The bond involves three parties: homeowner, GC, and bond company or "surety".

It works like this:

When a GC doesn’t complete a project as outlined in the contract, the homeowner will need a way to finish the project. This could be due to illness, relationship problems, etc. When a surety company (usually an insurance company) is involved, they can work with the owner to finish the project. This could include funding a different contractor or providing funds to the owner to continue the work.

In a nutshell, a construction bond ensures that the project can be completed, even if the GC or subcontractor can't finish the work themselves.

Basically, a bonded contractor is one who has a system in place that does two things:

• Protects the contractor from expensive and unexpected costs, like going to court
• Provides clients with confidence that the work in the contract will be completed

Construction Warranties

As the homeowner, you want assurance that the home is built and performs as designed. If it doesn't, you need a way to work with the GC to make it right. This is the purpose of a construction warranty.

In your builder's contract, you may find language about how problems are to be resolved in the event that the home does not perform as designed after the project is complete. An example is a roof that leaks. Generally, GCs will stand by their work and correct any problems free of charge.

Warranties can be explicit, which means they are listed in the GC's contract, or implied, which means they are based on local statutes and apply to all construction projects. Many states require builders to warrant their work for a specific number of years.

Examples of warranty claims include:

• Material defects
• Labor defects (incorrect building practices)
• Breach of building codes
• Health and safety risks
• Habitability

It's a good idea to ask about the builder's warranty policy and if it is not stated in the contract. According to the US Federal Trade Commission:

Deed and Title

If you are purchasing property for your home, the transaction will include two related concepts: deed and title. Let's define them:

• Deed - A deed is a legal document that transfers ownership from the seller to the buyer. It describes the property and has signatures from both parties. A deed is a physical object that indicates ownership and is often required to be recorded in the local courthouse or assessor's office.
• Title - The title is more conceptual and describes the legal right to ownership. For example, with a deed in place, the owner has the legal right, as the holder of the title, to use it as they wish.

Title Search

When purchasing a property, it's very important to know that the seller has the legal right to sell the property and be aware of any existing issues. This is accomplished with a title search, which is a search of public records that documents the ownership rights to the property and any debts, liens, wills, divorce settlements, etc.

If issues are discovered, they will need to be resolved before the transaction can be completed. If the search is completed without problems, the results of the title search are documented and shared with all parties and the transaction can proceed.

Title Insurance

Title insurance is often required if you are borrowing money for the purchase of property. It is important because it protects the buyer in the case of disputes that arise regarding ownership. For example, imagine buying property and feeling confident that everything is in order. Then, you get a message from an attorney that says their client is the actual owner, as stated in a will. This sets up an expensive legal battle. Title insurance is what protects the buyer in this situation.

Summary

In the heat of the moment, the legalities may seem like a distraction, but it's important to treat them with care. You are undertaking one of the most expensive projects of your life and having your legal ducks in a row can help ensure it goes smoothly and efficiently.