Skip to main content

Caution to Homebuyers! Don’t just accept the builder’s proposed contract or “warranty”

New Homebuyer House

If you’ve explored buying a new home recently, you are undoubtedly familiar with the many articles and press accounts that have appeared over the past few years regarding the battered state of the residential real estate market.  There is a glut of inventory of new homes that stretches across the country, and Washington is no exception.  New home builders are being pushed by lenders to sell this inventory as quickly as possible, and the results have been a virtually unprecedented buyer’s market and plunging home prices. Despite these very favorable market conditions, many buyers are continuing to purchase homes from builders without much thought other than price,and they often end up signing purchase contracts hand-picked by builders.  These purchase and sale agreements very frequently contain terms favorable to the seller and potentially disastrous to buyers.

One such unfavorable termcommonly ignored by buyers is illustrated by a recent case decided by the Washington State Supreme Court, Donia Townsend and Bob Perez, et al. v. the Quadrant Corporation, et al.. In Townsend, the Court examined a series of residential purchase and sale contracts between buyers and residential home builder Quadrant Corporation, a subsidiary of the Weyerhaeuser Corporation.  The buyers each alleged claims against Quadrant, including claims for shoddy workmanship, breaches of Washington’s Consumer Protection Act, and also for damages due to adverse health effects caused by water intrusion and mold that resulted from the shoddy workmanship.  Two of the plaintiffs filed personal injury claims on behalf of themselves and also their minor children, who were also alleged to have suffered health effects due to the water intrusion and mold.

In response to the lawsuits, the cases were consolidated and Quadrant filed a motion to have all of the plaintiffs’ claims summarily dismissed by the court and removed to private, binding arbitration.  Quadrant based its motion on a clause in its purchase and sale contract stating that any claims arising out of or related to the home purchase is subject to private arbitration only.  While the trial court agreed to hear the case pending a decision on whether the purchase and sale contract terms were impermissibly unfair to the consumer-buyers, the appeals court and ultimately the state Supreme Court reversed.  The Supreme Court found that the plaintiff-buyers had no right to their day in court because the arbitration clause in the contract meant they had signed away their right to bring claims in the public court system, even the personal injury claims that did not relate specifically to the purchase and sale contract.  The Townsend Court did allow the personal injury claims brought on behalf of the minor children to proceed in court, however all other claims were removed to separate, private arbitration matters.

So what’s wrong with arbitration, you might ask?  For starters, private arbitration is typically more costlythan taking a case to court. First there’s the filing fee, which for a typical homebuyer’s claim of $75,000 to $150,000 can be $2,600, if administered through the American Arbitration Association.  Most of this cost must be paid by the plaintiff, up front at the time of filing.  In addition, there’s a hearing fee of $150 per day; and an arbitrator fee, which usually runs $750 to $2,000 per day (usually split between the parties).  The costs go up from there if the requested damages are higher, with cases worth a $500,000 or more costing a minimum of $6,100.00, plus hearing fees and arbitrator costs.  At a time where average home prices are nearly $400,000 in King County and are approximately $250,000 state wide, it doesn’t take much imagination to realize how expensive private arbitration could be for a dispute where damages roughly equivalent to the value of the home is at issue.

To make matters worse, private arbitration presents other problems for would-be claimants.  For example:

  •  Businesses like home builders often enjoy an inherent advantage in private arbitration because they so routinely participate in the process and are much more familiar with the rules and various arbitrators in a particular area.  Businesses use arbitration over and over again, and in such a situation any arbitration service provider begins to gear their services to the people who use it the most.  This provides advantages to the builders, who are typically the defendants in arbitrations involving shoddy workmanship and related issues.
  •  These advantages includethe hesitation by some arbitrators to award certain categories of damages which are viewed as “unfriendly” to businesses, such as “treble damages” for breaches of the Consumer Protection Act.  As a result, in private arbitration you typically have to pay a lawyer by the hour because smaller awards mean that it’s harder to find attorneys who will work on a contingency basis.
  •  Unlike the courts, an arbitrator’s decision – known as an “award”–is often final with no right to appeal. In some cases, arbitration clauses contain a limited right to appeal “questions of law,” but more often than not, an arbitrator’s decision is final and binding.
  •  Any discovery allowed is either solely at the discretion of the arbitrator, or otherwise allowed under the rules of the arbitration service at issue, which are typically much more limited than the discovery allowed in court.  Discovery is the process whereby information and documents are obtained from the defendant company.  Discovery often makes or breaks a plaintiff’s case, and is critically important in cases involving fraud or dishonest business practices because much of the evidence in such cases is circumstantial.
  •  Arbitration is also preferable to companies because both the information uncovered during the course of the proceeding, and the basis for the ultimate award itself, are sealed and unavailable to the public.  This is a huge advantage to companies that would otherwise suffer hits to their reputation from lawsuits involving the quality of their products.  This in turn often emboldens and enables defendant companies to “bleed”the often cash-strapped homebuyer plaintiffs by making the whole process as expensive as possible, with little or no risk that the problems with the builder’s homes and business practices ever become public.

In addition to private arbitration clauses, there are other additional potentially unfavorable terms commonly included in the purchase and sale agreements favored by builders- venue provisions outside of Washington for out of state builder-sellers, nonrefundable deposits on buyer selected “builder upgrades,” disclaimers about the quality of the workmanship, and accelerated inspection and financing contingency deadlines, just to name a few.  Despite the fact these potential traps remain buried in the fine print of builder-selected purchase and sale

agreements, would-be buyers often miss or otherwise fail to fully considerthese provisions during the excitement of purchasing a new home.  Other buyers believe that real estate agents will look out for these potential pitfalls during the purchase process, however many buyers complete purchases with only the “assistance” of a seller’s broker only.  By definition, seller’s brokers are hired by and work solely for the interests of the seller only.

In this current economic climate, where most builder-sellers are motivated if not desperate to sell properties, well-qualified buyers have unprecedented power to negotiate favorable purchase terms.  If you’re in the market for a new home, don’t accept the purchase and sale agreement tendered by the builder simply because you agree on the price.  The same goes for so-called “warranties,” which often take away more remedies than they provide.  Consider having your purchase contractand all related documents reviewed by a qualified attorney.  Any builder with a quality product to sell should be more than willing to negotiate in good faith, and if you fail to ask for better terms while you have the negotiating power to do so, you may have more to lose than you think.