Real Estate & Construction Attorney
ARIZONA HOME CONSTRUCTION LAW UPDATE : IT'S ALL ABOUT JUSTICE FOR BUILDERS... SPELLED "JUST-US"
BOOMING IN-MIGRATION AND SALES OF QUALITY HOMES MADE ARIZONA
The proverbial "ARIZONA SUCCESS STORY" was for many years a narrative of seemingly endless in-migration and resultant expansions of housing and support services. The influx was fed for the most part by the state being one of those "Sun States" to which tides of Rust Belt retirees were not only attracted by the weather and cheaper prices, but also one where such in-migration made it job-rich for the working class. Moreover, most of the Retirees did not seek employment to take money from the economy, but instead brought new cash with them and put it into the economy that was fortuitous as otherwise Arizona had no major economic engines of its own (and still does not). As were built virtually miles of subdivisions in this explosive expansion, the rush to build also ended up with construction corners being inevitably cut. Builder warranty and malpractice claims soared until Arizona became the national poster boy for poor construction and the courts being clogged with consumer claims. First, the builder community tried to defend the claims on their merits, but juries routinely returned high verdicts. Second, when they could not win in the courts, the builders progressively turned to the legislature with new laws to "dumb down" their exposures with industry-protective anti-consumer legislation. Legislators eager to court favor with the major political contributors to them the builders lobby represented, passed law and law cutting radically back on what consumers got for their money and making the legal hurdles consumer's faced to enforce their claims against shoddy construction ever higher, ever more expensive to press and ever more inadequate for the damage caused.
THE NEW HOME WARRANTIES AND RIGHTS - WHY FIX IT WHEN IT WAS NOT BROKEN?
Consistent in this course of dilution, on March 23, 2015, Arizona Governor, Doug Ducey, signed into law House Bill 2578. This new legislation relates specifically to Arizona's construction defect claims and revises the Purchaser Dwelling Actions statute - ARS § 12-1361,
et al
. The new law became effective the summer of 2015.
The REAL intent of this new law is to derogate consumer rights yet again by burdening how homeowners can bring construction defect lawsuits and limiting what they can recover. There is a good argument that "beating up" on homebuyers is probably the wrong trajectory in a state where most prosperity depends upon home sales, but that is for another debate. The courts will eventually interpret the provisions and definitions, but all of this fuss with a new law begs the real question which is "why was an overhaul of a proven system needed at all?" The answer: "Payback" by the Governor and Legislature for respective political debts to the builder lobby that backed them with "dark money". In addition, there is a general right-leaning in Arizona politics that considers the concept of "consumer rights" to be anti-capitalistic claptrap that must be struck down. Nationally, Arizona's consumer protection laws are now considered to be considerably right of the mainstream. Again, one wonders how that will lure back the homebuyer who flocked to Arizona when the construction laws favored consumers. How does it help Arizona to be "open for business" when the underlying motto is "..come here and we will 'GIVE you the business'.." (?)
HIGHLIGHTING THE BIG CHANGES:
Following are a few of the highlights of the new law.
The repeal of ARS § 12-1364 - Attorney Fees provisions
ARS § 12-1364 was repealed. Previously, the "successful party" under the Purchaser Dwelling Action ("PDA") statute was entitled to attorney fees. The new law has removed this provision, which will obvious affect any the right of any subsequent buyers after the initial one. However, this does not mean that the first homeowners who buys will not have the ability to still recover attorney fees. Original purchasers retain their rights based on contractual privity. Specifically, ARS § 12-341.01 allows for recovery of attorney fees to a successful party in
any action arising out of contract
. A homeowner who has a contract with a builder/contractor may, if deemed a successful party, recover attorney fees.
SUBSEQUENT BUYERS
By contrast from the above, though, and here is where one of the larger undermines of consumer rights was made, subsequent purchasers of the property (those who buy from the first owner or anyone after the first buyer within the statutes of limitation) were able under the old law to make warranty claims for failures, as long as they were still inside the warranty period, with the same standing for the most part as if they were the original purchaser. Under the new law, subsequent purchasers had this warranty right taken away-they will not be deemed to have contractual privity with the builder/developer and will therefore be barred from recovering attorney fees. Subsequent purchasers will not be barred from filing suits, as the construction lobby has tried to accomplish through law and contract numerous times, as consumers will still be able to sue under an implied warranty and tort/negligence theory, much like in personal injury claims, but there are no awards of attorneys' fees to them. That's important since one of the enormous burdens to consumers who have lemon homes is the legal burden of simply bringing the defalcating and often must richer builder (or his insurer) to justice. If there is no attorney fee award, that means every dime of the fees are paid out of the damage recovery. And for every dime gone from the recovery, the consumer is deprived a full award to use for repair. The very act of enforcing his economic rights works out arithmetically to put the consumer further and further from restoration of them.
NO EXPERT FEES-ANOTHER CONSUMER DIS-INCENTIVE
The automatic ability to collect expert fees under the old statute has also been eliminated under the new one. First time buyers with purchase agreements now allowing expert fees in a dispute and subsequent buyers will have only a limited ability to recover expert fees under the new law. They must now though seek expert fees under ARCP Rule 69 and taxable costs (filing fees, court reporters fees and others, NOT including attorney fees) under ARS 12-332. But it still is not that simple under the new law. To recover expert fees under Rule 68, the claimant has to have filed a suit against the builder and then later in the suit tendered a Rule 68 "Offer of Judgment." If the other side then rejects or ignores it, one has to recover the same or more than tendered in a final verdict from the judge or jury to apply for these fees.
The above processes are many times a greater gamble than they seem-they put it all on a recovery that requires a full lawsuit and almost a total recovery by the plaintiff, something that is rare when jurors have the discretionary right to bring back any amount of damages they wish and they are often less than the amount requested. Not all claims end up with a judgment for precisely what was asked for in the Offer, so if the owner's recovery against the builder is even a few percentage points less than what was proposed by the owner, it is still possible that the owner will not be able to recover expert witnesses fees which, in construction litigation, if often daunting. And he might face that claim from the other side, even when he technically "won" the case.
ARCP Rule 68 does not automatically apply at all in the event the matter is arbitrated-Rule 68(g) carves out a few exceptions, but these exceptions rarely apply to the kind of arbitration built into builder contracts by their lawyers. In those many cases where an expert was still needed to determine the issues and argue them with the builder or the builder's experts and in which it is ultimately resolved without the initiation of litigation, then the owner swallows all of his expert fees, entirely, something that could deeply discount the value of the repair or resolution obtained any even reduce it to nil. ARS 12-332 permits the recovery of other costs like filing, court reporter and jury fees, but these are usually the "smaller change" in most construction litigation.
DEFINITIONS
The new law, for the first time, provides a definition of construction defect. In Arizona, "construction defect" now means
"a material deficiency in the design, construction, manufacture, repair, alteration, remodeling or landscaping of a dwelling that is the result of one of the following: (a) a violation of construction codes applicable to the construction of the dwelling; (b) the use of defective materials, products, components or equipment in the design, construction, manufacture, repair, alteration, remodeling or landscaping of the dwelling; or (c) the failure to adhere to generally accepted workmanship standards in the community."
This definition of "construction defect" is misleading. Phrases and words contained within the definition of construction defect, such as "material deficiency," have their own separate definitions, which any savvy plaintiff expert will easily exploit. Likewise, the definition of a construction defect encompasses any one of the following: a violation of construction (building) codes; defective material or the failure to adhere to generally accepted workmanship standards in the community.
The definition of a construction defect hinges on the presence of a "material deficiency." Material deficiency is defined:
as a deficiency that actually impairs either the (1) structural integrity (2) functionality or (3) the appearance of a dwelling or is reasonably likely to do any of the three in the "foreseeable future."
The actual terms used in the definitions are disparate. Examples of questions that are raised include:
- Is a violation of a building code, which was arguably established to ensure the stability and functionality of a structure or dwelling, a "material deficiency?"
- How will a material deficiency in "appearance" be interpreted? Who will make this interpretation?
- If an impairment of the appearance of a dwelling exists or if a building code violation is determined to impair the structural integrity or functionality of a dwelling, then, according to the law in Arizona, will a construction defect exist?
Lack of clarity + an abundance of confusion and miserly consumer remedies = an arithmetical inability to recover actual damages and accordingly more questions than answers
In addition to defining construction defect, the new law includes definitions of "seller" and "construction professional."
"Seller"
means:
any person, firm, partnership, corporation, association or other organization that is engaged in the business of designing, constructing or selling dwellings,
including construction professionals
.
"Construction Professionals"
are defined as:
architect, contractor, subcontractor, developer, builder, builder vendor, supplier, engineer or inspector performing or furnishing the design, supervision, inspection, construction or observation of the construction of any improvement to real property."
This new definition of "Seller" includes the term "construction professionals." Therefore, if you are a seller you are now also a construction professional and vice versa. This means that
all subcontractors, vendors, suppliers, architects, engineers and inspectors are "sellers"
and subject to all provisions of this new law as it relates to sellers.
A seller (which now includes subcontractors, vendors, suppliers, architects, engineers or inspectors) who receives notice of repairs has "a right" to repair or replace any alleged construction defects. The question is one of practicality. Historically, under the Arizona PDA statute, the homeowners provided a "notice and opportunity to repair" to the general contractor/developer. This was done because the identity of the general contractor/developer was most readily ascertainable. However, now general contractors, developers, subcontractors, vendors, suppliers, architects, engineers and inspectors are all deemed a seller. This creates confusion and more than a few unanswered questions. A few examples are:
- To whom shall notice be provided?
- What if one group of seller(s) does not receive the right to repair notice, do either and/or both the homeowner and seller forfeit their rights?
- Is a homeowner in violation of ARS § 12-1363 if they do not provide notice to all seller(s)?
- Does a homeowner only need to provide notice to one seller, if so, which one?
- How would a homeowner obtain the knowledge of all seller(s)? This is particularly difficult as even general contractors often find it extremely challenging to determine which entities work on their own projects.
- The homeowners and seller(s) are to select the "construction professionals" who will make the repairs to the home. Which one, or do all the sellers need to agree on the entities that will make the repairs? What if one seller does not agree, what is the result?
- Homeowners cannot "unreasonably withhold" consent to have any one construction professional performing the repair work. However, if a homeowner does not consent on "reasonable grounds" who is to perform the repair work? The seller(s) are, with consent of the homeowner, to select other professionals to perform the repair work. This could result in a seller being put in the position to consent to allow a direct competitor to perform repair work to their original work.
- If repair work is performed by an entity other than a seller of the home, who receives and pays the repair invoice? Is a seller, which is defined to include a contractor and/or subcontractor, required to pay the invoice for repair work by a direct competitor? Will a general contractor or any other seller be held responsible for all, some, or none of the repair work invoice?
The definition of "construction professional" includes inspectors, which adds another potential layer of complication. Is notice required for a city inspector and thus a city or municipality? Will this drag in free lance registered home inspectors? Will a homeowner be required to provide notice of claim against a governmental entity pursuant to ARS §12-821.01, requiring that
"persons who have claims against a public entity or a public employee shall file claims ... within 180 days after the cause of action accrues."
The conduct of the parties during the notice to repair period is now admissible as evidence. Any conduct, negotiations or communications during the right to repair will now be admissible and available for a jury to read and consider. Offers, communications, and promises that a construction professional makes - or does not make - during repairs will be available to a jury at trial. Caution needs to be exercised.
ANOTHER CONSUMER DIS-INCENTIVE: COMPLEX AND EXPENSIVE PRE-LIGATION PROCEDURES
Under the law, a consumer cannot commence an action until he has gone through a complex and expensive process of "giving the (contractor) sufficient notice" with time for a "right to cure." In practice this means he consumer must give a written and formally-served punchlist precisely explaining what is wrong with the home and that list must be technical and correct.
Each consumer list must be highly specific as to the issues which are alleged to be "defective." That often means the owner must engage construction, engineering, architectural or mechanical experts to even give the initial Notice of Claim to the builder. Just saying "slab moving around for some reason-please repair," for example, is not enough. To avoid being "vague" and "acting in bad faith," the consumer needs to have the technical expertise to state (or have his engineer state) something like "..slab is heaving 8% outside ROC tolerance in east bedroom due to under-compaction of sub-soils to only 80%, and a 4% reverse grades on the western perimeter allowing ambient environmental water to penetrate subslab through long-term hydrostatic pressure.."
It's going to take an engineer to do extensive site testing and to write up a Notice like that and the claimant's failure to get a professional opinion right up front has two risks: First, less than that may fail as a "competent Notice" to even require the builder to act (a point regularly argued by the builder); second, by other rules, notably ARS 12-2602, a litigation cannot even be filed by the claimant unless the claimant has a competent professional expert opinion supporting his technical claims at the time of filing. By functions of these realities, major litigation costs are all "up-fronted" against the consumer, while the defendant is required to do little to nothing to defend except deny. Meanwhile, as this lengthy and expensive "pre-dispute" process goes on, whatever defect there is (if it is serious) usually gets worse and worse. The consumer cannot do anything to abate it because that would then "spoil" the evidence of it (evidence must all be preserved) and let the builder off completely; on the other hand, if the consumer does not fix it, then the builder contends that the consumer "failed to mitigate he damage," causing it to become worse. It is a legalistic "lose-lose" proposition for the consumer.
BUILDER GETS SECOND AND THIRD BITES AT THE APPLE
After sufficient punchlisting and written builder rebuttals and counter-punchlist to the punchlist over a period that can be as long as 90-100 days, the seller/construction professional, if he agrees there "might be an issue" now has a right to opt to repair it "his way" instead of pay damages, even over the objection of the consumer, who often contends that if the builder did not know how to do it right the first time, why should they invite them back for a second attempt at simply learning and applying their trade? The statute is not clear how many "returns for more work" the builder is allowed before the owner can finally sue. The balance for that, though not much of one, is that if a seller/construction professional does make a repair, they are not entitled to a release. But they are allowed to block an owner's suit over and over again by "tendering (yet another) repair." A contractor can make a repair to a home or pay for someone else to do so. But no matter who does the repair, the builder (and new repairman) may still be sued by that same homeowner for the home that they just repaired unless the builder or repairmen tender, once again, a repair.
THERE IS A REASON THE HOMEBUYERS ARE NOT FLOCKING TO ARIZONA ANYMORE
The 2015 changes in the law were intended to raise the bar as far as possible on how construction defect claims are brought in Arizona and what they cost the consumer the law most certainly has done that. The transparent objective was to bar most claims by perniciously making it as expensive and as difficult as possible for a consumer to sue a builder, coming just short of just simply barring all suits against builders, entirely.
The multitude of definitions, phrases and terminology introduced by the law and the major remedy limitations of it after several decades of rather stable rules which better protected the consumer has undoubtedly left many consumers without genuine, functional protection rights at a time when most states have elected to EXPAND rights, to try to become more "user friendly" for consumers so as to attract the in-state investment of consumer dollars.
Perhaps this kind of gerrymandering, coupled with a wide reputation of generally disliking non-natives, is why the "bloom is off" in Arizona after once having led the new home sales of the country. Arizona has surely proven the point that local law during these troubled national economic times can only become just so prickly against its consumers, just so far out of the mainstream, until finally, residency, migration and investment steers elsewhere. It has certainly been put on the sidelines in the national recovery-mostly flourishing elsewhere for the first time in 50 years, and for very good reasons. Its publicity suggests a very negative legal and perhaps even social climate for "outsiders."
CONCLUSION
What Arizona had as boulder's law was good enough until 2015 to support the best economic times it ever had in new home building. That legislators felt it had to be "fixed" could not have been motivated then by any genuine sense of "steadying the balance of justice" or "fostering prosperity" for the state and its people.
Indeed, there was "Other Justice" to be done. That would be: "JUST-US" for the home construction lobby.
.
