Time to Build! Considerations for Residential Construction Contracts (for Both Builders and Landowners)
Over the past few months there has been a substantial increase in real estate activity. In line with the rise in development of new homes in the surrounding area, many real estate transactions consist of purchasers buying vacant lots with the intention of building a new home after closing. While the purchase and sale contract will contemplate the mechanism of transferring the subject property, it is the construction contract which will contemplate the actual building of the new home. For both builders and new landowners alike, there are benefits to having a well drafted and clear construction contract in place to contemplate the entire timeline of the build. Much like how every real estate transaction is unique, so to is the actual construction of a new home. Below is a summary of a few key considerations that every construction contract should address:
Builder’s Lien Holdback
The Builders Lien Act allows contractors, sub-contractors, workers and suppliers to file a lien against the title to a property where they supply work or materials. The lien is intended to provide a level of security for the claimant to ensure they get paid for services rendered. Liens can be filed at any time up to 45 days after the work has been completed. Landowners can protect themselves from the potential of a lien by holding back a portion of any payment made under a construction contract until the lien period has expired. The holdback can be used to pay out the lien claimant or paid into court to discharge the lien if it is registered. There is an entire payment and holdback mechanism under the Builders Lien Act which should be properly contemplated in the construction contract. Builders and landowners need to be aware that parties cannot contract out of the provisions of the Builder’s Lien Act. Therefore, a construction contract should properly refer to and address these provisions.
Deficiency List and Walkthrough
A deficiency walk-through is a chance for a landowner to walk through the newly built home (with the builder) to ensure that everything has been completed in accordance with the terms of the construction contract. In addition, a deficiency walk-through provides an opportunity to identify anything that has been damaged or still requires repair. Any deficiencies which are agreed upon can then be addressed. A deficiency walk-through is beneficial for the builder as well, as it can result in documented evidence that the landowner has accepted the quality of the newly built home, subject to any deficiencies that are discovered during the walk-through.
Scheduling and Timelines
The construction contract should state a start and/or completion date, or at the very least provide an estimation. There are always exceptions to providing clear timelines, such as certain conditions which have to be met (by either the builder or landowner) or the approval of third parties such as municipalities and regional districts. However, these considerations should be clearly stated in the construction contract. A construction contract should also specify what happens if timelines are missed. For example, does the landowner have the ability to terminate the contract for a missed deadline, or seek damages for any costs incurred as a result of the delay? A builder will want protection in this regard, especially for things that are out of their control (such as bad weather and labour and material shortages). It is easier to deal with delays when they have been contemplated in the contract.
There is no easier way for disputes to arise then for ambiguity or disagreement on costs. Construction contracts are usually “fixed” or “cost plus”. Under a fixed contract, the costs for construction are clearly set and are all encompassing. A builder under a fixed contract will want to ensure that they have fully considered the costs of construction so that they do not go over the budget during the build (and thus incur these costs directly). For a cost-plus contract, there is usually a set cost payable by the landowner, plus additional costs for such things as installation and hookup of utilities, connection of appliances, the cost of the new home warranty and fees for permits. A landowner will want to know exactly what additional costs they are responsible for. Tied into costs is the concept of change orders, where a landowner may want to make changes to the home during construction. How are these changed approved between the parties (usually in the form of an amendment to the contract), and how do the parties address any increase in costs because of a change order (builders will typically want these costs paid upon approval of the change order)?
While ideally the construction of the new home goes smoothly, disputes can arise. A dispute resolution mechanism (such as mediation or arbitration) can direct parties towards a resolution without having to incur additional legal and court fees.
The above considerations address a few of the key terms which should be included in any construction contract. Before, signing any construction contract, both parties should ensure the contract has been approved by their lawyer. A well-drafted construction contract will go a long way in ensuring the building of the home goes according to plan.
This article is provided as information only and should not be construed as legal advice. Always consult with a lawyer to provide you with advice specific to your own situation. For more information, please contact Patrick Bobyn by calling (250) 869-1286 or by email at firstname.lastname@example.org.
Patrick Bobyn is a solicitor practicing in the areas of business law, real estate, estate planning and estate administration. His real estate experience includes assisting both builders and owners with reviewing and revising construction contracts, as well as assisting clients with purchasing and selling real property, financing, and providing general advice as it relates to real estate law.