California's Construction Defect Law
Copyright© 2006 CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.). C.A.R. Legal Department. All rights reserved.
TABLE OF CONTENTS
On September 20, 2002, Governor Davis signed into law SB 800 (codified in California Civil Code Sections 895 through 945.5). C.A.R. members may obtain a copy of SB 800 online. The law made significant changes in the area of construction defect litigation and established warranties on new construction. SB 800 is applicable to all newly-constructed residential property intended to be sold as an individual dwelling unit, where the purchase agreement was signed by the seller on or after January 1, 2003. However, it does not apply to condominium conversions.
SB 800 is rather complicated, reflecting the compromises made between the competing interests of homeowners, trial lawyers and the building industry. This legal memorandum provides an overview of the law´s requirements which is relevant to all REALTORS® who sell new residential single-family properties.
Q 1. Why a new law?
A On December 4, 2000, the California Supreme Court decided the case of Aas v. Superior Court, 24 Cal. 4th 627 (2002), which held that a homeowner could not recover damages in a negligence lawsuit against a developer unless he or she suffered actual physical damage. As a result of this decision, a homeowner could not recover damages against a builder, even if the builder had violated building codes resulting in, for example, a home with significant earthquake and fire risks, until the homeowner suffered actual physical damage. While the homeowner retained the right to sue, if applicable, for breach of warranty and breach of contract, and possibly recover under those causes of action, the Aas decision caused great concern among homeowners, consumer groups and trial lawyers.
Consumer and trial lawyer groups worked to get the legislature to address the results of Aas and give the consumer a remedy to builder negligence or violation of building codes even if no actual damage had occurred. The building and insurance industry, however, concerned about the escalating cost of litigation wanted to make sure that any new law would also address developer and insurance industry concerns about unnecessary and costly litigation.
The resulting law creates a complex series of requirements, rules and procedures to address construction defects in California. The goal of the legislation is that the law will result in benefits to homeowners by providing them a means to effectively have construction defects addressed and, at the same time, by allowing builders the right to try to fix problems prior to a homeowner being allowed to file suit, reduce litigation.
Q 2. What about properties for which a purchase agreement was signed prior to January 1, 2003?
A For those properties where a purchase agreement was signed prior to January 1, 2003, the relevant law is codified in California Code of Civil Procedures Sections 337 and 337.15. These statutes allow a homeowner a four year statute of limitation to sue for patent construction defects and a ten year statute of limitation for latent defects. Also, the Aas decision described above applies to these properties and a homeowner cannot recover for damages unless they can establish actual physical damages due to the defects.
Q 3. When does SB 800 apply?
A The law applies to all newly-constructed residential property intended to be sold as an individual dwelling unit (for example a single family home or a condominium unit) where the purchase agreement was signed by the seller on or after January 1, 2003. It does not apply to condominium conversions. (Cal. Civ. Code §§ 896, 938.)
Q 4. Who is a builder of new residential properties under SB 800??
A The law applies to all builders of new residential properties. "Builder" under SB 800 includes all of the following: "any entity or individual including, but not limited to a builder, developer, general contractor, contractor, or original seller, who at the time of sale, was also in the business of selling residential units to the public." (Cal. Civ. Code § 911(a).) The law also applies to all "general contractors, subcontractors, material suppliers, individual product manufacturers, and design professionals" to the extent these parties caused a violation of the SB 800 standards (see Question 5) as a result of a "negligent act or omission or breach of contract." (Cal. Civ. Code § 936.)
Q 5. Does SB 800 set up standards that a builder must meet when constructing new residential properties?
A Yes. SB 800 sets forth building standards "intended to address every function or component of a structure" (Cal. Civ. Code § 897). The law, in effect, creates a de facto building code defining the standards a structure should meet. The standards are listed in California Civil Code Section 896.
Q 6. What are examples of these SB 800 "building standards"?
A Examples of these building standards are as follows:
"A door shall not allow unintended water to pass beyond, around, or through the door or its designed or actual moisture barriers, if any."
"Foundations, load bearing components and slabs, shall not contain significant cracks or significant vertical displacements."
"Plumbing and sewer systems shall be installed to operate properly and shall not materially impair the use of the structure by its inhabitants."
General Construction Issues:
"[M]anufactured products including, but not limited to, windows, doors, roofs, plumbing products and fixtures, fireplaces, electrical fixtures, HVAC units, countertops, cabinets, paint, and appliances shall be installed so as to not interfere with the products´ useful life, if any."
Q 7. What if a property violates one of these standards in Question 5?
A The violation of these standards creates an actionable defect for the homeowner to pursue against the builder.
Q 8. Are violations of these standards the only actionable defects a builder has to be concerned about?
A No. While the list is quite thorough, the law provides that "to the extent a function or component is not addressed by these standards, it shall be actionable if it causes damage." This "catch-all" provision opens up a builder to possible litigation for problems not addressed and there is no clear definition of "damage" for this section. (Cal. Civ. Code. § 897.)
Q 9. What are the statutes of limitations under the new law?
A There are varying statutes of limitations under SB 800. There is a general ten-year statute of limitation for construction defects under the new law (i.e., violations of the building standards listed in Civil Code Section 896) (Cal. Civ. Code § 941). However, the law also sets specific statutes of limitations for certain types of defects. Where the law sets forth shorter statutes of limitations, those time periods will be the applicable ones. (Cal. Civ. Code § 896.)
Q 10. Which building standards have shorter statutes of limitations?
A The statutes of limitations are shorter than ten years for the following building standards found in California Civil Code Section 896:
Plumbing and sewer systems must operate properly and not materially impair the use of the structure by their inhabitants: four years from close of escrow.
Electrical systems shall operate properly so as to not materially impair the use of the structure by its inhabitants: four years from close of escrow. (Note that the standard that electrical systems must not cause an unreasonable risk of fire has a ten-year statute of limitation.)
Exterior pathways, driveways, hardscape, sidewalls, sidewalks, and patio shall not contain cracks that are excessive or that display significant vertical displacement: four years from close of escrow.
Manufactured products, including but not limited to windows, doors, roofs, plumbing products, and fixtures, fireplaces, electrical fixtures, HVAC units, countertops, cabinets, paint, and appliances shall be installed so as to not interfere with products´ useful life: one year from close of escrow or longer if manufacturer states greater "useful life" term.
Noise from attached units in violation of applicable "interunit noise transmission standards set by government building codes, ordinances or regulation in effect a the time of original construction": one year from close of escrow.
Irrigation and drainage systems must function properly so as to not damage landscaping or other external improvements: one year from close of escrow.
Untreated wood posts shall not be installed in contact with soil such as to cause unreasonable decay to the wood based upon the finish grade at the time of construction: two years from close of escrow.
Untreated steel fences and adjacent components shall be installed so as to prevent unreasonable corrosion: four years from close of escrow.
Paint and stains shall be applied in such a manner so as to not cause deterioration of the building surfaces for the length of time specified by the paint or stain manufacturers´ representations: no action beyond five years from close of escrow.
Landscaping systems shall be installed so as to survive for at least one year: two years from close of escrow.
Dryer ducts shall be installed and terminated pursuant to manufacturer installation requirements: two years from close of escrow.
Fit and Finish Warranty: one year from close of escrow. (See Question 11.)
Q 11. Do builders need to offer a fit and finish warranty?
A The law requires a builder to provide a homeowner with a "minimum one year express written limited warranty" covering the fit and finish of the following building components: "cabinets, mirrors, flooring, interior and exterior walls, countertops, paint finishes, and trim." The one year warranty, however, will not apply to damage to those components caused by defects in other parts of the property governed by other statutes of limitation. (Cal. Civ. Code § 900.) (The C.A.R. new construction form contracts include a fit and finish warranty).
Q 12. Is there an automatic fit and finish warranty under SB 800?
A Yes. The law creates an automatic one-year warranty for the components enumerated in Question 11 if the builder does not provide an express (written) warranty (Cal. Civ. Code § 900).
Q 13. What is an "Enhanced Protection Agreement"?
A The builder has the option of providing what the law calls, "an enhanced protection agreement" which can offer greater or comparable protection to the homebuyer. If the builder provides such an agreement, she or he is bound by the contract and not the building standards outlined in California Civil Code Sections 896 and 897.
These standards cannot be less than those provided by the statute and there are a number of strict notice requirements which the law requires if a builder chooses to provide an enhanced protection agreement.
Q 14. Should a builder use an "Enhanced Protection Agreement"?
A This is a decision a builder should make with an attorney who can address the builder´s particular concerns.
Q 15. If a homeowner claims that a building standard has been violated can he file a lawsuit immediately?
A No, prior to filing a lawsuit the homeowner must utilize the pre-litigation procedure set forth in SB 800. (See Section III below on the pre-litigation procedures.)
Q 16. Does SB 800 address all claims that a homeowner could put forth against a builder?
A No, the law does not cover claims by the homeowner to enforce an express contractual provision violated by the builder, or any action for fraud, personal injury, or a violation of another statute.
Q 17. Does SB 800 limit the damages if, in fact, the homebuyer does file suit?
A Yes, the homebuyer is limited to damages under California Civil Code Section 944 for the following:
- The reasonable value of repairing any violation of the standards.
- The reasonable cost of repairing and rectifying any damages resulting from failure of the home to meet the standards.
- Reasonable cost of removing and replacing any improper repair of the builder.
- Reasonable relocation and storage expenses.
- Lost business income if the home was used as a principal place of business.
- Reasonable investigation cost for each violation.
- Other applicable fees and costs.
Keep in mind that these are the damages recoverable under SB 800; the homebuyer can still recover additional claims for damages resulting from other causes of action not covered under SB 800. (See Question 16.)
III. SB 800 PRE-LITIGATION PROCEDURES
Q 18. What is the purpose of the pre-litigation procedure presented in SB 800?
A One of the stated goals of SB 800 is to reduce litigation between builders and homeowners. The law provides a detailed pre-litigation procedure which must be followed before a homeowner can file suit against builder for a construction defect.
Q 19. Does a builder have to use this pre-litigation procedure?
A No, the law provides that the builder may create a different but substantively similar procedure to the one provided by SB800. If a builder decides to offer his/her own alternative dispute resolution procedure, it is important for the builder to consult with an attorney to make sure that procedure complies with the law. Larger builders with existing customer support or customer service departments may, for example, wish to incorporate these informal mechanisms in a customized procedure in the hopes of early resolutions of problems.
If a builder chooses not to establish his/her own alternative dispute resolution procedure or does not respond to a homebuyer´s attempts to resolve a dispute using the pre-litigation procedure set forth in SB800, the homebuyer may file suit and the matter will be resolved in court. While the non-adversarial procedures will not apply the builder is still bound by the other provisions of the law.
In other words, if a builder ignores SB 800, then the homeowner is not limited by the Aas decision (discussed in Question 1) and the homeowner may sue for all the actionable defects enumerated in Sections 896 and 897, plus the fit and finish warranty of Section 900.
(Cal. Civ. Code §§ 912, 915.)
Q 20. Is the builder obligated to inform the homeowner of this pre-litigation procedure?
First, the builder must record on title a notice as to the existence of these pre-litigation procedures and a notice that these procedures impact the legal rights of the homeowner. The information shall also be included with the original sales documentation and shall be initialed and acknowledged by the purchaser. (Cal. Civ. Code. § 912(f).)
A builder must provide with the original sales documentation, a written copy of the law which must be initialed and acknowledged by the purchaser. (Cal. Civ. Code § 912(g).) (A written copy of the law may be found at SB 800
If the builder has an enhanced protection agreement, the builder must inform the homebuyer prior to the close of escrow that he or she is opting out of the SB 800 standards and provide a copy of SB 800 standards. (Cal. Civ. Code § 903.)
The builder must also provide instructions to the homebuyer that all documents provided at the time of sale must be provided to a subsequent purchaser. (Cal. Civ. Code § 912(h).)
The C.A.R. new construction standard form addenda, NCAD and NCRPA, address the above requirements.
Q 21. What are the SB 800 pre-litigation procedures?
A The pre-litigation procedures are as follows:
Homeowner notifies the builder that the construction violates one or more of the standards set forth in the law. The notice must be in writing and sent via certified or overnight mail or personal delivery to the builder. The claim must describe the claim in "reasonable detail sufficient to determine the nature and location of the violation." (Cal. Civ. Code § 910(a).)
Within 14 days the builder must acknowledge the claim in writing. If the claim is not acknowledged, the homeowner can begin litigation. (Cal. Civ. Code § 913.)
If the builder elects, within 14 days from the acknowledgment of the claim the builder can do an inspection. If the builder elects to do an inspection and the inspection requires any changes to the property, the builder has 48 hours to bring the property back to its original pre-testing condition. (Cal. Civ. Code § 916.)
If the builder decides it needs a second inspection, then the builder must within 3 days send the homeowner the demand for a second inspection in writing and explain the reasons. The second inspection must take place within 40 days of the initial inspection. As with the first inspection, the builder has 48 hours to bring the property back to its original pre-testing condition. (Cal. Civ. Code § 916.)
Within 30 days of the last inspection, the builder may offer to repair the violation. The offer to repair must contain a detailed written statement of the work to be done, a reasonable completion date, compensation to the homeowner for recoverable damages and details regarding the contractor that the builder will be employing to do the repair. The offer must also advise the homeowner of his or her right to request up to three additional contractors that could do the work. (Cal. Civ. Code § 917.)
The builder must accompany the repair offer with an "offer to mediate the dispute if the homeowner so chooses" (Cal. Civ. Code § 919).
If the homeowner decides to accept the builder´s offer of mediation the following procedures apply:
The builder selects a 'nonaffiliated' mediator and pays the mediator's fees. However, at "the homeowner's sole option, the homeowner may agree to split the cost of the mediator, and if he or she does so, the mediator shall be selected jointly." (Cal. Civ. Code § 919.)
The mediation must occur within 15 days after the homeowner´s request to mediate is received (Cal. Civ. Code § 919).
The mediation must take place "at a mutually convenient location within the county where the action is pending." (If no lawsuit has been filed, the mediation most likely should still occur at a mutually convenient location within the county in which the lawsuit would likely to be filed). (Cal. Civ. Code § 919.)
The mediation is limited to four hours, unless the parties agree otherwise (Cal. Civ. Code § 919).
If the builder offers to repair the violation, and the mediator fails to otherwise resolve the dispute, the homeowner must allow the work to be performed (Cal. Civ. Code § 919).
If a mediation occurs and pursuant to the results of the mediation, work is to be done to repair the violation, the work must commence within seven days of the mediation or if a permit is required within five days of obtaining that permit (Cal. Civ. Code § 921(a)).
If mediation is rejected by the homeowner then the following applies:
Upon receipt of the repair offer, the homeowner has 30 days to authorize the builder to proceed with the repair (Cal. Civ. Code. § 918).
At the homeowner´s request, the builder has 35 days to provide the homeowner with three alternative contractors who are not owned or financially controlled by the builder. If the homeowner requests the alternative contractors, the builder is entitled to an additional non-invasive inspection within 20 days. (Cal. Civ. Code § 918.)
The homeowner has 20 days after receiving notice of the three alternative contractors to authorize the repair (Cal. Civ. Code § 918).
If the homeowner authorizes the repair, work must commence within 14 days of the acceptance of the offer to repair or 14 days of the selection of an alternative contractor or five days after a permit is issued if a permit is required (Cal. Civ. Code § 921(a)).
The builder must make every effort to complete the repair within 120 days (Cal. Civ. Code. § 921(b)).
Q 22. Can the builder offer cash rather than repair the problems?
A Yes, the builder can offer cash and obtain a "reasonable release." The option to accept the offer is that of the homebuyer. If the offer of cash is refused and the builder does not otherwise comply with the repair requirements, the homeowner may file a lawsuit. (Cal. Civ. Code § 929.)
Q 23. What if the builder does not offer to repair or does not comply with the timelines?
A The homebuyer may file a lawsuit. This provides a strong incentive for a builder who wishes to avoid litigation to strictly comply with the statute´s timelines and requirements.
IV. BUILDER DEFENSES TO HOMEOWNER CLAIMS/HOMEOWNER OBLIGATIONS
Q 24. Are there any defenses that a builder can assert against a homebuyer or is the builder strictly liable for violations of the construction standards?
A SB 800 provides various defenses which the builder can assert to defend against a homeowner. These defeneses are summarized below:
Unforeseen acts such as terrorism and acts of nature which cause the structure not to meet the standards. For example an unusual flood of such severity that it creates a defect despite the fact that the house was constructed according to existing rules regarding water intrusion. (Cal. Civ. Code § 945.5(a).)
A failure by the homeowner to timely mitigate, minimize or prevent damages in a timely manner. This includes a failure of the homeowner to timely notify the builder of a problem and the failure of the homeowner to allow the builder "reasonable and timely access for inspection and repairs." (Cal. Civ. Code § 945.5(b).)
The failure of the homeowner to follow the builder´s maintenance obligations provided the builder can show that those directions were in fact communicated to the homeowner (Cal. Civ. Code § 945.5(c).)
Damages caused by alterations to the property by the homeowner of by a third party hired by the homeowner, "ordinary wear and tear, misuse, abuse, or neglect or the use of the structure for something other than its intended purpose." (Cal. Civ. Code § 945.5(d).)
Claim filed outside the statue of limitation (Cal. Civ. Code § 945.5(e)).
If the homeowner validly released the builder (Cal. Civ. Code § 945.5(f)).
The builder repaired the problem (Cal. Civ. Code § 945.5(g)).
If the claim falls outside of the scope of SB 800 such as a fraud, breach of contract or other civil claim (See Question 15) (Cal. Civ. Code § 945.5(h)).
The information contained herein is believed accurate as of August 16, 2006. It is intended to provide general answers to general questions and is not intended as a substitute for individual legal advice. Advice in specific situations may differ depending upon a wide variety of factors. Therefore, readers with specific legal questions should seek the advice of an attorney.