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For most people, purchasing a home is the largest single investment of their lives. Because the process is full of hidden risks and pitfalls, a prospective purchaser should protect herself by seeking the advice of a competent real estate attorney before she signs a binding sales contract. Unfortunately, most purchasers do not do so. The ones who do hire an attorney usually do so only after they have already signed the sales contract. Over the course of more than 40 years, our firm has reviewed thousands of contracts and has helped many clients avoid sales contracts that are legally unenforceable. Although each sales contract is different, a home buyer who is aware of the common pitfalls in sales contracts will be at a great advantage. Almost all builders’ sales contracts for new homes and condos are pre-printed form contracts that are extremely one-sided, non-negotiable, “take it or leave it” contracts of adhesion, which appear to deprive the purchaser of almost every meaningful legal right that a knowledgeable home buyer would want to have. Virtually all of them contain some version of the following undesirable provisions: 1. They obligate the buyer to buy the home when (and if) the home is completed and the builder calls the buyer to settlement, but they do not obligate the builder to complete and deliver the home to the buyer. Some contracts have no deadline for completion of construction or delivery of the home. Most give the developer at least two years to complete construction plus additional time for delays attributable to reasons beyond the developer’s control. Typically, they give the builder the right to terminate the contract, at its discretion, for any number of reasons, such as its failure to meet certain pre-sale targets or its decision not to go forward with the project or to purchase the land on which the home or condominium is to be built, or because it has taken too long to complete construction. 2. Builder contracts invariably reserve to the builder every conceivable enforcement right against the buyer, including specific performances and damages, while at the same time depriving the buyer of these same fundamental contractual rights and remedies, even if, somehow, the builder is found to have breached the contract. 3. They reserve to the builder the unilateral right to change such things as the plans and specifications for the home, the grading of the lot, and the placement and orientation of the home on the lot, as well as the right to create easements over the lot (even after settlement on the home). 4. They require the purchaser to waive any statutory warranties on the new home that can be waived and substitute a third-party warranty that excludes from coverage most things the purchaser would expect to be covered, such as a leaky roof or a wet basement. The warranty standards of workmanship are minimal and do not meet the standards of the trades. Additionally, the procedures for making a claim are complicated and subject to strict time limitations, such that many buyers find it is too late to make a claim or give up pursuing one out of frustration. 5. They require the home buyer to agree to resolve any disputes through arbitration under rules that make it more difficult, expensive, and time-consuming for the home buyer than litigation would be. THE MARKET TURNS Before the downturn began in the new-homes market last year, home buyers paid little attention to these undesirable provisions in builders’ sales contracts. The supply of new homes and condos could not keep up with the apparently insatiable demand for them. Large numbers of investors and other home buyers began to enter into contracts to buy homes and condos that were years away from being completed. Speculators began to deal in new-homes contracts as if they were commodities in the futures market. Then, almost without warning, the age of “irrational exuberance” in the market for new homes and condos came to an end. The market turned. With a vengeance. And it deteriorated at a speed never before seen. Contracts that had been signed in 2005 and 2006 began to mature and the purchasers under those contracts began to wish that they hadn’t signed them in the first place. Investors began to realize that they weren’t able to “flip” their purchase contracts before settlement, as they had planned. Buyers who had anticipated selling their existing homes for enough money to enable them to move up to the new homes they had contracted to buy found that they couldn’t sell their existing homes at all, or at least not for a price that would enable them to settle on their new home. Purchasers of new homes began to try to cancel their contracts at an unprecedented rate, and the downward spiral accelerated. In many cases, purchasers decided that they were better off forfeiting their deposit instead of buying the home because the drop in the market value of the home far exceeded the amount of the purchasers’ deposit. When the market for new homes and condos was booming, builders were much more willing to refund a deposit because there was always another buyer ready, willing, and able to sign another contract for an even higher price. Today, there are no eager buyers waiting in the wings. Today, most builders will refuse to refund the deposit, knowing that many buyers who are financially able do so will go ahead and settle on the purchase of the property because they believe that the contract is legally enforceable and they do not want to forfeit their deposit or get sued for damages. Most of the buyers who cannot settle on their contracts simply forfeit their deposits. Some contract purchasers have forfeited deposits in excess of $100,000. Some builders now refuse to refund a buyer’s deposit even though the contract may be invalid, knowing that the buyer may be unwilling or unable to pay the legal fees to bring suit to avoid the contract. And even if the buyer does file suit, some builders will defend the case vigorously in order to increase the buyer’s legal fees and force her to drop the suit or settle for the return of a fraction of the deposit. The large sums of money involved and the intractable positions taken by builders refusing to return purchasers’ deposits have prompted many home buyers to seek legal assistance to avoid, or at least renegotiate, their contracts. As real estate attorneys who have successfully resolved scores of builder contract cases, we have seen that no builder sales contract is easy to avoid. It is harder to avoid some than others, and some you have no chance of avoiding at all. Ironically, however, the more one-sided and unfair the contract is, the better the possibility of avoiding it. Under basic common law principles, the typical builder sales contract is a bilateral contract. Each party to a bilateral contract must have an obligation to perform it; otherwise, there is no mutuality of obligation between the parties and the contract is unenforceable. In other words, if the builder is not obligated to build and sell the property to the buyer, then the buyer is not obligated to buy the property from the builder. FULL DISCLOSURE A counterpart to the common law requirement of mutuality of obligation for the enforceability of a sales contract exists in a relatively unknown and complex federal statute, the Interstate Land Sales Full Disclosure Act, commonly referred to as ILSA. ILSA prohibits a developer from selling a home in a subdivision with more than 99 lots or condominium units in a condominium with more than 99 units through the use of interstate commerce, unless the transaction is exempt or the developer registers the subdivision or condominium with the Department of Housing and Urban Development. ILSA also requires the developer to give the buyer, in advance of signing the sales contract, a copy of a property report containing detailed information about the developer and the project. If the developer does not do so, or if it does but the contract does not disclose the buyer’s rights under ILSA, the buyer has the right to revoke the contract and receive the return of her deposit and all money paid by her under the contract. ILSA also gives the buyer the right to sue the developer for the return of her deposit and other damages and to recover her legal fees in bringing suit. Most developers who are aware of ILSA seek to avoid its application to their project by utilizing one or more of the several exemptions provided in the act. Developers primarily use the “two-year completion” exemption, which applies if the sales contract obligates the developer to complete construction of the home or condominium unit within two years after the buyer signs the contract. If the contract provides that the buyer is entitled only to the return of her deposit if the developer does not complete construction within two years, or leaves it within the developer’s discretion to meet its obligation, the contract is deemed to lack mutuality of obligation and hence the subdivision or condominium is not exempt from ILSA. If a subdivision or condominium project is subject to ILSA and the developer misinterprets the applicability of an exemption or otherwise fails to comply with ILSA, a buyer may have the right to revoke her contract and obtain the return of her deposit even if the buyer has gone to closing and purchased the property. In sum, it looks like there is a lot more caveat vendor in builder contracts than most folks realize. Given the significant financial consequences of purchasing a home, the purchaser should be mindful of the common pitfalls of builders’ sales contracts and should review the contract with counsel before signing it.
Beau Brincefield and Arthur Kahn are principals of the law firm of Brincefield, Hartnett & Kahn, based in Alexandria, Va.

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