Home Building and Remodeling

Consumer Protections

Once you have chosen the best bid, it is time to write the contract. While many homeowners simply sign the bid and let that serve as a contract, the bid or proposal is rarely detailed enough to give you adequate protection should a dispute arise. Many contractors use prepared contract forms, but again, these may not be detailed enough. Remember that the contract can be revised, but only before you sign it.

Don’t sign any contract if the oral promises made by the salesperson are not backed up in writing. The contract should be detailed about the kinds of materials to be used and the work to be done. Minnesota law requires contractors to reduce all contracts and change orders to writing and to include the following:

1. A detailed summary of the services to be performed;
2. A description of the specific materials to be used or a list of standard features to be included; and
3. The total contract price or a description of the basis on which the price will be calculated.

Wherever possible, specify brand names, colors, grades, styles, and model numbers. The contract should also include the names of any subcontractors and all material suppliers. Keep in mind that any item not included in the contract can be considered an extra that may end up costing you more.

State law also provides additional consumer protections when you have work done on your home: every contract for home construction or a home improvement project includes a state-mandated warranty against defects, and, if something really goes wrong with your project, you may be able to recover money from the Contractor Recovery Fund.

What to Include in Your Contract

• Building Permits and Inspections: The contractor should obtain the necessary permits and inspections so the contractor will be responsible for the work meeting all building codes. If you obtain the permits, you will be responsible.
• Starting and Completion Date: Delays can and do occur, so a general statement allowing for “reasonable” delays, while establishing an anticipated starting and completion date, is a good idea.
• Change Order Clause: This is an agreement that the contract cannot be modified without the written consent of both parties. Protect yourself: put major changes in writing.
• Schedule of Payments: While a token “good faith” down payment is customary, this should not be more than a small percentage of the total job. Any contractor who insists on a large down payment should be avoided. On the other hand, many contractors are small businesses with the need for cash flow to buy material and pay wages. If this is the case, you might set up a payment schedule that reflects work done to date.
• Holdback Clause: This allows you to withhold a final payment until sometime after all inspections have been passed and the job is completed. This allows you time to inspect the job. If there are any problems, this can serve as incentive for the contractor to remedy them.
• Cleanup: This item is often neglected, but it should be considered, particularly if a good deal of debris will be generated.

There are many other items that can be part of your contract, depending on the type and size of the project. If the project involves a large amount of money, it may be in your best interest to have an attorney review the contract for possible problems and to suggest additional provisions for your protection. Most importantly, be sure the contract is written in plain language to help minimize the possibility of misinterpretation.

Once you have signed the contract, you still may be able to reconsider that decision within three business days under the Minnesota Home Solicitation Sales Act. Generally, in all home solicitation sales, the seller must: (a) inform the buyer orally of the right to cancel; (b) provide a receipt or copy of a contract that references specific language regarding the right to cancel a contract; and (c) furnish the buyer with a fully completed form in duplicate captioned “Notice of Cancellation.” If you don’t cancel a home solicitation sale within three days, you may be locked into the contract.

Similarly, if the goods or services were to be paid from the proceeds of an insurance policy, State law provides the homeowner with the right to cancel the contract within 72 hours after being notified by his or her insurance company that the claim has been denied. The contractor must then return any payments to the homeowner within 10 days, less reasonable compensation for emergency services provided to the homeowner.

Home Warranties

Minnesota law mandates that contracts for new-home construction and home improvement projects include statutory warranties against defects. These warranties are set forth in Minnesota Statutes, chapter 327A, and are transferable to subsequent purchasers of the home. The statutory warranties may only be waived or modified under limited circumstances. Any attempt to waive or modify the statutory warranties that does not comply with the applicable exceptions “shall be void.”

In every sale of a new home, in every contract for new-home construction, and in home improvement contracts for major structural changes or additions to a home, a statutory warranty is provided to the homeowner. For new homes, the statutory warranty coverage begins when the buyer takes possession of the home. For home improvements, the statutory warranty begins when the project is completed. Statutory warranties provide that:

1. For one year the home shall be free from defects caused by faulty workmanship and defective materials due to noncompliance with building standards.
2. For two years the home shall be free from defects caused by faulty installation of plumbing, electrical, heating, and cooling systems due to noncompliance with building standards.
3. For ten years the home shall be free from major construction defects due to noncompliance with building standards.
4. For remodeling projects, work not specifically covered above is covered for a one-year period. During this period the contractor warrants that the home shall be free from defects caused by faulty workmanship or defective materials due to noncompliance with building standards.

In new-home construction, the homeowner can take action against the contractor for breach of warranty and recover either the amount necessary to fix the defect, or the difference between the value of the home without the defect and the value of the home with the defect. In remodeling projects, the homeowner can take action against the contractor for breach of warranty and recover damages up to the amount necessary to fix the problem.

In both new-home and home improvement construction, the contractor is not liable under the home warranty statute found at Minnesota Statutes, chapter 327A, for problems caused by work for which they were not responsible, or products they did not furnish; damage not reported by the homeowner within six months of discovering the problem; damage due to normal wear and tear; loss or damage due to others’ negligence; and, in the case of home improvements, loss or damage due to defects in the existing structure not caused by the home improvement. There are additional exclusions spelled out in State law as well.

These statutory warranties are in addition to any other warranties that the contractor agrees to provide as part of the contract. You should, therefore, be sure that you have read and understand the extent of any contractual warranties that your contractor agrees to provide. You should also be sure that you understand what steps you must take to exercise your rights under any contractual warranties that the contractor agrees to provide.

You cannot file a lawsuit against the contractor on your statutory warranties without first going through a multi-step process to give the contractor an opportunity to repair the problem. The first step is to notify the contractor in writing of the problem you have encountered. As a general matter, you must do this within six months of discovering the problem. The next step is to let the contractor inspect the problem so that the contractor can propose a repair. The contractor is required to perform the inspection within 30 days of your notice, and to provide a written offer to repair the problem within 15 days of the inspection.

If you and the contractor are not able to agree on a plan for the repair, your recourse under the warranty law is to file a lawsuit against the contractor. However, if the contractor inspected your property and made a written offer to repair, you cannot file a lawsuit until (a) at least 60 days have lapsed since the written offer of repair is provided, or (b) you complete the home warranty dispute resolution process through the Department of Labor and Industry. In the home warranty dispute resolution process, you and the contractor will select a neutral party who will try to help the parties reach an agreement on the scope of the repair. If the home warranty dispute resolution process is not successful, you still have the right to file a lawsuit against the contractor.

Contractor Recovery Fund

If a homeowner hires a licensed contractor who fails to perform the agreed -upon duties or breaches the contract, the homeowner may take legal action and obtain a judgment against the contractor. If the homeowner is unable to collect on this judgment from the contractor, the homeowner may be eligible to have part of the judgment paid by the Contractor Recovery Fund, provided that the contractor is properly licensed with the State of Minnesota and the final judgment was obtained against the contractor on the grounds of fraudulent, deceptive, or dishonest practices; conversion of funds; or failure of performance arising out of the performance of licensed contractor activity. The fund is established by statute and administered by the Minnesota Department of Labor and Industry as a safety net for consumers. State law limits the amounts of possible recovery and the circumstances under which the fund will provide recovery. Minnesota law limits an individual claimant’s annual payments from the fund to $75,000 per licensed contractor, and the total annual payment to all claimants about a single contractor to $300,000. These limits mean that, if multiple claims are filed, your claim may be subject to prorating or reduction.

There are several steps in the process between suing a contractor and recovering money from the Contractor Recovery Fund. The steps in the process that you, the homeowner, must take include:

• Obtaining a judgment in your favor against a licensed contractor.
• Diligently pursuing your remedies against the contractor and any other persons liable to you for the damage. You will probably look to the assets of the contractor, the owner of the contracting company, the bondholders, the insurance company, and anyone else that may be liable.
• Applying to the Contractor Recovery Fund. If no assets are found during your search, you must apply to the fund within two years after your judgment became final. You will submit an application form, supporting documents, and a copy of your judgment to the Minnesota Department
  of Labor and Industry.
• Seeking payment from the fund:
  • The Minnesota Department of Labor and Industry has 120 days after receipt of your application to either accept, modify, or deny your application.
  • If your application for payment is accepted, payment is generally made in the following fiscal year.
  • If your application is not accepted, you have 30 days from your receipt of the order denying the application to make a written request for a hearing to determine whether you are entitled to payment.
• Receiving an order for payment from the fund. Payments are limited to your actual and direct out-of-pocket losses from the transaction with your contractor. The applicable law provides that you cannot recover your attorney fees, litigation costs, or any interest from the fund.

You may file an application to the fund even if the judgment against your contractor has been discharged in bankruptcy. If your contractor files for bankruptcy before you obtain a judgment, you should ask the bankruptcy court to lift the bankruptcy stay for the sole purpose of allowing you to obtain a judgment against the contractor so you can file a claim for recovery with the fund.