Buyers of New Construction: Beware of the Pennsylvania Association of Realtors®!
The Pennsylvania Association of Realtors’ (“PAR”) proposed contractual scheme for the sale of new construction is indefensible. By design, it leaves buyers of new homes with little to no protection against builders and sellers who are negligent, incompetent, or worse, unscrupulous and frequently insolvent. In short, PAR instructs its’ clients, buyers of newly constructed homes, to proactively offer to buy their new home with no warranties, express or implied, from the seller. To make matters worse, the proposed agreement includes no requirement that the house be completed in a good and workmanlike manner and provides no guidance on obtaining a viable builder’s warranty.
1. Buyers are encouraged to use PAR’s form agreements.
PAR is a professional trade association for real estate agents licensed in Pennsylvania. PAR is also a vendor of forms for use in real estate transactions including several suggested form Agreements of Sale. When the buyer’s agent, who is usually a member of PAR, provides the buyer with a form Agreement of Sale, it is usually a PAR form. PAR promotes a form “Standard Agreement for the Sale of New Construction (ASNC)” for the purchase of a new construction home. To be clear, the majority of the agents who are members of the association are not the focus of this criticism. Rather the PAR forms committee has prepared and approved these forms and I suspect most agents are unaware of the dangers of the provisions, or lack of provisions, discussed herein. Often the agents are unsuspecting victims when they land on the wrong end of a lawsuit brought by a buyer who was sold a defective home and had their rights severely restricted by the agent who unwittingly supplied the contract form.
2. Buyers initiate the offer to buy.
Though most people taking the time to read this will understand the process of purchasing a home, it is worth repeating. Homes, new or otherwise, are advertised for sale. Customarily, an interested buyer prepares an offer to purchase the home on a form Agreement of Sale usually provided to them by the buyer’s agent. A contract is formed when the seller countersigns the Agreement of Sale that was proposed by the buyer. In other words, the buyer, in the first instance, crafts the terms of the offer. This article is concerned with the ASNC form that PAR suggests for initiating an offer. In any negotiation, an initial proposal typically gets countered or negotiated. So, PAR recommends that the Buyer open the negotiation with a position that is highly unfavorable to the buyer and should not be acceptable to the buyer. In doing so, PAR does a great disservice not only to its clients, the buyers, but also to its members, the agents who usually have no legal training and rely on PAR to vet and provide appropriate forms.
3. Widespread Construction Defects.
Litigation over defective construction has been escalating for years. Anybody in the residential real estate industry in Pennsylvania is aware of the problems. Disputes over defective stucco application leading to deteriorating structures and mold growth are an epidemic. The Greater Philadelphia Chapter of PAR recently held an event billed as “Stuccopocalypse”1 that states “Southeastern PA has been labeled the stucco failure capital of the world”. Attorney General Josh Shapiro filed complaints against 35 contractors in Pennsylvania in April 20192. PAR cannot claim to be ignorant of the extent of litigation. In July 2020, they updated their forms to fast track the path to litigation of buyer and seller disputes3. Yet they have taken no action to update the forms that exacerbate the buyers’ problems and undermine the incentive for builders to improve their craft.
3. The PAR Agreement does not require quality construction.
Nothing in PAR’s ASNC agreement requires the seller to construct the home to any standard of quality; not even so much as “habitable” or “code compliant”4. To the contrary, PAR’s recommended ASNC form disclaims all reliance on the plans and promotional materials that the Buyer almost certainly relied upon when purchasing a home that is still under construction:
All representations, claims, advertising, promotional activities, brochures or plans of any kind made by Seller, Brokers, their licensees, employees, officers or partners are not a part of this Agreement unless expressly incorporated or stated in this Agreement.
ASNC, para. 22(A). While a disclaimer of representations is not an unusual contractual provision, it is troubling that PAR would include that provision in a standardized buyer’s offer rather than including a space for the buyer to list any plans, specifications, and promotional materials that it relied upon. Indeed, the ASNC is specifically recommended by PAR for “the sale of a newly-constructed residence or future construction” yet there is no provision that binds the seller to the quality of the construction in the agreement that will bind the buyer to the purchase. The most that the agreement provides is a prefatory statement under the fifth sub-heading under “Construction and Permits” titled “Substitutions” that says: “Buyer and Seller acknowledge that the buildings and improvements on the premises will be substantially similar to the established building specifications”. “Established building specifications” however is not defined. That sub-paragraph goes on to permit the seller to substitute materials or products that are, in seller’s sole discretion, of equal quality. Otherwise, it is entirely left to the agent and buyer, who is often not represented by an attorney, to incorporate the plans, specifications, and sales materials. Buyers and agents often are not aware of the need to incorporate the documents relied upon and the resulting agreement fails to bind the builder to an acceptable standard of construction or even the pictorial representations and promises contained in the sales literature that was presented to the buyer.
Pennsylvania has no statutory New Home Warranty.
Pennsylvania does not have a statute requiring that sellers of new construction deliver a warranty to the consumer. Many other states do. For example, a seller of a new construction home in New Jersey is required to warrant the home as follows:
During the first year of a new home’s warranty, warranty coverage extends to defective systems, workmanship, materials, plumbing, electrical and mechanical systems, appliances, fixtures, and equipment, and major structural defects. From the commencement date of the warranty up to two (2) years from that date, the mechanical, electrical, and plumbing systems and major structural defects are covered. The builder is responsible for warranty coverage during the first two years. During the third through tenth years of coverage, only major structural defects are covered.
NJSA 46:3B-1et seq. In other words, a new home buyer’s protection from defective workmanship in New Jersey is not dependent on the terms of the written agreement. Conversely, there are no statutory warranty protections in Pennsylvania. If there is a major structural defect in the home discovered after the sale, the buyer’s remedies are largely limited to what is provided in or with the contract – the agreement of sale and any addenda. Absent negotiated contractual protections or an enforceable warranty, Pennsylvania buyers would be left with nothing more than threadbare and largely inapplicable implied warranties of fitness for a particular purpose5 and habitability6 (the “Implied Warranties”). But PAR even takes those Implied Warranties away from their buyers.
The PAR form eviscerates even the threadbare Implied
Warranties.
Notwithstanding the epidemic volume of subpar and defective construction that is prevalent in the new home construction industry, the PAR form takes a decidedly and disastrously pro-builder approach, directing the buyer to start the negotiation for the purchase of a new home by offering to purchase the home with no written warranty from the seller and even no implied warranties. Specifically, PAR’s form the ASNC agreement, contains the following pre-printed language:
Limited Warranty: Except as set forth in any new construction warranty that may be provided herewith, SELLER MAKES NO OTHER REPRESENTATIONS OR WARRANTIES OF ANY NATURE, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THOSE OF WORKMANLIKE CONSTRUCTION, HABITABILITY, DESIGN, CONDITION, QUALITY OR OTHERWISE AS TO THE PROPERTY AND THE RESIDENCE AND OTHER IMPROVEMENTS CONSTRUCTED THEREON, AND SELLER HEREBY EXPRESSLY DISCLAIMS ANY SUCH REPRESENTATIONS OR WARRANTIES. Buyer hereby acknowledges and accepts such disclaimer and agrees to waive any and all rights Buyer may have by virtue of such representations and warranties. Except for the warranties provided by Seller, Buyer assumes the risk of any and all damage occurring in or appearing on the Property from the date of settlement, regardless of the cause thereof. Buyer’s assumption of this risk is partially in consideration of the amount of the purchase price of the Property which is lower than it would be if Seller was to be held responsible for any such risks by virtue of said expressed or implied representations or warranties.
ASNC, Para. 16(b)(emphasis in original). This is the heart of my criticism with the ASNC. It is inexcusable that PAR would propose a scheme whereby the offeror gives up the heart of what it is purchasing in the initial offer. It is also a disservice to its agents who could be exposed to liability for recommending the form and whose value to the consumer is severely undercut by systematically proposing a position that is prejudicial to the Buyer. It is as if PAR is telling its buyers to go to a seller of new construction and say “If you will permit me the privilege of buying a home from you, I will absolve you of any responsibility to build a decent product for me.”
7. The PAR form does not require the Seller to Deliver a Builder’s Warranty
Despite the “Except as set forth in any new construction warranty . . .” language, there is nothing else in the ASNC that requires the builder to provide a warranty. Because the ASNC form is designed for use by a prospective buyer who is crafting the offer to purchase a home that is still under construction, the form should contain language requiring the seller to warrant the construction, workmanship, materials, plumbing, electrical and mechanical systems, appliances, fixtures, and equipment for three (3) years from the date of closing and to warrant the construction from any major structural defects for a period of twenty (20) years from closing. Of course, the seller may negotiate the length and scope of the warranty down, but the importance to the consumer and to the industry as a whole is that all parties understand the issue, that the negotiation occurs, and that the builders strive to achieve a suitable level of workmanship with the understanding that they will be held accountable for failing to do so. The ASNC has nothing of substance to protect the buyer or incentivize the seller.
8. The PAR form gives no guidance on obtaining an enforceable
warranty.
Warranties offered by a seller are frequently worthless. Commonly, any warranty offered by the seller is not backed by a third-party insurance or warranty company. It only requires the seller to repair defective workmanship defined in the agreement for the period of time defined in the warranty. The seller, however, is often a single purpose entity created to purchase the land, develop the home(s) and sell the home(s). In other words, the builder is frequently a limited liability company that exists only so long as it takes to construct and sell the home(s). There is nothing necessarily nefarious about that business model because every new real estate project even when initiated by the same principal investor(s) often has different equity investors and financing sources which justifies an independent corporate structure. However, the warranty should issue from an entity that has a longer life span and greater depth. This could be handled in a variety of ways such as requiring that the warranty issue from a third-party warranty company or that the seller represent that it will not dissolve and will maintain sufficient assets to honor the warranty for so long as the warranty exists.
9. Conclusion
The Pennsylvania Association of Realtors Standard Agreement for the Sale of New Construction (“ASNC”) is not an appropriate form for a buyer. No buyer should sign this agreement. The ASNC leaves a buyer exposed to an endless variety of construction defects with no clear remedy as against the builder or seller. Indeed, the ASNC is a disservice to the agents that are members of PAR because they will find themselves with unhappy clients or worse, the “deep pocket” in a lawsuit by a buyer who finds that their dream home has turned into a money pit. Any buyer of new construction should consult a confident real estate attorney before binding themselves to an agreement and ensure that they receive the home the intend to bargain for and a viable warranty to guard against the all too common latent construction defects.
1https://www.facebook.com/events/274405054346225
3 https://www.parealtors.org/agreement-of-sale-to-see-some-changes-july-1/
4Section 10(f)(2) of the ASNC notes that a Seller’s Property Disclosure Statement need not be given if a one-year warranty is given, the home is inspected for code compliance, and a certificate of occupancy will issue. However, as explained further in this article, that is little to no protection for the buyer, particularly if the seller provides the disclosures in lieu of the warranty. Typically, new homes pass the code inspection but local building inspectors are not engineers and many latent defects such as stucco defects pass undetected.
5The implied warranty of fitness for a particular purpose protects a buyer when a seller knows that the goods are being purchased for a particular purpose but a ”’particular purpose’ differs from an ordinary purpose for which the goods are used in that it envisages a specific use by the buyer which is peculiar to his business”. This has no application to a home buyer that purchases a home for its “ordinary purposes” as a home.
6 A claim for breach of the implied warranty of habitability represents a contract claim by a tenant against a landlord where the conditions of a tenancy are such as to make a rental home property uninhabitable.