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IS YOUR STATE NEXT?
As Goes Texas So Goes the Nation 
TEXAS REGULATES HOMEBUYERS!
NEW HOMEBUYER LEGISLATION MAY BE COMING TO YOUR STATE SOON
!
How Texas Home Building Industry shaped the Texas Residential Construction
Commission (TRCC) and regulates new homebuyers

Old Bush & Motts Website
Sunday, 10 September 2006

Copy of Archived Bush & Motts Website

THE WHY, WHAT, AND WHEN OF THE NEW TEXAS RESIDENTIAL
CONSTRUCTION COMMISSION ACT

THE NEW RESIDENTIAL REAL ESTATE CONSTRUCTION LAW RULES

Under the New Texas Residential Construction Commission Act

 I.       INTRODUCTION  

       In the past in Texas , disputes between builders and consumers involving construction defects have all too often been resolved in a courtroom.  This was unfortunate for both sides because of the time and expense involved.  This situation was caused, in large part, by appellate court decisions that:

       (1)  created implied warranties of good and workmanlike construction and habitability, but failed to adequately define what these warranties covered [1]  ;

       (2)  eliminated or restricted a builder’s ability to contractually disclaim these implied warranties [2]  ;

       (3)  determined that damages arising from a breach of either of the implied warranties were not covered under the builder’s commercial general liability policy [3]  ;

       (4)  weakened the original purpose and intent of the Texas Residential Construction Liability Act (“RCLA”) [4]  ; and

       (5)  created doubt as to whether mental anguish and punitive damages could be recovered in a construction defect case [5]  .

       The impact of these decisions on the housing industry was significant.  Builders were exposed to undefined and uninsured liability for implied warranties that were difficult, if not impossible, to contractually disclaim.  On top of this, most insurance carriers that wrote general liability insurance for builders quit writing builder insurance in Texas and those that stayed raised their premiums significantly and increased their coverage exclusions.  Recognizing the potential impact of all this on housing prices and availability, the Texas Association of Builders created a Building Standards Task Force to study the problems and draft legislation to help address them.  After over a year of work by scores of dedicated people, House Bill 730, the Texas Residential Construction Commission Act, Tex. Prop. Code, § 401.001 et seq. (“TRCCA”), was passed by the Texas Legislature and became effective on September 1, 2003

II.       OVERVIEW OF THE TRCCA

       The TRCCA is a comprehensive statute that can be generally summarized as follows:

A.    Formation of the new Texas Residential Construction Commission.   

       The commission consists of nine people appointed by the Governor.  Four members are homebuilders, three are public members, one is a licensed engineer and one is a licensed inspector.  The commissioners are:

 

       (1)  Patrick Cordero of Midland is chairman of the commission.  He is CEO of Strategic Abstract & Title Corp. and a member of the American and Texas Bar Associations.  His appointment expires February 1, 2009 .

       (2)  Art Cuevas of Lubbock is president of Art Cuevas Construction.  He is vice-chair of the City of Lubbock ’s Building Board of Appeals and a former member of the Texas State Board of Plumbing Examiners and has served on the boards of directors for the NAHB, TAB and the West Texas Home Builders Association.  His term expires February 1, 2005 .

       (3)  J. Paulo Flores of Dallas is a director in the law firm of Gessner & Flores and an author and lecturer on construction law issues.  He is a member of the Dallas Hispanic Chamber of Commerce, the Hispanic Contractors’ Association and the American, Texas , Dallas and Hispanic Bar Associations.  His term expires February 1, 2005

       (4)  John R. Krugh of Houston is senior vice president and corporate counsel for Perry Homes and is active in the Greater Houston Builders Association. His term expires February 1, 2009 .

       (5)  Glenda C. Marriott of College Station is vice president of Mariott Homes.  She is an officer and past president of Bryan/College Station Home Builders Association and vice chair of the Bryan/College Station Convention & Visitors Bureau Board.  Her appointment expires February 1, 2007 .

       (6)  Scott M. Porter of Kerrville is president of Porter Contracting Co.  He is an area director for the Texas Hill Country Home Builders Association and a member of the Kerrville Chamber of Commerce.  His appointment expires February 1, 2007 .

       (7)  Mickey R. Redwine of Ben Wheeler is the owner and CEO of Dynamic Cable Holdings and holds an advanced peace officer license.  His appointment as a public member of the commission expires February 1, 2007 .

       (8)  Kenneth L. Davis of Weatherford is vice president of Pate Engineers and has more than 15 years of experience as a consulting engineer.  He is a registered professional engineer in Texas and New Mexico and a member of the Parker County Builders Association and the Greater Fort Worth Builders Association.  His term expires February 1, 2009.  

         (9)  Thomas Killebrew of Fort Worth is president of Metro Code Analysis, a plan review and inspection company.  He serves on the board of the Greater Fort Worth Builders Association and the HBA of Greater Dallas.  His term expires February 1, 2005 .

 

       The Commission has six primary duties:  1) adopt procedures for registration of builders and homes, 2) create and adopt limited statutory warranty, building and performance standards, 3) oversee the State-sponsored inspection and dispute resolution process, 4) provide a process for voluntary certification of arbitrators, 5) maintain a central registry for filing of arbitration awards, and 6) oversee three task forces.

 

B. Registration of Builders.   

       The TRCCA provides that a person may not act as a builder unless that person holds a certificate of registration from the Commission.  The requirements for registration are simple and straightforward.  The initial fee for registration may not exceed $500.00 with a fee for renewal not to exceed $300.00.  Each certificate of registration can last up to 24 months.  To be eligible for registration as a builder, a corporation, a limited liability company, or a partnership must designate at least one of its officers or members as its agent and this person must also be registered as a builder.  The Commission can discipline a builder for engaging in defined prohibited practices including fraud, misappropriation of trust funds, discrimination and failure to pay a final judgment arising from a construction defect.

 

 C.   Registration of Homes.

       To provide additional funds for the operation of the Commission, there will be a per home registration fee of approximately $30.00 payable within 15 days following the end of the month in which closing of a new home occurs or, if there is no closing, within 15 days following the earlier of the date of the contract or commencement of the work.

 

D.   Inspection and Dispute Resolution.  

       If there is a dispute involving an alleged construction defect, either the homeowner or the builder may file a claim with the Commission.  The Commission then appoints a state-approved third party inspector to inspect the alleged defect and determine if the house complies with the applicable building and performance standards.  Either side can appeal the inspector’s findings to the Commission.  After the Commission’s decision is final, if the homeowner rejects the ruling, the builder can make a RCLA offer which can be based on the Commission’s ruling.  Then, in any subsequent lawsuit or arbitration proceeding, the homeowner has the burden to prove by a preponderance of the evidence that the Commission’s ruling was inconsistent with the applicable building and performance standards.

 

E.   Building and Performance Standards.  

       The new TRCCA abolishes all implied warranties relating to residential construction.  Instead, the statute provides that initial construction must comply with the non-electrical standards found in the International Residential Code for One and Two Family Dwellings (“IRC”) and the electrical standards contained in the National Electrical Code (“NEC”).  It further states that the Commission shall promulgate a standard warranty that provides one year coverage for workmanship and materials, two years coverage for plumbing, electrical and HVAC delivery systems and ten years coverage for major structural components.  The TRCCA does create a specific statutory warranty of habitability, but also says that a breach of this warranty by itself is not a violation of the DTPA.  Third-party warranty companies are expressly addressed in the statute, which allows builders to conditionally transfer their warranty obligations to a third-party warranty company in accordance with the terms of the particular warranty agreement. 

 

F.    ARCLA Amendments.  

       The TRCCA contains several amendments to the Texas Residential Construction Liability Act found at Chapter 27 of the Texas Property Code (“RCLA”) that close loopholes created over the past ten years.  For example, damages in a RCLA case are now limited to defined economic damages with mental anguish or punitive damages being expressly excluded.  Also, if a builder’s RCLA offer is now found to be unreasonable, RCLA still controls the types of damages for which the builder can be liable.  The TRCCA also provides that if a builder makes a reasonable offer of settlement, which is rejected by the homeowner, then the homeowner cannot recover more than the value of the offer.

G.   Arbitration  

       The Legislature is concerned about the public’s perception of the fairness of arbitration.  As a result, the TRCCA contains certain provisions relating to arbitration.  Specifically, arbitrators may voluntarily choose to be certified by the Commission and certain arbitration awards must be filed with the Commission.  Basically, these provisions will help provide more information about how arbitration is working in Texas .  The TRCCA also states that an arbitration award can be set aside by a court it if reflects a manifest disregard of applicable Texas law.  This will help in situations where an arbitrator fails to properly follow the TRCCA and/or the RCLA.  

H.   Task Force Groups  

       The TRCCA also calls for the Commission to create three task forces.  One will advise the Commission on recommended practices for controlling moisture intrusion and mold.  Another task force will study the effectiveness of arbitration in residential construction disputes and make recommendations.  The third task force will advise the Commission on rain harvesting and water recycling.

 

 I.   Timetable  

       There are several different dates in the TRCCA that control when various provisions become effective.  These include: 1) September 1, 2003 – RCLA changes; 2) January 1, 2004 – Commission begins collecting house registration fee, certain arbitration awards must be filed, and inspection process is initiated; and 3) March 1, 2004 – Commission begins registration of builders and voluntary certification of arbitrators.

 III.       GENERAL PROVISIONS  

A.   General Definitions – Chapter 401  

       Throughout the TRCCA, the following definitions apply:

 

       (1)  “Applicable building and performance standards” means:

            (a) building and performance standards adopted under Section 430.001 of the TRCCA; or

            (b) for homes constructed before the adoption of building and performance standards under Section 430.001 of the TRCCA, the building and performance standards under any express warranty provided in writing by the builder or, if there is no express warranty, the usual and customary residential construction practices in effect at the time of the construction.

       (2)  “Applicable warranty period” means:

            (a) a warranty period established under Section 430.001 of the TRCCA; or

            (b) for construction to which the warranty periods adopted under Section 430.001 of the TRCCA do not apply, any other construction warranty period that applies to the construction.

       (3)  “Approved architect” means an architect licensed by this state and approved by the Commission to provide services to the Commission in connection with the state-sponsored inspection and dispute resolution process.

 

       (4)  “Approved structural engineer” means a licensed professional engineer approved by the Commission to provide services to the Commission in connection with the state-sponsored inspection and dispute resolution process.

       (5)  “Commission” means the Texas Residential Construction Commission.

       (6)  “Home” means the real property and improvements and appurtenances for a single-family house or duplex.

       (7)  “Homeowner” means a person who owns a home or a subrogee or assignee of a person who owns a home.

       (8)  “Limited statutory warranty and building and performance standards” means the limited statutory warranty and building and performance standards adopted by the Commission under Section 430.001 of the TRCCA.

       (9)  “Nonstructural matter” has the meaning assigned by the limited statutory warranty and building and performance standards adopted by the Commission under Section 430.001 of the TRCCA.

       (10) “Request” means a request submitted under Section 428.001 of the TRCCA.

       (11) “State inspector” means a person employed by the Commission under Section 427.002 of the TRCCA.

       (12) “State-sponsored inspection and dispute resolution process” means the process by which the Commission resolves a request.

       (13) “Structural” means the load-bearing portion of a home.

       (14) “Structural failure” has the meaning assigned by the limited statutory warranty and building and performance standards adopted by the Commission under Section 430.001 of the TRCCA.

       (15) “Third-party inspector” means a person appointed by the Commission under Section 428.003 of the TRCCA.

       (16) “Warranty of habitability” means a builder’s obligation to construct a home or home improvement that is in compliance with the limited statutory warranties and building and performance standards adopted by the commission under Section 430.001 of the TRCCA and that is safe, sanitary, and fit for humans to inhabit.

       In addition, Section 401.003 defines “Builder” as follows:  any business entity or individual who, for a fixed price, commission, fee, wage, or other compensation, constructs or supervises or manages the construction of:  1) a new home;  2) a material improvement to a home, other than an improvement solely to replace or repair a roof of an existing home; or  3) an improvement to the interior of an existing home when the cost of the work exceeds $20,000.  The term includes:  1) an owner, officer, director, shareholder, partner, affiliate, or employee of the builder;  2) a risk retention group governed by Article 21.54, Insurance Code, that insures all or any part of a builder’s liability for the cost to repair a residential construction defect; and  3) a third-party warranty company and its administrator.  The term does not include any business entity or individual who has been issued a license by this state or an agency or political subdivision of this state to practice a trade or profession related to or affiliated with residential construction if the work being done by the entity or individual to the home is solely for the purpose for which the license was issued. 

       Section 401.004 defines “construction defect” as follows: 1) the failure of the design, construction, or repair of a home, an alteration of or a repair, addition, or improvement to an existing home, or an appurtenance to a home to meet the applicable warranty and building and performance standards during the applicable warranty period; and 2) any physical damage to the home, an appurtenance to the home, or real property on which the home or appurtenance is affixed that is proximately caused by that failure.  The term does not include a defect that arises or any damages that arise wholly or partly from: 1) the negligence of a person other than the builder or an agent, employee, subcontractor, or supplier of the builder; 2) failure of a person other than the builder or an agent, employee, subcontractor, or supplier of the builder to: a) take reasonable action to mitigate any damages that arise from a defect; or b) take reasonable action to maintain the home;  3) normal wear, tear, or deterioration; or 4) normal shrinkage due to drying or settlement of construction components within the tolerance of building and performance standards.

       The TRCCA definition of a “construction defect” is not as broad as the definition of construction defect found in the RCLA.  The RCLA defines “construction defect” as “…a matter concerning the design, construction, or repair of a new residence, of an alteration of or repair or addition to an existing residence, or of an appurtenance to a residence, on which a person has a complaint against a contractor.” 

 

B.   Exemptions – Chapter 401  

       The TRCCA does not apply to a home that is: 1) built by the individual who owns the home, alone or with the assistance of the individual’s employees or independent contractors; and 2) used by the individual as the individual’s primary residence for at least one year after the completion or substantial completion of construction of the home. 

       The TRCCA also does not apply to a homeowner or to a homeowner’s real estate broker, agent, or property manager who supervises or arranges for the construction of an improvement to a home owned by the homeowner.

 

IV.       BUILDER COMPLIANCE  
A.    Builder Registration – Chapter 416  

The TRCCA provides that a person may not act as a builder in the State of Texas unless the person holds a certificate of registration from the Commission.  An applicant for a certificate of registration must submit an application on a form prescribed by the Commission.  Each applicant must disclose whether the applicant has entered a plea of guilty to or been convicted of a felony or a crime involving moral turpitude.  The Commission may conduct a criminal background check of the applicant and may obtain criminal history record information from law enforcement entities.  However, unless such information is a public record at the time the Commission receives it, the information is confidential and may not be released by the Commission except under a court order or with permission of the applicant. 

       A person may not receive a certificate of registration unless:  1) the person is at least 18 years of age; 2) is a citizen of the United States or a lawfully admitted alien; and 3) the Commission is satisfied with the person’s “honesty, trustworthiness and integrity” based on information supplied or discovered in connection with the person’s application.

 

       The certificate of registration must be issued within fifteen (15) days after receipt of the application.  If the Commission denies the application, the applicant is entitled to a hearing before the Commission.  The filing fee for an original application may be up to $500.00.  The fee for an application to renew a certificate of registration may not exceed $300.00.  The TRCCA requires the Commission to establish a fee schedule that takes into consideration the unit volume or dollar volume of potential applicants when setting the application and renewal fees.  Each certificate of registration will be for a period not exceeding 24 months. 

       If the builder operates through one or more business entities such as a corporation, limited liability company, partnership, limited partnership or limited liability partnership, the entity must be registered as a builder with the Commission.  In addition, the entity must designate at least one of its officers, managers, or partners (as the case may be) as its agent and such agent must also be registered as a builder. 

       Each builder must maintain a fixed office location in Texas and the address of the builder’s principal place of business must be designated on the certificate of registration.  If the builder moves from that address, it must, within thirty (30) days after such move, notify the Commission of its new address. 

       If the builder operates under any type of an assumed name, it must notify the Commission of all names under which it operates.  If it changes an assumed name, it must notify the Commission within forty-five (45) days of its new assumed name. 

       The TRCCA does not require a builder to obtain a separate certificate of registration for each sales office.

 

 B.   Prohibited Practices and Disciplinary Proceedings – Chapter 418  

       The TRCCA specifies eleven (11) separate grounds for disciplinary action against a registered builder.  These are:  1) fraud or deceit in obtaining a certificate of registration;  2) misappropriation of trust funds;  3) naming false consideration in a contract;  4) discrimination;  5) false or misleading advertising;  6) giving the Commission a bad check;  7) failure to pay an administrative penalty assessed by the Commission;  8) nonpayment of a final non-appealable judgment arising from a construction defect or other transaction between a builder and a homeowner;  9) failure to register a home as required by the TRCCA;  10) failure to pay the registration fee for a home; and 11) failure to reimburse a homeowner for the cost of an inspection when ordered to do so by the Commission.

       If the Commission determines that a ground for disciplinary action exists, the Commission may:  1) revoke or suspend a builder’s registration;  2) probate the suspension of the registration; or  3) formally or informally reprimand a registered builder. 

       If the Commission proposes to take disciplinary action, the person against whom such disciplinary action is directed is entitled to a hearing before the Commission.  A builder who disagrees with any disciplinary action taken by the Commission may appeal such action to a district court in the county in which the administrative hearing was held. 

       In a contested case involving disciplinary action, the Commission may, as part of its order, impose an administrative penalty on a registered builder who violates the TRCCA or any rule adopted by the Commission.  The administrative penalty may not exceed $5,000 for each violation.  In determining the amount of the penalty, the hearings officer or the Commission shall consider:  1) the seriousness of the violation; 2) the history of previous violations; 3) the amount necessary to deter a future violation; 4) efforts to correct the violation; and 5) any other matter that justice may require.

C.   Registration of Homes – Chapter 426 
 

       A builder must register each new home with the Commission on or before the 15th day of the month following the month in which the transfer of title from the builder to the homeowner occurs.  The registration must include the information required by the Commission by rule and be accompanied by the registration fee specified by the Commission not to exceed $125.00.

       A builder who enters into a transaction other than one involving a transfer of title to a new home from the builder to the seller, (i.e. remodeling in excess of $20,000 or mechanic’s lien construction on the owner’s lot) must also register the home with the Commission.  This registration must include the information required by the Commission by rule, be accompanied by the fee (not to exceed $125.00) and be delivered to the Commission not later than the 15th day after the earlier of (a) the date of the agreement that describes the transaction between the homeowner and builder, or (b) the commencement of work on the home.  

       The Commission has posted a Home Registration Form, Instructions for Completing the Home Registration Form and a 501(c)(3) Non-Profit Fee Waiver Form on its website, which is http://www.trcc.state.tx.us.  Copies of these forms and instructions are included as Appendix A.

D.   Dispute Resolution Process – Chapters 426, 427, 428 and 429  

       The TRCCA contains a mandatory administrative process designed to facilitate resolution of disputes relating to alleged residential construction defects.  This administrative process does not apply to the following types of claims:  1) claims solely for personal injury, survival or wrongful death, 2) damage to goods, 3) violations of Section 27.01 of the Texas Business & Commerce Code (statutory fraud claims), 4) a builder’s wrongful abandonment of an improvement project before completion, or 5) a builder’s misappropriation of construction trust funds in violation of Chapter 162 of the Texas Property Code.

       If a dispute between a homeowner and builder arises out of an alleged construction defect, the homeowner must first provide the builder with written notice of each construction defect the homeowner claims to exist.  This written notice must be given at least thirty (30) days before the homeowner contacts the Commission to initiate the statutory dispute resolution process.  After this notice is provided, the builder and the builder’s designated consultants, if any, must be given a reasonable opportunity to inspect the home.  If the homeowner and the builder are unable to resolve the dispute within the aforesaid thirty-day time period, the homeowner or the builder may submit to the Commission a written request for state-sponsored inspection and dispute resolution.  This request must:  1) specify in reasonable detail the alleged construction defects, 2) state the amount of any known out of pocket expenses and engineering or consulting fees incurred by the filing party in connection with each alleged construction defect, 3) include any evidence that depicts the nature and cause of each alleged construction defect and the nature and extent of repairs necessary to remedy the construction defect, including, if available, expert reports, photographs and videotapes, 4) be accompanied by the fees required in the TRCCA, and 5) state the name of any person who has, on behalf of the requesting party, inspected the home in connection with the alleged construction defects.

       The TRCCA expressly states that a homeowner must comply with the state-sponsored inspection and dispute resolution process before initiating an action for damages or other relief arising from an alleged construction defect. 

       Furthermore, this state-sponsored inspection and dispute resolution process must be requested on or before the second anniversary of the date of discovery of the conditions claimed to be evidence of the construction defects, but not later than the 30th day after the date the applicable warranty period expires. 

       A person who submits a request to the Commission for administrative review must send by certified mail, return receipt requested, a copy of the request, including all evidence submitted with the request, to each other party involved in the dispute. 

       On or before the 15th day after the date the Commission receives a request, the Commission must appoint the next available third-party inspector from the applicable list of third-party inspectors maintained by the Commission.  If the dispute involves workmanship and materials in a home of a nonstructural matter, the third-party inspector must issue a recommendation not later than the 15th day after the date the third-party inspector receives the appointment from the Commission.

       If the dispute involves a structural matter in the home, the Commission must appoint an approved engineer to be the third-party inspector.  This third-party inspector must inspect the home not later than the 30th day after the date that the request is submitted and issue a recommendation not later than the 60th day after the date the third-party inspector receives the assignment from the Commission, unless additional time is requested by the third-party inspector or a party to the dispute. 

       The third-party inspector’s recommendation must address only the construction defects, based on the applicable warranty and building and performance standards, and designate the method or manner of repair, if any.  The third-party inspector’s recommendation may not include payment of any monetary consideration unless the inspector finds for the party who submitted the request.  In such event, the Commission may order the other party to reimburse all or part of the fees and inspection expenses paid by the requestor. 

       A homeowner or builder may appeal a third-party inspector’s recommendation on or before the 15th day after the date the recommendation is issued.  If there is an appeal, the Executive Director of the Commission must appoint three state inspectors to a panel to review the recommendation.  This panel must review the recommendation and can approve, reject, or modify the recommendation of the third-party inspector or remand the dispute back to the third-party inspector for further action. 

       In any legal action involving a construction defect brought after a recommendation by a third-party inspector or a ruling by the panel of state inspectors on the existence of a construction defect or its appropriate repair, the recommendation or ruling shall constitute a rebuttal presumption of the existence or non-existence of a construction defect and the reasonable manner of repair of the construction defect.  A party seeking to dispute, vacate, or overcome that presumption must establish by a preponderance of the evidence that the recommendation or ruling is inconsistent with the applicable warranty and building and performance standards. 

 

       Appendix B is a flow chart prepared by the Texas Association of Builders illustrating the timeline for the statutory dispute resolution process.

V.       WARRANTIES AND BUILDING AND PERFORMANCE STANDARDS  

A.   Limited Statutory Warranties and Building and Performance Standards – Chapter 430  

       The TRCCA requires the Commission to adopt limited statutory warranties and building and performance standards for residential construction that comply with the provisions of Chapter 430 of the TRCCA.  The warranty periods are as follows:  1)  One year for workmanship and materials;  2)  Two years for plumbing, electrical, heating and air-conditioning delivery systems; and  3) Ten years for major structural components of the home. 

       The TRCCA requires that the limited statutory warranties and building and performance standards must:  1) require substantial compliance with the International Residential Code (“IRC”) and National Electrical Code (“NEC”);  2) include standards for mold reduction and remediation that comply with Section 430.003 of the TRCCA;  3) establish standards for performance for interior and exterior components of the home;  4) contain standards that are not less stringent than the standards adopted by the United States Department of Housing and Urban Development as set forth 24 C.F.R. 203.202, et seq. 

       Section 430.003 of the TRCCA does not require the limited statutory warranty to include coverage for mold claims.  Instead, it provides that the building and performance standards adopted by the Commission must include measures that are designed to reduce the general population’s exposure to mold.  These measures would include:  1) methods by which mold in indoor environments may be recognized and 2) recommended management practices for limiting moisture intrusion in a home and mold remediation.

 

 B.   Statutory Warranties Exclusive  

       Section 430.006 of the TRCCA states that the warranties established in the TRCCA supercede all implied warranties.  The TRCCA goes on to state that the only warranties that exist on residential construction or residential improvements are the warranties created by the TRCCA or any express, written warranty acknowledged by the homeowner and the builder.  The TRCCA does preclude a builder and a homeowner from including language in a contract that would waive or restrict the limited statutory warranties and building and performance standards adopted in the TRCCA.  It does, however, allow a builder and homeowner to contract for more stringent warranties and building standards than those specified in the TRCCA. 

       The TRCCA abolishes the implied warranty of good and workmanlike construction and the implied warranty of habitability which were first created by the Texas Supreme Court in 1968 in the case of Humber v. Morton [6]   and were later found to be essentially non-waivable by the Texas Supreme Court in its December 31, 2002 opinion in the case of Centex Homes v. Buecher [7]  .  It also abolishes, with respect to construction defect disputes, the implied warranty of good and workmanlike repair that was created by the Texas Supreme Court in 1987 in the case of Melody Home Manufacturing Company v. Barnes [8]  . The TRCCA creates a statutory warranty of habitability defined as a “builder’s obligation to construct a home or home improvement that is in compliance with the limited statutory warranties and building and performance standards adopted by the Commission…and that is safe, sanitary, and fit for humans to inhabit.”  Section 430.002 states that the construction of each new home or home improvement shall include the warranty of habitability.  In order to establish that a builder or remodeler has violated these statutory warranty of habitability, the party seeking to do so must establish the following:  1) that the construction is not in compliance with the limited statutory warranty or the statutory building and performance standards,  2) such non-compliance has a direct adverse affect on the habitable areas of the home,  3) such non-compliance has rendered the home unsafe, unsanitary, or otherwise unfit for human habitation, and 4) the condition could not have been discoverable by a reasonably prudent inspection during the applicable warranty period.  Significantly, the TRCCA states that a breach of this statutory warranty of habitability is not, by itself, a violation of the Texas Deceptive Trade Practices-Consumer Protection Act (“DTPA”). 

       Third-party warranty companies are not required to provide a warranty of habitability in their limited warranty documents. 

 

C.   Third-party Warranty Programs – Chapter 430  

       The TRCCA specifically addresses the role of third-party warranty companies in Texas and states that the Commission may approve as a third-party warranty company:  1) an entity that has operated warranty programs in Texas for at least five years;  2) a company whose performance is insured by an insurance company authorized to engage in the business of insurance in Texas; or 3) an insurance company that insures the warranty obligations of a builder under the statutory warranty and building and performance standards.

       A third-party warranty company wishing to operate in Texas must submit to the Commission an annual application and fee in the form and in the amount required by the Commission by its rules. 

       With respect to third-party warranty companies, the TRCCA specifically provides:  1)  a builder may elect to provide a warranty through a third-party warranty company approved by the Commission; and 2) a builder may transfer his contractual warranty liability to the third-party warranty company if the company agrees to perform the builder’s warranty obligations under the TRCCA that are covered by the warranty provided through the third-party warranty company and actually pays for or corrects any construction defect covered by the warranty provided through the third-party warranty company.

       In an effort to forestall the type of litigation that has been filed in Texas in the past, the TRCCA expressly provides that a company that administers a warranty for a third-party warranty company is not liable for any damages resulting from a construction defect or from repairs covered under the warranty. 

       Since a third-party warranty company approved by the Commission has all of the rights of the builder under the TRCCA regarding performance of repairs to remedy construction defects or payment of money in lieu of repairs, a homeowner who has a complaint against a third-party warranty company is required to go through the administrative process discussed above.  If, after the administrative process is concluded, the homeowner elects to bring a cause of action or a legal claim against a third-party warranty company for breach of the limited statutory warranty, the only damages that a successful homeowner can recover are those provided in amended Section 27.004 of the Residential Construction Liability Act (“RCLA”).  The TRCCA also provides that a breach of a limited statutory warranty shall not, by itself, constitute a violation of the Texas Deceptive Trade Practices-Consumer Protection Act (“DTPA”).  This is a significant change from prior Texas law which provided that any breach of a warranty, express or implied, was an automatic violation of the DTPA. 

VI.       ARBITRATION  

 A.   General Provisions – Chapter 436  

       The TRCCA does not contain any prohibitions against or restrictions on arbitration of construction defect disputes pursuant to a contractual agreement to arbitrate.  Chapter 436 contains some general definitions, including definitions of “arbitration,” “arbitration services provider,” and “arbitrator.”  The only substantive section of the TRCCA relating to arbitration proceedings is found in 436.003 where there is a non-waiveable requirement that an arbitration of a dispute involving a construction defect shall be conducted in the county in which the home alleged to contain the defect is located. 

       Chapter 436 also directs the Commission to appoint a task force to study residential arbitration and report to the legislature on the task force recommendations. 

 B.   Reporting Arbitration Awards – Chapter 437  

       In order to provide more detailed information on how arbitration is working in Texas with respect to resolution of residential construction defect disputes, the TRCCA contains some requirements with respect to filing arbitration awards with the Commission.  Chapter 437 of the TRCCA states that if an arbitration award is filed in a court of competent jurisdiction in Texas , the filing party shall, not later than the 30th day after the date the award is rendered, file with the Commission a summary of the arbitration award.  This summary must include:  1) the name of the parties to the dispute;  2) the name of each party’s attorney, if any;  3) the name of the arbitrator who conducted the arbitration;  4) the name of the arbitration services provider who administered the arbitration, if any;  5) the fee charged to conduct the arbitration;  6) a general statement of each issue in dispute;  7) the arbitrator’s determination, including the party that prevailed in each issue in dispute and the amount of any monetary award; and  8) the date of the arbitrator’s award. 

 C.   Grounds for Vacating Arbitration Awards – Chapter 438  

       Chapter 438 of the TRCCA contains a new, statutory basis for vacation of a residential construction arbitration award.  It provides that “a court shall vacate an award in a residential construction arbitration upon a showing of manifest disregard for Texas law.”  This provision could be very beneficial to builders and third-party warranty companies in cases where an arbitrator refuses to follow the TRCCA and/or the RCLA.

VII. RCLA CHANGES  

       Article 2 of the TRCCA also contains several significant amendments to the Texas Residential Construction Liability Act.  These include the following: 

 

       (1) expansion of the definition of “action” to include arbitration proceedings;

 

       (2) a new and exclusive definition of the types of economic damages that can be recovered in an action controlled by the RCLA.  Under this new definition, “economic damages” means compensatory damages for pecuniary loss proximately caused by a construction defect.  The term does not include exemplary damages or damages for physical pain or mental anguish, loss of consortium, disfigurement, physical impairment, or loss of companionship and society.

 

       (3) a clarification that RCLA applies not only to an action to recover damages, but also to an action to recover any other form of relief arising from a construction defect.  This would include an action for rescission or other equitable relief. 

 

       (4) a “second bite at the apple” provision which requires a claimant who believes that the contractor has made an unreasonable offer of settlement to advise the contractor within 25 days as to the reasons why the claimant considers the offer unreasonable.  The contractor then has an additional 10 days to make a supplemental written offer of settlement to the claimant.

 

       (5) mandatory dismissal, rather than abatement, of actions when the claimant fails to comply with the notice and inspection requirements contained in the TRCCA, if applicable, or in the RCLA.

 

       (6) elimination of a former section of the RCLA that allowed the trier of fact to determine whether a claimant unreasonably rejected an offer of settlement made under the RCLA.  Now, the question is simply whether or not the contractor’s offer was reasonable.

 

       (7) in situations where the trier of fact determines that the contractor’s offer of settlement is reasonable, the maximum recovery available to the homeowner is limited to the fair market value of the contractor’s offer plus any reasonable and necessary costs and attorney’s fees incurred before rejection.

 

       (8) clarification that the only consequence of a finding that a contractor’s offer is unreasonable is that damages are not capped at the “short menu” as specified in item no. 7 above but, instead, can include, as applicable, the “long menu” discussed in item no. 9 below. 

       (9) a provision specifying that in any action subject to the RCLA, if there is a finding that there was no reasonable offer of settlement made, the claimant may recover only the following economic damages proximately caused by a construction defect:  a) the reasonable cost of repairs necessary to cure the construction defects;  b) reasonable and necessary costs for the replacement or repair of any damaged goods in the residence;  c) reasonable and necessary engineering and consulting fees;  d) reasonable expenses of temporary housing reasonably necessary during the repair period;  e) the reduction in current market value, if any, after the construction defect is repaired if the construction defect is a structural failure; and f) reasonable and necessary attorney’s fees.

 

       (10) a provision for a conditional resale to the builder if the cost and repairs exceed an agreed percent of the fair market value of the home.  For this provision to be operative, it must be contained in a written agreement between a contractor and a homeowner and be exercisable only if the home is less than five (5) years old.  The repurchase price is established at the original purchase price plus the cost of any permanent improvements made by the homeowner and moving expenses.  An offer to repurchase under this provision is considered a reasonable offer under the RCLA absent clear and convincing evidence to the contrary.

 VIII.            SUMMARY  

       The TRCCA is a carefully balanced statute designed to: 1) establish clear, objective standards for residential construction and performance, 2) provide a fast, economical and fair administrative process to resolve residential construction disputes without litigation, and 3) implement a registration system for builders that allows the Commission to discipline builders who engage in prohibited practices.

 

ROBERT L. RUSSELL BUSH
BUSH & MOTES, P.C.
4025 Woodland Park Blvd., Suite 190

 

Arlington , Texas 76013

817-274-5992 or 1-800-211-1791

Fax: 817-261-1671

 http://web.archive.org/web/20040706003622/http://bushmorrisonlaw.lawoffice.com/CM
/Articles/Articles58.asp

July 6, 2004

 

 

 

 

 

 

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