Watch for These Issues in Builder Contracts

​In many builder transactions, an attorney, who is representing the builder, has drafted the builder’s contract from scratch. They most often favor their clients, the builders, rather than your clients. Here are a few things to look for and bring to the attention of your clients.

​Seller’s ability to increase the price.
In this environment of increasing construction costs, we’ve been seeing clauses that allow the builder to increase the contract price.  The language varies, but basically, the builder contract states that if there is an increase in cost, the buyer can either agree to the increased price or terminate and get funds paid returned in full plus $250.00.  The addition of the $250.00 payment is included to fulfill the mutuality requirement. Typically, these clauses are enforceable If you see this type of clause, you probably won’t be able to get it excluded from the contract, but you should point it out to your client before the contract is executed.  For example:
 
Seller’s Right to Terminate for Increased Cost of Construction. Should there be a rise in the cost of any specified building material or materials, exclusive of any other price changes, that would cause the total contract price to increase by more than _____(%), the Builder shall, before making any additional purchases of specified material or materials, provide to the Buyer a written statement expressing the percentage increase of the contract price, the building material or materials in question, and the dollar amount of the price increase to be incurred. The Buyer may then, at his option, terminate the contract by providing within _____ business days written notice of termination to the Builder. Should notice of termination not be forthcoming within _____ business days, as provided herein, the Builder shall have the option to terminate the contract, or to proceed with the contract and purchase the specified building materials at the increased price. If termination is elected, the Builder shall provide to the Buyer a written notice of termination, and the Buyer shall receive a refund of all earnest money, construction deposits and upgrade or option deposits., plus a builder termination fee of $________ If the Builder elects to proceed on the contract, he may then purchase the specified material or materials at the increased price, and the Buyer shall be required to pay the increased cost incurred.
 
Seller’s ability to terminate for any reason.
Watch out for this kind of clause that allows the builder to terminate for any reason, even if the Seller doesn’t like the buyer.  Typically, this clause is used to terminate when costs and prices are increasing, but it can be for any reason.  Again, these clauses a generally enforceable.
 
Seller’s Right to Terminate without Default. Without regard to default and for any reason or no reason, Seller shall have the right to terminate this contract, at any time prior to the closing upon the payment to the buyer of the Earnest Money, construction deposits and a builder termination fee of $________, as liquidated damages.
 
 
Omission of Agency Representation Disclosures
Look for the required agency representation disclosures, firm license numbers and licensee license numbers, so you are in compliance with the Georgia license law. GAR has an agency form specifically for this purpose.  It is intended to be used with a non-GAR contract and covers the agency requirements. (GAR F119) It can be added to the non-GAR contract as an exhibit.  If the only item missing from the builder contract is the Firm License number, it can be added to the signature block without adding the Agency Exhibit.
 
Delivery and Closing Date
If there is no specific closing date.
Builders often do not set a specific closing date.  Instead, the closing date is often tied to the Certificate of Occupancy or Substantial Completion.  An indefinite Closing Date is generally construed as a “reasonable date.” Therefore, if a contract is missing a specific closing date, a reasonable time for performance will be implied. Therefore, if the closing date is specified as on or before 15 days of the issuance of a Certificate of Occupancy, the contract will not necessarily be void for indefiniteness.
 
Or a Specific Date with unilateral extensions may be used.
Alternatively, builders may wish to select a closing date depending on the anticipated completion date, and to provide for automatic extensions for construction delays. You may see the following type of clause:
 
Automatic Extensions for Construction Delays
The closing of this transaction shall be upon substantial completion of the improvements on the Property (“Closing”). Such date shall be on or before __________________, 20___ (“Final Closing Date”). Substantial completion shall be deemed to occur when a certificate of occupancy, temporary certificate of occupancy, or final inspection certificate covering the Property has been issued by the applicable governmental agency. Should the closing date change from the above date, Seller shall give Buyer advance notice of the date and time of the closing. Seller shall have the right (and in addition to all other rights therein) upon notice to Buyer to extend Final Closing Date unilaterally for _____ (___) periods ______ (__) days each.
 
Right to Extend for Contingencies That Cause Delays
Builder contracts often include contingencies for protection when there are delays in construction that are out of their control. Examples are inadequate provision of utility services or shortage in construction materials. You may see the following broad type of contract clause.  So long as the event is verifiable, the clause is generally enforceable.
 
Extension of Closing Date Due to Construction Delays. 
Seller shall not be responsible for delays in construction caused by strikes; acts of God or nature; poor weather; failure or unavailability of adequate sewer, water, electricity, gas, fire protection, or other utility service; material and labor shortages; theft; unanticipated soil conditions, sinkholes, or underground springs; sewer or other governmental moratoriums; delays in government approvals for land development and construction; and delays caused by buyer’s change orders or selections. The closing date shall be extended for a period of time equal to such delays.
 
Omission of Commission Payment
Some builder contracts actually state that no commission is to be paid in a transaction, or even that no real estate broker is involved, unless there is an exhibit or statement to the contrary in the agreement. Be sure to review the contract to be certain the commission clause or commission exhibit is included.  If you are not covered in the contract,  add the Agency Exhibit noted above.  (The Agency Exhibit also fulfills the agent license and firm license number requirements.)  You can also use the Instructions to Attorney to confirm your commission. Be sure the Seller and Listing Agent execute the document.  Best practice would be to include the Instructions to Closing Attorney as an Exhibit to the contract.
 
Reference: Weissman, Seth. The Red Book on Real Estate Contracts in Georgia.  BookBaby. Kindle Edition.