741 S.W.2d 349 (Tex. 1987)
Finally, in Centex Homes v. Buecher, the Court was squarely presented with the issue of whether the implied warranties of “good and workmanlike” construction and “habitability” in new home construction could be disclaimed or waived. The Court concluded that the implied warranty of “good and workmanlike” construction was a “gap filler.” Provided that the parties described the “manner, performance or quality of the desired construction,” the implied warranty of good and workmanlike construction could be disclaimed. Centex at pg. 275. The Court further held that the implied warranty of “habitability” could not be waived, but stated “the implied warranty of habitability extends only to latent defects. It does not include defects, even substantial ones, that are known by or expressly disclosed to the buyer.” Centex at pg. 275.
Where do we go from here?
As can be seen from the foregoing cases, the law is fluid. However, the Centex case appears to make it clear that the implied warranty of “good and workmanlike” construction, can be waived to the extent that the parties define the quality of construction. Accordingly, it is critical that builders provide as many objective standards for construction as possible. To the extent that a standard is not defined, it is clear that the implied warranty of “good and workmanlike” construction will fill that gap. In other words, “good and workmanlike” will be defined by the experts employed by parties in any litigation or arbitration proceeding. The fact that the Limited Statutory Warranty and Building and Performance Standards are no longer the law, does not mean that they cannot be adopted by builders in their contracts. In addition, builders should consider adopting the Residential Construction Performance Guidelines, published by the National Association of Homebuilders to supplement the Building and Performance Standards. To the extent of any conflict between these standards, the more restrictive should control. In addition, if builders are aware of other construction conditions, that are not addressed by either Building and Performance Standards or Residential Construction Performance Guidelines, they should provide supplemental descriptions of conditions and what the performance standard is. By providing a comprehensive set of objective standards, builders should be able to limit their exposure to claims for breach of the implied warranty of “good and workmanlike construction.” These standards should be set forth in a limited warranty, which should be provided to the customer at the time of contracting, so that it becomes part of the basis of the bargain between the parties.
In addition, builders should provide extensive disclosures regarding any conditions in the home, which may affect its habitability. For example, plywood contains formaldehyde. Plywood will off-gas the formaldehyde over a period of time. That off-gassing could affect persons with a sensitivity to it, thus rendering the house uninhabitable. However, by disclosing that fact, the presence of formaldehyde is no longer a latent condition and will not subject the builder to liability under the limited warranty of “habitability.”
Finally, builders must include in their contracts, the notice mandated by Tex. Prop. Code §27.007 in 10-point bold type:
This Contract is subject to Chapter 27 of the Texas Property Code. The provisions of that chapter may affect your right to recover damages arising from a construction defect. If you have a complaint concerning a construction defect and that defect has not been corrected as may be required by law or by contract, you must provide the notice required by Chapter 27 of the Texas Property Code to the contractor by certified mail, return receipt requested, not later than the 60th day before the date you file suit to recover damages in a court of law or initiate arbitration. The notice must refer to Chapter 27 of the Texas Property Code, and must describe the construction defect. If requested by the contractor, you must provide the contractor an opportunity to inspect and cure the defect as provided by Section 27.004 of the Texas Property Code.
If the builder’s contract does not include this notice, then the homeowner will be entitled to recover a civil penalty of $500.00 from the builder, in addition to any other remedy provided by the Residential Construction Liability Act (RCLA).
As further protection against lawsuits, builders may include a provision in their contracts or a separate agreement, that if the reasonable cost to repair a construction defect exceeds a certain percentage (to be agreed upon between the builder and owner) of the fair market value of the residence, without the construction defect, then the builder may elect to purchase the home. Any such provision or agreement should include the following: “By closing on the purchase of the residence, Purchaser is conclusively deemed to have ratified and confirmed this agreement.”
 95 S.W.3d 266 (Tex. 2002)
Tex. Prop. Code §27.0042. This agreement only applies to residences less than 5 years old that were sold by the builder, as opposed to construction on the customer’s lot.
If the builder includes a “buy back” provision in its contract or by separate agreement, at the time of sale, then an offer to purchase the residence on the following terms is considered “reasonable” absent clear and convincing evidence to the contrary:
- Seller shall reimburse Purchaser or otherwise pay for the following:
- The original sales price including all upgrades and options;
- All closing costs paid by Purchaser as reflected on the settlement statement;
- The cost of any improvements (which will remain with the residence) made by Purchaser after closing as reflected by actual receipts or cancelled checks;
- The reasonable cost to move from the residence (to be determined by taking the average of two bids, one procured by Purchaser and one procured by Seller);
- The cost of transferring title back to Seller; and
- Any reasonable and necessary attorney’s fees and engineering/consulting fees actually incurred by Purchaser in connection with the construction defect(s).
- In consideration of the foregoing, Purchaser shall:
i. Deed the property back to Seller by Special Warranty Deed free of any liens or encumbrances; and
ii. Deliver the residence to Seller on the closing date of the repurchase (as agreed to by the parties or if no agreement can be reached then forty five (45) days after Seller gives notice in writing that it is exercising its option to repurchase) in a good and clean condition save and except for ordinary wear and tear, the construction defect, or damage caused by the construction defect.
The 2011 legislative session is likely to be fraught with proposed legislation regulating builders and their warranty obligations. Until then, builders’ contracts will be the key to their survival. Contracts should include:
1. An express disclaimer of the warranty of “good and workmanlike construction” and all other implied warranties, including “habitability” (except for latent undisclosed conditions);
2. A comprehensive set of Building and Performance Standards defining the quality of construction;
3. A disclosure of all conditions known to the builder, which may affect the “habitability” of the residence; and
4. The RCLA notice in bold 10-point type.
With these provisions in place, builders can significantly limit their liability.