• W. Cory Reiss

For sale: three bedrooms, two baths, and the builder's wiggle room.

Updated: Nov 4

Shakespeare’s Juliet famously asked: What’s in a name? Not much if the subject is a fragrant flower, but a heck of a lot when the name tricks you into buying something that’s supposed to be sweet and really stinks.


Consider "warranty." It conjures synonyms like “guarantee” and “assurance.” It hints at consequences when not honored. It sounds like a bond.


But alas, ‘tis not always so.


Home builders have been blessed by companies that sell “warranties” for new construction homes that don’t really provide guarantees but induce buyers to give up stronger legal rights to enforce workmanship standards.


These third-party “warranties” typically provide a mechanism to lodge a complaint with the builder, in which the warranty company plays middleman and either convinces the builder to correct the problem or leaves the parties to mandatory binding arbitration. The warranty company may not actually guarantee the workmanship but rather guarantees a particular type of bureaucracy. Third-party warranties often limit the builder’s liability with a set scope of responsibility, numerous exclusions, rigid deadlines, and caps on financial liability for construction defects. They can also void coverage for emergency repairs if the owner doesn't have time to provide advanced notice to the warranty company.


A true warranty is a guarantee that the property is as represented, which means free of substantial defects and meeting prevailing workmanship standards, and it can be enforced to require repair or replacement of defective work and materials. But many faux warranties offer a procedure that increases the odds a builder will be let off the hook.


North Carolina courts have unequivocally enforced the arbitration provision of a common third-party warranty, a “2-10 Home Buyers Warranty,” on the grounds that as a matter of contract law, that’s what the parties agreed to do in case of a dispute. Make no mistake, if the box is checked on a new construction purchase agreement that waives all express or implied warranties but the one provided by a third party, as in Bass v. Pinnacle Custom Homes, Inc., you are probably stuck with it come what may.


Arbitration is a dispute resolution process outside of our courts that may limit an injured party’s right to discovery, favor corporate defendants, and reduce recovery. If binding, such provisions also virtually eliminate appeal rights if the arbitration panel — usually one to three people with law degrees — gets it wrong.


When checking the box on the purchase agreement and accepting a third-party warranty, North Carolina homebuyers give up the state’s “implied warranty of habitability” and any other “express” warranties, which can be enforced by a lawsuit if the builder refuses to fix its construction defects. That’s a threat that often prods reluctant builders to act.


But once a buyer accepts an alternative warranty and gives up all others, many builders are less diligent about recognizing and correcting defects.


Beware also that real estate agents may be selling warranties in glowing terms that don’t do the actual contracts justice. Whatever an agent may say about a warranty you’re being asked to buy, if you sign on, you’ll be presumed to have read and understood the terms yourself.


So while Juliet’s indifference to Romeo’s last name was romantic, don’t forget that play was a tragedy and they both died. The answer to her question — What’s in a name? — probably should have been “everything.”

© 2020 by Reiss & Nutt PLLC.

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