Contractor vs. homeowner disputes: should you take legal action against your contractor?
We talked to an attorney with two decades of experience to help you learn everything you need to know about involving the law in a dispute between you and your contractor.May 30, 2021 • Justin Goldman
The last thing anyone wants to do during a renovation is pursue legal action against a bad contractor. Whether it’s because of unfinished work, a disagreement on payment terms, or another difficult scenario, it’s certainly a harrowing experience for any homeowner considering involving a lawyer.
However, the situation isn’t unheard of. In fact, home improvement and construction projects took the #1 spot for worst consumer complaint of 2019.
Why is this? Well, for one, home improvement projects are a huge financial investment. While other complaints about car troubles or shopping purchases are certainly common, home improvement projects are generally much more expensive. Therefore, when things go south, they really go south.
Also, when homeowners get into disputes with builders and contractors, their physical property might be on the line - financially speaking. It’s not just money, it’s ownership over your living space that’s at stake. That’s a pretty big deal.
We sat down with seasoned construction attorney Charles Gallagher to discuss homeowner/contractor legal disputes to help homeowners better understand their options during these difficult situations. We also got input from Jody Costello, expert in protecting homeowners from unethical contractors.
If you’re considering a RenoFi Loan, just know that RenoFi performs meticulous due diligence on every homeowner’s contractor, so you can better avoid scenarios like these and have a great relationship with the contractor you work with.
Most Common Legal Disputes between Homeowners and Contractors
Charles points out that the most common issues between homeowners and contractors involve payments and timeframes.
Why is this? Often project changes implemented during construction will add onto the total project cost and this can cause disagreements. Contractors and homeowners alike can’t predict every problem that’s going to arise along the way - issues behind walls, old pipes, or electrical wiring that’s not up to code will require extra spending and more time on behalf of your contractor. This is why your contract should have a “change order procedure,” which details the way in which both parties need to go about adding on any changes to the original construction plan.
Another important step for homeowners to take is to require Lien Release Waivers when making payments to the contractor. Referred to as a “Conditional Lien Release,” the contractor is essentially waiving his or her rights to filing a Mechanics Lien against your property for that portion of the job for which you are paying. “Conditional” as it is based on payment being satisfied, such as the check clearing your bank and the contractor receives payment. Should the contractor dispute being paid for the work, the homeowner has proof in the form of a signed release from the contractor, along with a cancelled check.
Also, your contract’s payment structure can affect the propensity for conflict. There are two common types of renovation contracts: fixed fee price contracts and cost plus contracts. Charles said he sees more issues with “cost plus contracts,” which are most common in the state of Florida. With fixed fee contracts, your contractor is capped at a certain fee and under no circumstances will there be budget overruns past that number, unless you institute a change order, as described above.
With cost plus contracts, there is no outer limit. With these types of contracts, a contractor might continue to to add on to the total price of the project throughout construction. This payment structure is more common with new builds, although it also appears with design/build firms completing remodels.
With renovation projects, a timeline is always more of a suggestion than a steadfast rule - even if it’s stated in the contract.
“It’s rare to have a project that is on deadline or met on deadline. Every project is typically longer than the expected timeframe,” says Charles. So many factors are outside of a contractor’s control with timing - unforeseen problems behind walls, mistakes from previous projects that need fixing, or even weather delays.
However, there’s often a grey area between what the homeowner and what the contractor consider a reasonable delay. A project delayed by a few weeks is different from a project delayed by six months. When you add in pandemic-related delays, the waters are even murkier for what’s appropriate. A delayed project can cost a homeowner thousands, especially if you’re planning alternate accommodations for the duration of work.
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When Should You Sue?
To be clear, we can’t provide any specific advice for your individual situation. Taking legal action is a drastic step that RenoFi helps homeowners avoid at all costs.
However, there are a few tips from Charles that may help you think more clearly about your own project, based on cases he’s dealt with in the past.
Above all, we’d recommend consulting an experienced, practicing attorney to make any sort of decision.
If the situation is egregious…
According to Charles, there’s a big difference between what a homeowner would consider unreasonable, and what a court would consider unreasonable when it comes to contractor disputes. If your situation is particularly egregious, it will be easier to prove in court and there’s a better chance you’ll be able to recover damages.
For example, if your contract has a start month of October 2020 and your contractor has not started work and it’s already January 2021, most judges would consider that clearly egregious.
If your contractor has poor communication skills and won’t answer your phone calls, that’s not necessarily a good enough reason to sue them.
Most situations however will probably fall into a gray area, so it can be difficult to tell.
If you have clear, undeniable evidence there was a breach of contract…
While not having clear written proof of breach of contract doesn’t mean you shouldn’t sue under any circumstance, according to Charles, it is more motivation to take action.
If your contract clearly outlines a scope of work for your project, and your contractor did not complete a large portion of that, that is proof of breach of contract that will hold up in court. It generally comes down to issues that can be easily proved with clear evidence, says Charles.
If you have no other options…
Taking legal action against your contractor should be a last resort. If you’ve tried talking to them, emailing them, sending them a letter, negotiating on expectations, and anything else you can think of, then it could be time to consider hiring an attorney.
It’s important to understand that this route will most certainly delay your renovation and cost even more money than you’ve maybe already lost. If it’s still worth it to you knowing these things and you’ve explored other solutions, then it may be time to take this step.
Keep in mind that if your contractor is already dodging communication with you, suing them may not help. There’s a chance they will still be uncooperative and this will drag out the process.
How to Prepare to Take Legal Action
While we certainly can’t advise that you take a specific course of action, there are certain things you should consider before hiring a lawyer or letting your contractor know, according to Charles.
Understand Whether Or Not Your Contractor Can Take a Lien on Your Property: If you’re holding out on paying your contractor for work done on your remodel outlined in your contract, your contractor could take out a lien on your property.
What does this mean? A lien gives your contractor the right to seize and sell your property if you fail to meet the obligations of your contract. Therefore, even if the amount of money you are refusing to pay your contractor is small, say only $5,000, your contractor could end up getting your entire home.
A contractor can file a lien on your house for the services rendered if you refuse to pay them, and in some states, they aren’t legally required to tell you that they’re doing this. Make sure that you understand this risk before holding out on payment with the intention of suing.
But also know that unethical contractors can file mechanics liens against homeowners who may dispute a “surprise invoice” for work they never authorized or were unaware of being performed. When challenged by the homeowner, the contractor could threaten to file the lien if they’re not paid, knowing that the homeowner will be forced into paying because of the fear of losing their home.
These types of “fraudulent liens” are rarely perfected by contractors as it does cost them to perfect the lien - filing a lawsuit to foreclose on the property - and if the homeowner refuses to pay the contractor, he/she simply lets the lien become null and void, as the time to legally perfect the lien has lapsed. Every state has different laws as to what those time limits are.
The homeowner is then left to remove the lien from their title which usually requires hiring an attorney to do so.
Make Sure You Have A Paper Trail: If you’re looking to prepare a legal case against your contractor, the best thing you can do is keep a detailed record of all communications that would prove breach of contract. This includes emails, text messages, notes, etc. If you don’t have this information, even keeping a dated journal will be helpful to keep the facts straight. Also, pictures, pictures, pictures. Make sure to document progress.
As you’re considering your options, think to yourself, would this evidence hold up in a court? says Charles. This is a good rule of thumb to make sure you actually have a case.
Review Your Original Contract: You need to find evidence of a breach of contract if you are looking to take legal action against your contractor. Go back through your original contract and look for anything stated that your contractor has violated. This is useful to present your case to an attorney or later in court.
See If Your Contractor Is Licensed And/or Bonded: Lastly, if your contractor is licensed, you may be better suited filing a complaint to your state’s licensing agency rather than hiring an attorney. If your contractor is bonded, this means that if they fail to complete the job or any aspects of it, you as a consumer are somewhat protected* by a surety company. Some contractors pay a premium to this surety company for this security, and others don’t. Looking into these options could be an easier route than hiring a lawyer to sue.
*Surety Bonds are limited anywhere from $12,000 to $15,000 per contractor and not per incidence or complaint. Unlike other types of insurance where the risk is spread across everyone insured, the bond pays out to the limit of $15,000, that’s it.
So imagine if five people file against a contractor and the amount owed collectively is $50,000, then they’re out of luck. It’s better that the homeowner look for some type of General Liability insurance coverage or Builders Risk insurance which offers greater protection for both the consumer and contractor. You can consider this additional insurance as a positive when vetting the contractor.
Types of Legal Action You Can Take
If you’ve consulted an attorney or otherwise decided that you have evidence to make a case against your contractor, there are a few different actions you can take to recover money lost: suing with an attorney, small claims court, or pursuing restitution from a state guaranty fund.
Hire A Lawyer And Sue: This is the most costly and time consuming legal action you can take against your contractor. For issues of larger sums, this avenue might be worth it.
Go To Small Claims Court (Represent Yourself): There are a few important things to know about going to small claims court. This option is more accessible as you will represent yourself and don’t need to hire an attorney. However, in small claims cases, you won’t be able to collect anything other than money from your contractor.
A judge in small claims court won’t be able to order a contractor to finish a job - all they can do is issue an order to pay a certain amount of money. Every state has a maximum amount of money you can claim - and it varies greatly from state to state.
In Kentucky, for example, the maximum is $2,500, whereas in Delaware, the maximum is $25,000. This limit may affect whether you want to elevate the situation to a traditional court.
Seek Reparations From Your State’s Guaranty Fund: If your contractor is licensed with the state, you have the option of seeking reparations from your state’s guaranty fund. This is a fund set up by your state for situations where licensed contractors can’t fulfill contractual obligations, that’s funded through a one time fee that contractors pay when they become licensed. Every state has a different maximum amount that a consumer can get from the fund - in many states its around $25,000. An important thing to note is that this process could take months or even years - it’s not a quick solution.
How to Avoid Taking Legal Action
Lastly, we know that generally, homeowners who haven’t yet reached their breaking point will do anything to avoid having to take legal action against their contractors.
If you’re already at that point, there’s no going back, but if you haven’t started your project or signed a contract, there are some steps you can take to potentially avoid a nightmare contractor situation.
Use RenoFi Contractor Due Diligence: While we can’t predict the future and assure that you can avoid legal action, our due diligence process certainly gives homeowners peace of mind that their contractor has passed our RenoFi test.
If you prepare to apply for a RenoFi Loan, RenoFi’s team will complete a renovation underwrite of your contractor and renovation plans. This underwrite helps understand the level of risk involved for you as a homeowner if you decide to proceed with the contractor and plans you’ve chosen. RenoFi will look over your contract to make sure it includes necessary information and that it sets you and your project up for success. RenoFi will also vet your contractor to make sure they’re prepared to take on your project and have sufficient experience.
Hire a Lawyer to Look Over Your Renovation Contract: Asking your contractor to explain your contract is not enough, says Charles. “You are not going to be well-served asking your contractor to explain contract language because they are considered an ‘adverse party.’ It’s unlikely that your contractor will let you know to be wary of a provision that is benefiting them.”
While it’s certainly expensive, Charles recommends getting someone versed in construction law to take a look at your contract and make sure it isn’t too contractor slanted, and even help you offer a counteroffer to your contractor if you believe it is. If you’re not taking on a RenoFi Loan, we certainly recommend this step. If you are, this probably isn’t necessary, as RenoFi will look over your contract for you.
Why A Lawyer Can Help: Charles gave one example of a client that got a pool installed. Charles read through this client’s renovation plans and contract and let him know that because of the size of the pool, it would require six water trucks. The contract only mentioned three - meaning the homeowner was going to have to shell out extra cash to fully fill the pool himself. That was a shock! The homeowner had no idea, and certainly wanted to factor this into his decision making.
Proceed Slowly Before Signing a Contract: Charles recommends at the very least, do not proceed quickly with signing a contract until you very fully understand every single thing that’s written there - what your obligations are, what your contractors obligations are, etc. This not only means what’s included in the contract, but what isn’t. If there’s something you’re assuming that your contractors will do or provide that’s not in writing, assume it will not get done.
In the end, it is the homeowners’ responsibility to make sure that they are protected and not vulnerable to potentially serious problems and unethical contractors. However, if you’re intending to apply for a RenoFi Loan, RenoFi will perform due diligence on your contractor, which involves a detailed analysis of his or her performance and work history, as well as a contract review. This is a great way to mitigate risk of legal issues down the road.
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