Caution for Arizona New Home Buyers

As the economy continues to improve after the Great Recession, there will be an increase in new home construction in Arizona.  For several reasons, new home buyers in Arizona should be careful in approaching their purchase, and should obtain the help of professionals when necessary.  For the reasons explained below, buyers may want to consider purchasing a resale from a homeowner rather than purchasing a new home directly from the builder or developer.

Limitations on Contractual Remedies

When you purchase a new home from a builder or developer, you are normally required to use a purchase contract that has been drafted for their benefit.  This type of contract is called an adhesion contract, because you are required to accept or “adhere to” the terms that benefit the other party.  In other words, you have very little bargaining power with respect to the bulk of the contract terms.  These terms typically include limitations on your remedies if the homebuilder breaches the contract by providing you with a new home that has a construction defect.

For example, damages under the contract are usually limited to a variant of repair costs.  This would include the cost of repairing the construction defect.   Normally, the contract does not allow for consequential damages such as the decrease in the market value of the home due to the breach.  This limitation on remedies can have a significant impact on a new home buyer.  For example, there are areas in Maricopa County, Arizona, that have well documented problems with expansive soil and shrink-swell soil.  If a builder or developer constructs a home in such an area without properly taking into account the nature of the soil, the foundation of the home can shift or move, resulting in significant damage.  Under these circumstances, the cost of repairing and stabilizing the home may not fully compensate the homeowner for the decrease in the market value of the home due to the construction defect.

In addition, contractual warranties given by builders and developers of new homes usually contain limitations.  Therefore, trying to get the builder or developer to fix sloppy work can often be frustrating, time consuming, and expensive.  In many instances you may have to hire a lawyer to help you, and even then there is no guarantee you will get satisfaction.

The Arbitration Clause

Most importantly, new home contracts usually contain a clause that requires all disputes between the buyer and the builder or developer to be submitted to binding arbitration.  These arbitration clauses are legally enforceable.  If your contract contains a binding arbitration clause, you cannot sue the builder or developer in a court of law for damages arising from defects in your new home.  Instead, you have to file a demand for arbitration with an organization such as the American Arbitration Association.

This is significant, because there are limitations associated with arbitration that do not apply to litigation in court.  First, you do not have the right to a jury trial.  Rather, you must rely on the decision of an arbitrator.  Second, in Maricopa County Superior Court the current filing fee for a civil action is $319.00, and you do not have to pay separately for the judge who is assigned to your case.  This is a bargain.  On the other hand, the administrative and filing fees for the American Arbitration Association are significantly higher, depending on the amount of money at issue in your case.  In addition, you have to pay one-half of the estimated fees of the arbitrator before your arbitration hearing.  Fees charged by arbitrators vary between approximately $300 per hour and $600 per hour.  Therefore, you could end up paying between $3,000 and $15,000, or more, in filing fees, administrative fees, and arbitrator fees, before you ever get to an arbitration hearing.  This does not include the attorney’s fees that you may incur if a lawyer handles your case.  Third, arbitration rules usually limit the amount of discovery you can do in order to obtain evidence to support your claim.  For example, the arbitrator may not allow the parties to take any depositions of witnesses, or may severely limit the depositions that can be taken.  If you cannot obtain the evidence, you cannot prove your claim.  Finally, if you get an unfavorable result in arbitration, it is difficult to get it reversed on appeal, because arbitrators have broad discretion in deciding the merits of your case.

In summary, new home buyers should be aware that if they have a problem with their new home, their potential recourse against the builder or developer will most likely be limited to binding arbitration.

Arizona’s Economic Loss Doctrine Limits Recourse

In addition, Arizona law relating to a concept known as the economic loss doctrine limits a new home buyer’s remedies against the builder or developer for construction defects.  Under the economic loss doctrine, a new home buyer can bring a claim against the builder or developer for breach of contract, but cannot sue for a tort such as negligence.  This is significant, because the damages available in a negligence or tort action often exceed the damages that would be available for breach of contract.   This is one way in which Arizona law limits recourse for a new home buyer who purchases directly from the builder or developer.  It is worth noting that this rule does not apply if you purchase a resale, because you are purchasing from a homeowner and not from the builder or developer.

In summary, if you buy a new home directly from a builder or developer and the home has a construction defect, you are limited to suing the builder or developer for breach of contract and cannot sue for negligence.  However, if you purchase a resale in a new subdivision from a homeowner, you do not have a contract directly with the builder or developer.  Under these circumstances, if you discover a latent or hidden construction defect in the home, you retain the right to sue the builder or developer in tort for negligence.  Therefore, the purchaser of a resale in a new subdivision typically has broader remedies against the builder or developer than does the original purchaser of the home.

From a legal perspective, this does not make much sense.  Hopefully, Arizona courts will change or further clarify the law in this area.  One alternative available to the courts would be to treat new home buyers as consumers who are not subject to the economic loss doctrine.  Nevertheless, at this juncture this is a problem that new home buyers need to be aware of, because the economic loss doctrine limits their potential remedies against the builder or developer of a new home.

Conclusion

For all of these reasons, new home buyers in Arizona should be careful in approaching their purchase, and should obtain the help of professionals when necessary.  Although you may get along with a builder or developer at the outset, you should know that their economic interests are not aligned with yours.  If problems arise, you can expect them to protect their own interests at your expense.  In order to avoid many of these problems, buyers may want to consider buying a resale rather than a new home.

Craig Stephan
Attorney at Law
480-621-8281
website: www.craigstephanlaw.com
email: info@craigstephanlaw.com

Caution for Arizona New Home Buyers
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