What Warranty Does The Builder Provide?

Compiled by:
Bill Gallagher, Owner/President
Superior School of Real Estate
Written by:
Joan Riordan, General Counsel
Home Buyers Warranty

Before you purchase a new home, two frequently asked questions are, “Does the builder provide a warranty?” and “What’s the North Carolina law regarding warranties and builders?” To help you answer these two questions and to get a better understanding of NC laws and concepts regarding home warranties, I have included a copy of Joan’s information on warranties below.

The Law:
In North Carolina and South Carolina, the builder’s implied warranty is included with every home the builder sells. The implied warranty does not guarantee that the house will be perfect, nor does it relieve the homeowner of his responsibility to properly maintain the home and follow generally accepted landscape practices. In addition, all new homes go through a period of settlement and movement when the home may experience some minor material shrinkage, cracking and other events which are normal and customary. Examples include small cracks in drywall and paint and separation where dissimilar materials meet each other – for example, where moldings meet sheetrock, or where tile grout meets a sink. In most cases, only paint and caulking is necessary to conceal these blemishes due to the natural expansion and contraction of dissimilar construction material. Because these events are normal and customary, they are probably not construction defects in light of the court’s definition of the builder’s implied warranty obligations.

In North Carolina, the builder implied warrants that the home is free from major structural defects and constructed in a workmanlike manner in accordance with the standard prevailing at the time and place of construction. Similarly, in South Carolina, the builder implied warrants that the home is habitable and constructed in a workmanlike manner. Although a judge or jury decides what is covered under the builder’s implied warranty obligation, the builder can raise defenses related to improper maintenance and intervening actions by third parties.

The builder may disclaim the implied warranty with clear and unambiguous language. Typically, when an implied warranty is disclaimed the builder substitutes an express or written warranty. An express warranty may be an oral promise so generally any disclaimer will encompass all warranties, express or implied, except for the written warranty given by the builder.

So what express warranty should a builder give?

In North Carolina or South Carolina there is no state statute specifying the builder’s warranty obligations to the homeowner. In contrast, New Jersey, Texas, Indiana, Maryland, and California impose minimum statutory warranty requirements that each builder provides to his homebuyer as a matter of law.

A home is probably the consumer’s single largest purchase. The risk to the builder of disclaiming all express and implied warranties and giving a minimal one year warranty or no warranty at all is that a court may find that such an action is unconscionable.

The ten-year insurance-backed warranty concept in the United States grew out of Congressional hearings in 1973 investigating poor construction practices in the residential construction industry and lack of builder warranties on their products. Congress believed that builders could solve this problem through a ten-year insurance-backed warranty provided to new home buyers by the builder. Since 1980, the Department of Housing and Urban Development (“HUD”) has required certain newly constructed housing to be protected by a ten-year insurance-backed warranty in order to be eligible for mortgage insurance from the Federal Housing Administration (“FHA”) for mortgages in excess of 90 percent of the appraised value of the property. The HUD Insured Ten-Year Protection Plan states the standard for workmanship, systems and structural coverage for new home warranties in the United States. The most prominent features of the HUD Insured Ten-Year Protection Plan are (1) coverage of the one-year workmanship warranty, the two-year systems warranty (wiring, piping and ductwork) and the ten-year structural defects warranty and (2) insurance-backing for the builder’s obligations under the warranty. Every two years, ten-year insurance-backed warranty protection plans must be submitted to HUD for re-approval.

A written express warranty that incorporates the standards set forth in the HUD Insured Ten-Year Protection Plan provides both the homeowner and the builder with the best protection. The builder’s warranty obligations are clearly defined and not left to speculation by a judge or jury. However, not all private warranty programs provide the same coverage. The insurance backed protection provided with the 2-10 HBW warranty begins upon the day title is transferred to the homeowner. Other warranty plans do not provide insurance coverage until the beginning of the third year.

Does the buyer benefit from a builder’s express written warranty?

The home buyer benefits from an express insurance-backed warranty because the standards are clearly defined and the builder’s warranty obligations are backed by the warranty insurer. If the builder fails to fulfill his workmanship and systems obligations, the warranty insurer for the 2-10 HBW Warranty steps in as surety and fulfills these obligations. Further, the warranty insurer accepts full responsibility from the day of closing for the builder’s structural defect obligations as defined in the warranty booklet. The express warranty may be transferred to subsequent home owners, whereas in North Carolina the implied warranty obligation only benefits the first purchaser of the home. This transferability may increase the resale value of the home.

Does the warranty shorten the homeowner’s opportunity to bring a claim against the builder? In both North Carolina and South Carolina, an action (arbitration or lawsuit) to recover on a breach of contract, negligence, breach of warranty or breach of implied warranty claim must be brought within 3 years of the date the defect is discovered. However, in the absence of an express warranty, both states limit the length of time for discovery of the defect. Hence, in North Carolina a homeowner cannot bring a claim for breach of implied warranty 6 years after the date the house was substantially complete. In South Carolina, a claim for breach of implied warranty cannot be brought 8 years after the date the house was substantially complete.

In contrast, an express warranty establishes the warranty period, and requires the homeowner to notify the builder/warranty administrator of warranty issues usually within 30 days of the expiration of the warranty term. Workmanship and systems warranty terms are generally 1 and 2 years, respectively. The warranty term for a qualifying structural defect is generally 10 years.

Initially it appears that homeowners benefit from the longer implied warranty term, 6 years in North Carolina and 8 years in South Carolina, however, this may not be true in practice. Under most private warranty plans, the warranty term for workmanship and systems usually end at a point in time when it is generally believed that the homeowner is responsible for maintenance related to the home. Hence, many deficiencies which occur after the expiration of the warranty term are due to inadequate maintenance of the home. The advantage of insurance backing for the builder’s warranty obligations far outweigh the benefit from a longer term for the implied warranty because the right to a remedy is only valuable if the responsible party is financially solvent.

Enacted in 2003, the “South Carolina Notice and Opportunity to Cure Construction Defects Act” requires the homeowner to give the builder the opportunity to repair a construction defect 90 days prior to initiating an arbitration or lawsuit. The builder has 30 days from receipt of the homeowner’s notice to inspect and offer to remedy, settle or deny the claim. Failure to respond to the homeowner’s notice is deemed a denial of the claim. The homeowner’s reply to the builder’s response is due in 10 days. Under the law the homeowner must give the builder access to inspect and repair. Any offers by the builder are not admissible in a later action based upon the claim. The intent of the law is to facilitate the prompt resolution of claims. This purpose is fostered if objective standards for good construction workmanship are set forth in a written document.

In contrast, North Carolina does not have a Notice and Opportunity to Cure law, but rather a Homeowners Recovery Fund operated by the state Licensing Board. The fund is a last resort for homeowners to recover reimbursable losses due to an incompetent builder. The homeowner must first obtain a judgment and exhaust all avenues of recovery, including surety and insurance contracts, before making a claim with the fund. The fund does not guarantee payment. In contrast, a written warranty backed by a warranty insurer does provide assurances not available from the state fund.

This document is intended as general guidance. Builders and Homebuyers should consult legal counsel in their state to obtain recommendation based upon current law.
© 2007 Home Buyers Warranty

I welcome your comments, ideas, and suggestions regarding this e-mail and future e-mail topics. Please e-mail me at bgallagher@superiorschoolnc.com. I look forward to seeing you in class very soon.