A newly-enacted law in the state of Washington is being held up as a model for out-of-court resolution of real estate construction disputes between new home buyers and their builders. Proponents hope that similar statutes can be adopted in other states as a way to save money--and time--in getting home buyers’ claims remedied with minimal legal wrangling.

The National Association of Home Builders, a 205,000-member trade group for the residential construction industry, thinks the Washington plan gives builders a mandatory and orderly path to correct errors within fixed time periods, while simultaneously preserving buyers’ rights to sue if they’re not satisfied.

The new law, which took effect June 13, requires builders either to remedy their customers’ complaints within a “cure” period or to settle the dispute with a cash payment. What makes the new plan remarkable is that it garnered support from pro-consumer and pro-business legislators, liberals and conservatives. The bill creating the new dispute-resolution mechanism passed both the Senate and Assembly with no negative votes.

The statute creates a formal process within which new home buyers and their builders must attempt to resolve controversies before going to court. The law applies to all new single family projects and condominiums constructed and sold within the state. It works as follows:

When a buyer claims a construction defect, he or she cannot file suit immediately. Instead, there is now a mandatory 45-day period within which time the consumer must inform the builder of his or her intent to file suit. Once the home building company receives the intent-to-file-suit notice, it has 21 days to inspect the defects claimed by the consumer, or offer to fix the problem immediately, or to pay monetary damages to settle the issue.

As an alternative, the home builder can dispute the claim. If it chooses to do so, the buyer is then free to file suit immediately and the case goes to court. Under the new law, the lawsuit will have to list each of the alleged defects prompting the claim.

If the home builder chooses to inspect the property as part of the plan, it has 14 days after the inspection to either offer to fix the problem immediately or to settle for cash. If either option is unacceptable, the buyer is free to file suit.

The head of the Washington State Building Industries Association, Tom McCabe, says the legislature took up the issue after watching liability insurance costs for builders soar out of control in California. In that state, a series of class actions against condominium developers prompted criticism of contingency-fee plaintiffs’ lawyers, who were accused of suing first, and seeking builder repairs later.

In some cases, according to McCabe, trial attorneys convinced condominium boards to file class actions without ever contacting individual owners of units to determine whether they supported the action. McCabe says the law “give(s) us a chance to fix (defects) before” consumers rush to court.

“Tell us what’s wrong,” he said. “Let us take a look and see if we can resolve your complaint. If we can’t work things out, then go ahead and sue.”

The passage of the alternative dispute resolution system by a legislature known as relatively liberal politically, “is good for consumers and builders,” said McCabe, even if it’s a setback for the contingency-fee trial bar.

• Letter to the Editor: Washington Builder Law Nothing New in Texas

Published: July 8, 2002

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.