A new, significantly shorter statute of repose bars suits against construction contractors of detached one- and two-family homes and townhomes, filed six years after the substantial completion of such homes, where the contractor also furnished a written warranty in compliance with the statute.

Projects like apartments and hotels are not covered by the new law, though there is some chance condos could be covered, as detailed below.

As construction litigators know, the statute of repose — separate and distinct from a statute of limitations — strictly bars any claim brought after the repose period ends, regardless of when the injury was actually discovered, such as the case of latent defects.

The statute of repose bars any lawsuit or arbitration demand regardless of when the statute of limitations began to run or ended. There are some exceptions, but they are very limited.

For example, imagine a case in which latent defects are discovered in several of a homebuilder's projects, more than six years after substantial completion. The latent defects could constitute millions of dollars in damages. Under the new law and in light of the six-year statute of repose, that entire case could likely be thrown out, and the developer would have no recourse against the homebuilder.

Initial Thoughts and Practice Points

Residential Contractors

Litigators need to discuss early in the case with their residential contractor clients whether a written claim was received or if there is potential evidence of willful misconduct or fraudulent concealment that could trigger an extension or negation of the statute of repose protection.

Transactional attorneys representing residential contractors should be sure prime contracts have the warranty language detailed below to take advantage of this new protection, if the warranty language is not there already. 

The language likely needs to be sufficient warranty language with limited-to-no exclusions. An added bonus with such express warranty language is that — coupled with enforceable language expressly waiving implied warranties — it might help the contractor avoid certain implied warranty causes of action, like the implied warranty of good and workmanlike performance.

Owners and Developers

Of course, owners and developers will need to be ready to file suit or arbitration very quickly at the first sight of any defect if substantial completion is nearing six years out.

Owners may also now feel additional pressure to have their projects examined by experts to try to discover any potential latent defects, particularly as the new six-year statute of repose approaches.

The statute still allows for an extension of the statute of repose over the six-year period where the action is based on "a written warranty, guaranty, or other contract that expressly provides for a longer [SOR] effective period."

If the owner or developer can get a longer statute of repose expressly provided for in their contract with the contractor — e.g., 10 years, or even longer — then of course the owner should do so.

Ultimately, the owner's ability to get this will often come down to the owner's bargaining position. The legislative history of this new law shows the residential builder groups fought hard for the new statute of repose, so it may be tough for residential builders to now contractually agree to waive this right.

The legislation was signed into law by the governor and took immediate effect only a month ago, on June 9. The new statute of repose applies to causes of action arising out of the design, construction or repair of an improvement to real property, where the cause of action is asserted after June 9, and the contract on which the cause of action is based was also entered into after June 9.

This statute applies to detached homes and townhomes, does not apply to large multifamily apartments, hotels or similar projects, and likely doesn't apply to standard individual condo units or condo developments.

This is because the new law only applies to a "residence," defined in the new law as "the real property and improvements for a detached one-family or two-family dwelling or a townhouse not more than three stories above grade plane in height with a separate means of egress or an accessory structure not more than three stories above grade plane in height."

It's a somewhat strange definition. It's unclear why the new law uses the word "dwelling" instead of "house," as is used in the long-established Residential Construction Liability Act.

Webster's defines "dwelling" as something a little more than a house: "a shelter (such as a house) in which people live." Ultimately, the new law is focused on a structure more like a traditional house, but the odd use of the word "dwelling" may create some ambiguity down the road.

Also, because the new law defines "contractor" by reference to the RCLA, the new law may apply to condo units, condo projects, or triplexes and quadruplexes, given the RCLA's definition of "contractor" being linked to the broader RCLA definition of "residence."

The new law probably does not apply to these standard condo or quadraplex projects, given the new law's more narrow — compared to the RCLA's — "residence" definition and Code Construction Act requirements of newer and more specific terms trumping older and less specific terms.

Of course, there are some instances where a detached house is a condo unit — in which case "condo" would fall under the new law as a "detached … dwelling" — but those types of condos are relatively rare. Nevertheless, some ambiguity remains regarding whether certain condos could be covered by the new law.

The statute applies to wide variety of claims. The new law applies to any claim for (1) injury, damage, or loss to real or personal property; (2) personal injury; (3) wrongful death; (4) contribution; or (5) indemnity and arising out of the design, construction or repair of a new residence, of an alteration of or repair or addition to an existing residence, or of an appurtenance to a residence.

The contractor must furnish a statutory written warranty to receive protection of the six-year statute of repose.

The contractor only gets the enhanced protection of the six-year statute of repose if the contractor furnished a written warranty with the residence that meets the statutory requirements, namely, the "written warranty must provide a minimum period of: (1) one year for workmanship and materials; (2) two years for plumbing, electrical, heating, and air-conditioning delivery systems; and (3) six years for major structural components."

This above quoted definition is the only guidance the new law provides regarding the contents of the warranty required. Maybe other guidance can be gleaned from the warranties provided under the now-defunct Texas Residential Construction Commission or other sources, but ambiguity remains. The issue of what may, or may not, constitute a sufficient written warranty is detailed further below.

A lot of industry forms — as just one example, the Texas Association of Builders residential construction contract form — may already meet this warranty requirement, but of course the actual contract at issue must be reviewed.

If the contractor does not provide this written warranty, then the contractor is effectively under the prior, less contractor-friendly 10-year statute of repose.

The new six-year SOR starts to accrue at "substantial completion of the improvement" at issue.

How do you know what substantial completion is? In at least one instance, Texas courts have used the certificate of substantial completion as the basis for calculating the statute of repose.

On the other hand, industry forms like the TAB or the American Institute of Architects forms make reference to the stage where the owner "can occupy or utilize the Work for its intended use." If one is representing the owner, then, out of an abundance of caution, you should probably go with whichever one of these dates is sooner.

Exceptions to the Statute

There are essentially three limited instances — under both the prior and new law — in which the statute of repose may be extended or not apply.

If the claimant presents "a written claim for damages, contribution, or indemnity to the person performing or furnishing the construction or repair work" during the six-year repose period, the period is extended for "one year from the date the claim is presented."

"Written claim" is not defined; much of this vaguely worded language predates the recent legislation, and I am aware of no case law interpreting this "written claim" exception.

This may mean that if the owner presented a written claim in year six of the statute of repose, the owner now has about a seven-year statute of repose — but at that stage, why risk it? If you are the owner, do not wait for the extension and just get your suit on file as soon as possible if you are in year six.

Though not clear under the new legislation, the claimant likely also gets an exception under the language still in the statute that says if the damage, injury or death occurs during year six of the six-year period, the claimant can bring suit within two years of such damage, injury or death.

In that instance, it is roughly an eight-year statute of repose. But again, why risk it? Do not wait for the extension and just get the suit on file immediately.

An action "based on willful misconduct or fraudulent concealment in connection with the performance of the construction or repair" is excluded from statute of repose protection.

As one might expect, the willful misconduct and fraudulent concealment exception is generally a tough burden for the owner to prove. For example, for fraudulent concealment, Texas case law states the owner has the burden to show the contractor had actual knowledge of the wrong, a duty to disclose the wrong and a fixed purpose to conceal the wrong.

Legislative History and Background

The legislative history reveals this legislation was supported by large homebuilders and residential builder groups, like the Greater Houston Builders Association, Texas Association of Builders and Texans for Lawsuit Reform. The legislation was opposed by residential plaintiff attorney groups like the Texas Trial Lawyers Association, among others.

Other Unanswered Questions From the New Statute

What is a sufficient written warranty to give the residential contractor the protection of the new statute of repose? Is something like the standard American Construction & Education Services Inc. warranty, with its many exclusions, enough? The answer is unclear.

Perhaps some guidance can be taken from case law regarding substituting the implied warranty of good and workmanlike performance only with an express warranty providing for the "manner, performance, or quality of desired construction," according to the Supreme Court of Texas' 2003 decision in Centex Homes and Centex Real Estate v. Buecher. 

According to the legislative history captured in the bill's House Research Organization report, a goal of the new law was to incentivize builders to provide stronger written warranties to homeowners.

Given this, contractors who want the protection of the statute perhaps may want to furnish a warranty with little-to-no qualifications, e.g., unlike the ACES warranty, as just one example.

Otherwise, perhaps the contractor risks the owner having an argument that the contractor did not really furnish a warranty under the new statute, and thus the contractor should not get the protection of the new statute.

What structures are covered by the new law?

In addition to the discussion above about the vague definitions of "residence" and "dwelling" generally, what about the limitation of "three stories" in the residence definition?

I have personally seen more four-story townhomes around the Houston area lately, perhaps being built higher in reaction to Hurricane Harvey. Are those four-story townhomes not covered under the new law, because they do not fall within the new law's definition of a "residence?"

Perhaps the builders who supported the new law were mostly just concerned about more standard one- and two-story houses, which are clearly protected under the new law.

All of the above issues will of course ultimately need to be decided by Texas courts.

To read the full article, click here.