Over the last year, I have noticed an alarming trend where residential builders, realtors, and sellers enter into contracts for new construction that utilize the “As Is” Residential Contract for Sale and Purchase (commonly referred to as “FARBAR Contract”), which is a standard form contract published by the Florida Realtors and The Florida Bar. The FARBAR Contract is a valuable tool in most residential real estate transactions; it provides standardized terms governing a transaction as well as provides for the basic outline to get to closing.
While immensely valuable in the resale market, the FARBAR Contract is ill-suited for the new construction context. The primary reason for this seems fairly obvious, as the FARBAR Contract assumes that the home exists at the time the contract is entered into. As a result, the FARBAR Contract fails to address many issues that arise during the construction process.
The most common of these issues are construction delays, increases in the price of material, and financing contingencies. These issues combined with external factors such as supply shortages, labor shortages, governmental delays and increasing interest rates have highlighted the inadequacies of the FARBAR Contract in the new construction context in recent months.
Construction delays are simply not accounted for under the FARBAR Contract; again, the assumption underpinning the FARBAR Contract is that the home exists, and the seller’s performance merely requires delivering clear title, possession of the property at closing, and executing the necessary closing documents. Extensions are certainly common with the FARBAR Contract, but they often do not extend for months on end.
With new construction, supply and labor shortages and delays at the permitting office can mean delays that go on for months. This often leaves buyers frustrated and on the hook for alternate housing and storage throughout the duration of the delay. Rising interest rates also pose an issue with new construction projects. Delays in construction could result in a buyer’s interest rate lock expiring or require per diem payments to preserve the interest rate. Significant delays could mean thousands of dollars in per diem charges to avoid large jumps in interest rates.
Builders are bound to deliver the home by the closing date or may face unsatisfied buyers who are looking to recoup their out-of-pocket costs when negotiating a contract extension. New construction contracts typically address construction delays, where instead of a fixed closing date like under the FARBAR, the closing date is made contingent upon the builder receiving the certificate of occupancy from the local government. Builders are typically not responsible for damages to the buyer that result from delays under most new construction contracts. While this may seem unfair to the buyers, a new construction contract at least sets more realistic expectations between the parties. A buyer, instead of renting a hotel or locking in their interest rate, may take a more conservative approach if they do not have a fixed move-in date on the calendar.
The cost of building materials has skyrocketed in the last two years due to supply chain issues. Many savvy builders account for this in their new construction contracts, including provisions that factor in increased building costs by either passing them off to the buyer or allowing the buyer to select alternate materials. The FARBAR Contract does not account for this and often leaves both parties to the contract frustrated when material costs exceed the originally agreed to purchase price. Even if the parties do not modify the purchase price, builders will often be forced to cut into their profit to account for such increases. The FARBAR Contract addresses items such as closing costs, prorations, and legally required disclosures, not increases in the purchase price due to external factors.
Often when a FARBAR form is used for new construction, the buyer may waive their financing contingency, as many of the operative financing provisions do not apply to new construction projects. Typically buyers are required to apply for and diligently pursue obtaining financing within relatively short time frames under the FARBAR. These time frames are inapplicable to new construction projects that could take a year or more. Buyers waiving their financing contingency waive their right to back out of the contract without penalty if they don’t obtain financing by closing or the home appraises for less than they are borrowing. This could result in a buyer forfeiting their deposit to the builder.
Punch List Items
Another significant issue that can emerge are punch list items. Typically most of the obligations under the FARBAR Contract expire on the date of closing unless specifically mentioned otherwise. New construction contracts on the other hand, typically acknowledge that punch list items will need to be completed after closing and provide for a procedure in which to memorialize those items in writing. Unless the parties memorialize punch list items into a post-closing addendum, or trust their builder to come back after closing, those defects may not ultimately be cured or take far longer than necessary.
Florida law requires a number of disclosures be made in the context of construction contracts depending on the specifics of a particular transaction. For instance, builders need to provide notice of the Florida Homeowners’ Construction Recovery Fund, provide pool safety riders, affiliated entity disclosures, energy rating guidelines and construction lien notices, just to name a few. Often builders may not be aware of these specific disclosure requirements and may face penalties by failing to include these items.
The above issues are just a few of the many issues that can arise when using the FARBAR Contract in the new construction context. The above issues highlight that using the FARBAR Contract for new construction is a bad idea for both builders and buyers alike. The general framework of the contract does not adequately account for the unique aspects of a new construction project, and most provisions are often difficult to apply should issues emerge. While no contract is necessarily perfect, the contract should be tailored to appropriately fit the transaction to ensure that the expectations of the parties are clear from contract formation through closing.