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Professional Standards Manual

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7. New Construction

(c) Deficiencies

[12/03/2010 The following information updated]

The building contract should provide for a mechanism of identifying construction deficiencies, the date by which they must be repaired, any holdback mechanism and a dispute resolution process.

The typical deficiency provision will require that representatives of both the buyer and the seller (builder) jointly conduct a walk-through of the property prior to possession in order to identify any work that requires correction. The parties should prepare a written deficiency list at the time that this walk-through is completed, and both seller and the buyer must sign and date the list. A copy of the list should be retained by both parties.

If there is a dispute as to any particular deficiency, the contract should provide for a neutral third party to determine the extent of the deficiencies (typically an architect or engineer), the cost of repairing the deficiencies and whether or not they are satisfactorily completed.

If the builder agrees to a deficiency holdback, a licensee can use the following clause to provide for such a holdback.

Walk-Through Inspection Deficiency List Clause

The Buyer and an authorized representative of the Seller will jointly conduct a walk-through inspection of the property no later than (number of days) days before the Completion Date.

The Parties will, immediately after completion of the walk-through inspection, complete a deficiency list of mutually agreed upon items that are to be remedied by the Seller (the “Deficiency List”). The Deficiency List, which will form part of the contract will identify the deficiencies and include a mutually agreed upon value for each of the deficiencies to be remedied. Both parties will sign, date and retain a copy of the Deficiency List. The quality of work and materials used to correct the deficiencies will be equal to or better than that of the surrounding construction.

In the event that the deficiencies are not rectified (number of days) days prior to the Completion Date, the Buyer’s conveyancer will hold back from the sale proceeds the amount specified for any uncorrected deficiency until all the deficiencies specified on the Deficiency List are completed, and will place this holdback in the Buyer’s conveyancer’s trust account.

The Seller agrees that if the conveyance of the Property has completed and any of the specified deficiencies have not been corrected, the Buyer’s conveyancer will retain the specified holdback until the Seller corrects the deficiencies, which shall not be later than (number of days) days after the Completion Date. The Seller agrees that if the deficiencies have not been corrected by the later date, the Buyer’s conveyancer may release the balance of holdback to the Buyer and the Buyer may correct the deficiencies himself/herself.

Any dispute concerning the identification and pricing of deficiencies, the rectification of the deficiencies, and release of the holdback will be settled by _________________ [or the following alternative language: “arbitration under the British Columbia Commercial Arbitration Act” at the expense of (the Buyer, the Seller, or both)]

* The Homeowner Protection Office has outlined a number of additional methods for resolving disputes, including mediation, arbitration and litigation. For owners of homes that are required to have new home warranty insurance under the Homeowner Protection Act (homes built by licensed residential builders with building permits applied for on or after July 1, 1999), a mandatory mediation process has been set up. Owners who are in a dispute with their home warranty insurance providers can compel them to mediation. In addition, the Notice to Mediate (Residential Construction) Regulation allows any party to a Supreme Court action involving a residential construction dispute to compel the other parties of the dispute to a structured mediation session. Both mediation processes are performed independently of the HPO. For further information, refer to the HPO website at www.hpo.bc.ca. 

A well drafted deficiency holdback clause will provide a dispute resolution mechanism for any dispute that arises between the parties. If the deficiencies are not corrected in accordance with the deficiency clause, the clause will typically provide that the buyer may (but not must) elect to use any retained deficiency holdback to cure the defects. Alternatively they may refer the matter to the designated arbitrator (if one is designated in the deficiency clause) or if the clause simply refers to the Commercial Arbitration Act, they may start the process of invoking that Act and choosing an arbitrator. Or they may elect to sue the seller/builder for breach of contract if arbitration is not provided for or if the arbitration clause allows for such actions. If there is a new home warranty provided as part of the transaction, the buyer may also pursue a claim through the new home warranty provider. In any case, the parties should be referred to their respective legal advisers if such a dispute arises.