| Special In-Depth Focus: the New Texas Residential Construction Commission We have an entirely new agency of sorts, a new bureaucracy, in Texas. It’s the new Texas Residential Construction Commission (TRCC), and it basically regulates every significant residential construction project in Texas. This new law is so big, and covers so many different topics, that I’m going to start with an outline so you can see what I’m going to cover in this article:
Now let’s go point by point. 1. REGISTRATION REQUIREMENTS FOR BUILDERS Every “Builder”, as defined by this new act, MUST register with the TRCC. No one can act as a Builder (as in, build any project) unless they are properly registered. A “Builder” is generally any business or individual who constructs or supervises or manages the construction of:
The term “Builder” includes an owner, officer, director, shareholder, partner, affiliate, or employee of the builder. It does NOT include any business entity or individual who has been issued a license by the State to practice a trade or profession related to or affiliated with residential construction, if the work being done by that entity or individual to the home is solely for the purpose for which the license was issued. In other words, electricians and plumbers (to name 2 specific examples) are not “Builders.” And subcontractors do not need to register, only general contractors. Builders must also be at least 18 years old, a citizen of the United States or a lawfully admitted alien, and meet the TRCC standards for honesty, trustworthiness and integrity. Those standards haven’t been set yet. Stay tuned for updates. If you are a Builder as defined by this new law, then you must register your business with the TRCC and pay the required fee every year. By law, the registration fee cannot exceed $500 per year, and according to the Executive Director of the TRCC, Stephen Thomas, this fee may be significantly less than that. The TRCC will establish fees based on the builder’s unit and/or dollar volume. As you can see, whether or not you are a “Builder” is determined first and foremost by the projects you build. And you may be a “Builder” on some projects and not a “Builder” on others. But if you are a Builder on just one project in the year, you will have to register with the TRCC and pay the registration fee for that year. If you are a “Builder,” the next step is to look at how your business is organized. Entities may not register unless an officer designated as the agent for the entity is registered as a Builder. Registration rests on individuals first and foremost, then entities. No entity can be registered without a qualified, registered individual. If registering as a corporation, a designated officer must register and the corporation must register. If registering as a limited partnership, a designated officer must register, the general partner must register and the limited partnership must register (the designated officer can be the same for the general partner and the limited partnership). If registering as a limited partnership, the limited partner(s) do not need to register. We expect further clarity on this from the TRCC, as they finalize their registration forms. Registration of builders begins January 1, 2004, and is mandatory no later than March 1, 2004. You should file your application as soon after January 1, 2004, as possible. The ultimate question here is, do you want to register? If there is any “grey area”, do you want to avoid the TRCC registration requirements? In my opinion, NO! BUILDERS WILL WANT TO REGISTER TO GET THE PROTECTIONS OF THIS NEW ACT and TRCC administrative processes. Read on for details, and contact us for help in registering your construction business with the TRCC. As a side note, we also strongly suggest that you NOT operate your residential construction business as a sole proprietorship. If you have a business, one entity should operate your residential construction business, and others should operate your other, non-residential construction businesses. You should have one entity that does nothing but residential construction projects. You should also get your business organized in the correct entity prior to registering with the TRCC. Since you should register right after January 1, 2004, you should form that entity, if necessary, now. Please contact us for any help you may need in organizing your residential construction, and other, business operations. ACTION ITEM: FILE YOUR REGISTRATION APPLICATION WITH THE TRCC AS SOON AS POSSIBLE AFTER JANUARY 1, 2004, AND NO LATER THAN MARCH 1, 2004. SET UP AND USE A SEPARATE BUSINESS ENTITY FOR RESIDENTIAL CONSTRUCTION PROJECTS. 2. REGISTRATION REQUIREMENTS FOR CONSTRUCTION PROJECTS We‘re still waiting on the TRCC to adopt all of its registration rules and finish its forms. But this much we know. Any covered project completed after January 1, 2004 (even if it was started in 2003) must be registered. The Registration for new homes must be filed on or before the 15th day of the month following the month in which the transfer of title from the builder to the homeowner occurs. In other words, for a new home sold in January, the registration must be filed by February 15. The fee to register a house is $30. For TRCC covered home improvements, the registration must be filed not later than the 15th day after the earlier of:
The TRCC fee for home improvement registration will likely be $30, according to the TRCC Executive Director. It must be paid either by the 15th day after signing of the contract, or before beginning the work Do you want to register your projects? YES! Get the protections of the TRCC on every single construction project you possibly can. Again, you can contact us for help in registering your projects and to help you understand and implement TRCC registration as a normal and usual part of your business. ACTION ITEM: FOR EVERY PROJECT COVERED BY THE TRCC AFTER JANUARY 1, 2004 (contract signed after 1-1-04 or project completed after 1-1-04), TIMELY FILE YOUR REGISTRATION APPLICATION WITH THE TRCC AND PAY THE FEE. 3. TRCC REGULATION AND DISCIPLINE OF BUILDERS This new law requires the TRCC to regulate those who are Builders under this new law. A Builder is subject to TRCC disciplinary action for:
On a determination that a ground for disciplinary action exists, the TRCC may:
Before the TRCC imposes a disciplinary action against a Builder, the Builder is entitled to a hearing before the commission. The TRCC is in the process of writing the procedural rules they will follow in these sorts of cases. If a Builder disagrees with the TRCC’s administrative decision, that Builder may appeal to a district court in the county in which the administrative hearing was held. Stay tuned for further developments. 4. BUILDING AND PERFORMANCE STANDARDS The TRCC is in the process, right now as of December of 2003, of writing detailed building and performance standards. These are the rules your work will be measured against to determine if there is a “construction defect.” These performance standards will be phased in over time, as they are finalized. All of them will be published before being finally adopted, and anyone may comment on them, and ask the TRCC to change them. We can help you formulate your comments. These building and performance standards will help the TRCC, and you, determine whether a construction project was built in a “good and workmanlike manner” We do know that a “construction defect” is defined as:
These are specifically listed as “NOT” construction defects: a defect that arises or any damages that arise wholly or partly from:
As you can see, the person most likely to cause any of these sorts of defects are homeowners. This new TRCC act and the TRCC itself will help protect Builders against these sorts of claims. It helps keep the homeowners responsible for acting responsibly. ACTION ITEM: GET INVOLVED WITH THE TRCC’S RULE-MAKING PROCESS AND HAVE A SAY IN WHAT BUILDING PERFORMANCE STANDARDS WILL APPLY TO YOUR CONSTRUCTION PROJECTS. 5. THE NEW WARRANTIES This new act includes some new mandatory warranties. These are the things builders guarantee about their construction. Generally, under this new law, builders must warrant these things for the indicated length of time:
The particulars of these warranties will be developed over the next few months by the TRCC. This new law also changes the “warranty of habitability.” Texas has had a warranty of habitability for many years. This new law changes it in favor of the Builder. Under this new law, a homeowner must first show a “construction defect” as defined in Point No. 4 above. Then, to show a breach of the warranty of habitability, the homeowner must go on to show that the construction defect has “a direct adverse effect on the habitable areas of the home and that it could not have been discoverable by a reasonable prudent inspection or examination of the home or home improvement within the applicable warranty periods adopted by the commission.” This new law imposes on the homeowner more responsibility to timely monitor the condition of their residence. And this is yet another critical part of this new statute:
That means that these new warranties are also non-waivable by contract. Whatever the TRCC ultimately says they are, they will be. Builders can add to them if they want, but these are the absolute minimum rights available to homeowners. And the best news is that the TRCC will determine these warranties, not necessarily plaintiffs lawyers or overly emotional owners. Until the new warranties are fleshed out in Commission rules, which probably won’t be until the summer of 2004 according to the TRCC Executive Director, contractors are left with their own contract provisions and current law. This “current law” changed via a Texas Supreme Court decision issued in December of 2002, so if the form of contract you use has not been revised since December of 2002, it should be reviewed immediately by a qualified attorney. You may contact us to review and revise your contract forms. ACTION ITEM: REDRAFT EVERY CONTRACT YOU USE WITH HOMEOWNERS TO TAKE INTO ACCOUNT THE NEW TRCC WARRANTIES. 6. DISPUTE RESOLUTION PROCESS This is one of the most important changes that this new act brings to residential construction. Before we go through the new dispute resolution process, there are a few preliminary things you must know. First, the TRCC is in the process of qualifying people who will act as “third party inspectors.” These inspectors will be code certified by the Independent Code Body and have a minimum of 5 years of experience. There will be 2 types of inspectors, “workmanship and materials inspectors” and “structural inspectors.” They do what their titles suggest. Which type of inspector gets involved depends on the construction defect alleged by the homeowner. Second, there will be “Review Panels” that will consist of 3 TRCC employees who are also Code Certified Inspectors. Now here’s the process:
In my opinion, this is a very helpful development. Construction is complicated, and very few homeowners understand all the nuances. If the homeowner can’t agree with the TRCC, this system boils it down to whether or not a third party inspector was right, or not. The same goes for builders who disagree with the TRCC, lest anyone think there is a double standard. ACTION ITEM: TAKE EVERY WRITTEN DISPUTE SERIOUSLY AND FORCE EVERY DISPUTE TO FOLLOW THE NEW TRCC DISPUTE RESOLUTION PROCESS. PUT MANDATORY ARBITRATION PROVISIONS IN YOUR CONTRACTS AS WELL. 7. CHANGES TO THE RESIDENTIAL CONSTRUCTION LIABILITY ACT (RCLA) This new act also makes changes to the RCLA. The changes are many, and very technical. A full review of all changes is beyond the scope of this article, because it’d take a fairly full explanation of the RCLA prior to these new changes. However, generally for construction projects not covered by the TRCC, the revised RCLA will apply. The new RCLA puts more pressure on builders to accept a reasonable offer to resolve a dispute. At the same time, though, it imposes lighter penalties for not making reasonable offers. Builders now have the opportunity to make a supplemental offer if the homeowner rejects the builder’s first offer. It is very important that you note these three things that are specifically excluded from the RCLA:
What this means is that many consumers will try to frame their claims as one of these types of cases, most notably “fraud in the transaction.” The problem is, these fraud claims may not be covered by insurance. And any suit framed in fraud will need to be challenged on the front end to see if it can be forced into the TRCC and/or RCLA instead. ACTION ITEM: MAKE SURE YOUR CONTRACT FORMS INCLUDE THE LANGUAGE REQUIRED BY THE RCLA. GET INVOLVED IN EVERY DISPUTE EARLY. CHALLENGE ANY “FRAUD” CLAIMS AND MOVE THEM INTO TRCC OR RCLA COVERAGE. DO SOME PERSONAL ASSET PROTECTION JUST IN CASE. 8. THE COMMISSIONERS The Commission itself is composed of 9 members, all appointed by Governor Perry. Of those 9, 4 are builders, 3 represent the general public, 1 is a licensed professional engineer who practices in the area of residential construction, and 1 is a licensed architect or a building inspector, either of whom practice in the area of residential construction. As of the date of this article, the 9 Commissioners are:
The TRCC also has a full time Executive Director, recently appointed Stephen Thomas. Thomas most recently worked for the Office of the Governor, as Senior Deputy Director for Administration and Constituent Services and as Chief Financial Officer and Director of Human Resources. Prior to those positions, he was Human Resources and Risk Management Director for the Texas Department of Banking. He also spent 13 years with the Texas Department of Transportation in various capacities. 9. CONCLUSIONS AND BUILDERS’ PLAN OF ACTION There are a whole lot of questions about the TRCC, how it will do what it must do, what it will do, etc., from a very practical level to a very broad perspective. Get involved and help guide the development of this whole new body of law. Do some personal asset protection now, before there are any clouds on the horizon. Get your business ready for the TRCC. Follow the ACTION ITEMS pointed out in this article. Note that these ACTION ITEMS begin January 1, 2004. The time to act is now, not later. And stay tuned here to McTexLaw for future developments.
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