Is Your Home Improvement Contract Putting You At Risk?

Hannah Kreuser Attorney at Law Specializing in Construction Law and Business Law
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If you are like many contractors, odds are that your home improvement contract (HIC) is not compliant with California law, putting you at risk for disciplinary action, voiding of the contract, and even criminal prosecution.

Generally, the laws allow parties to contract how they wish. However, California HICs are an exception and California Business and Professions Code (BPC) requires much in the way of content, form and formatting for a HIC to meet the legal requirements. This is because California has written its laws to provide broad protections to homeowners when it comes to construction work performed at their residence. However, in attempting to promote this goal, the laws surrounding HICs have produced requirements that are confusing and fail to account for the realities of a home improvement project, making it difficult and uncomfortable for contractors to comply.

A HIC is required for home improvement projects that change a residence or property. Specifically, the law defines a “home improvement” as “the repairing, remodeling, altering, converting, or modernizing of, or adding to, residential property and shall include, but not be limited to, the construction, erection, replacement or improvement of driveways, swimming pools, including spas and hot tubs, terraces, patios, awnings, storm windows, landscaping, fences, porches, garages, fallout shelters, basements, and other improvements of the structures or land which is adjacent to a dwelling house.” (BPC section 7151.) A HIC is not required for new residential construction; for work priced at $500 or less; the sale, installation, and service of a fire alarm or burglar system; or a service and repair contract (which has its own requirements).

When a HIC is used, BPC section 7159 specifies certain content, form, and format requirements, all of which must be followed to produce a compliant HIC. While this article will not discuss all of these requirements, it will discuss some of the problems commonly seen in HICs.

To be compliant, an HIC must be in writing and legible, as well as identified as a “HOME IMPROVEMENT” contract in 10-point bold font across the top. The headings contained in the HIC can be no smaller than 10-point bold font, and the text contained in the HIC can be no smaller than 10-point font. However, certain required notices will need to be given in 12-point font.

It is important to follow the specifications for contract price and payments. Although, it is common in the industry to charge on a time and materials basis, this is not an appropriate “contract price” under the BPC. A fixed contract price, in dollars and cents, must be given following the heading “CONTRACT PRICE.” If you require a down payment for the project, this must be expressly noted in the HIC under the heading “DOWN PAYMENT” and may not exceed the lesser of 10% of the total contract price or $1,000. Additionally, if you will be invoicing the homeowner prior to project completion, the frequency, completion markers, and payment amount must be detailed under the heading “SCHEDULE OF PROGRESS PAYMENTS.” If finance charges or sales commissions apply, these will also need to be separately listed. Remember, a contractor may only collect payment for work already performed and/or materials delivered to the homeowner.

California requires a HIC to incorporate a change order form into the contract itself to be compliant with the law, as well as the inclusion of certain language which, among other things, informs the homeowner that to be incorporated into the HIC, change orders must be in writing and signed by both the contractor and homeowner and describe the scope of the change, the cost impact, and its effect on the schedule of progress payments; basically the same price and payment requirements discussed above.

Finally, many HICs do not include all of the notices required by law. These notices relate to: (1) commercial general liability insurance; (2) workers’ compensation insurance; (3) mechanics lien; (4) Contractor State License Board (CSLB) information; and (4) the Three-Day Right to Cancel. Specific language must be used for these notices and is provided in BPC section 7159.

While it may not seem like a big deal to skip over some of these requirements, consequences for the contractor may be severe. Depending on which requirements are not met, the contractor is subject to the risk of disciplinary action by the CSLB, a void contract, and/or criminal prosecution.

BPC section 7159(a)(5) specifically states that failure to comply with that section’s requirements is cause for discipline. Thus, where the CSLB ever has reason to look at your home improvement contract, any violation is easily notable, and contractors often receive citations and incur fines as a result.

Further, by using a HIC that is not statutorily compliant, a contractor may be jeopardizing his/her/its ability to collect payment. This is because the courts have held that a contract made in violation of a regulatory statute, such as the BPC applicable to HICs, is void. (Asdourian v. Araj (1985) 38 Cal. 3d 280, 291.) Even if the HIC is void, a contractor is still entitled to the reasonable value of his/her/its work; however, this value can sometimes be difficult to prove. While some courts have indicated that there are exceptions to this general rule, it is much safer, and much less expensive to comply with HIC requirements upfront, instead of trying to convince a court that your situation should be considered an exception to the rule, or that you are entitled the reasonable value of your work, valued at the contract price.

Finally, certain violations will subject the contractor to criminal prosecution for a misdemeanor resulting in a fine not less than $100 nor more than $5,000, and/or jail time up to one year. The violations considered a criminal misdemeanor include: (1) the contract not being in writing and not including the agreed contract amount in dollars and cents; (2) charging a homeowner a down payment greater than 10% of the total contract price or $1,000, whichever is less; and (3) requesting or accepting payment exceeding the value of the work performed, or materials delivered, to date. While these last two have less to do with the HIC itself, they are reminders that the Down Payment and Schedule of Progress Payments sections of the HIC should be properly included and completed.

The current law has not made it easy for contractors to comply with the statutory HIC requirements. Not only are numerous formatting and form specifications required, but there are also content specifications, that make it impossible to have a fully compliant HIC less than six pages long. Even though it may be time consuming to ensure that your HIC is compliant with the current California laws, and result in a contract lengthier than you may want, it is worth ensuring that the statutory requirements are met to avoid the severe consequences that are possible, both civilly and criminally, for noncompliance.

Remember, there are many other statutory requirements that exist. If you need help drafting a HIC that implements all requirements, or ensuring that your current HIC is compliant, it is advisable that you consult with an experienced attorney. Although many contractors use HICs that are not in compliance, to continue to do so places the contractor and his/her/its license at risk.

Article by Hannah C. Kreuser, Esq. in 2019. Ms. Kreuser is part of Porter Law Group, Inc. in Sacramento, California.

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