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Nail down good contracts before hammers start swinging

DEAR BENNY: I own a vacant lot and want to build a house on it.

I know I need good contracts with my architect and builder.

Where can I locate those documents? — Harry

DEAR HARRY: I am glad you asked this question, because too many times, consumers don’t have good contracts with their contractors and end up in trouble.

I suggest that you go to the American Institute of Architects’ website, www.aia.org, where you will find a large list of contracts (36 in number) that will meet your needs.

For example, there is A102, “Standard Form of Agreement Between Owner and Contractor Where the Basis of Payment is the Cost of the Work Plus a Fee With a Guaranteed Maximum Price,” or form A103, which is similar to A102 but without a guaranteed price.

Another form for homeowners who have specific projects in mind is A107, entitled “Standard Form of Agreement Between Owner and Contractor for a Project of Limited Scope.”

Not everyone is planning to build a new home, but because of the economy, many homeowners are remodeling — and even expanding — their present home, rather than buying a new one.

In my law practice, I have had too many clients who signed what I call the “two-page special” contract between homeowner and contractor. This document merely spells out what the contractor will do — in very general terms — and the price.

However, it does not have the protections that are included in the AIA contract forms. For example, when will the job start and when will it end? What reserves will be held until the job is completely finished?

I like to see at least 15 percent of the price held back until completion, although sometimes I can get the contractor to agree only to a 10 percent reserve.

What warranties is the contractor giving? What happens if there is a dispute between the parties? Do you have to litigate, or arbitrate or can the project architect (if any) resolve these issues?

Is there a draw schedule for payments? Too many of my clients have paid the contractor upwards of 80 to 100 percent of the contract price and the contractor walks off the job having completed far less than that.

All of these issues must be included in any contract where the job will cost at least $10,000 or more. Actually, I would like to see a good contract in place for any price job, but that’s not always practical.

Bottom line: Preventive action must be taken before any job — large or small — begins, and the AIA contracts are a good place to start.

DEAR BENNY: I need further clarification on a paragraph you recently wrote.

It reads: “When only one spouse signs the promissory note, the lender will require the nonsigning spouse to be on the deed of trust. Why? Because in order to foreclose on the property should the borrower go into default, the lender must be able to sell the property at a foreclosure sale. The deed of trust gives the lender the power to sell the house. But if the husband and wife own the property together, unless both sign the deed of trust, the property cannot be foreclosed upon.” — Paula

DEAR PAULA: Let me try to explain.

In most states, mortgage lenders use deeds of trusts. Oversimplified, these are the mortgage documents. You sign a promissory note: “I owe the bank XX dollars and agree to pay under the following terms and conditions.”

You also sign a deed of trust. With this document, you are deeding — in trust — your house to a trustee. The trustee, selected by the lender, has the power to sell the house outside of the purview of a court of law, although many states are now requiring that courts have to get involved somewhere in the process. If you and your spouse own the house and both convey — through that deed of trust — the house to a trustee, the trustee technically has full rights to sell at a foreclosure sale.

But if only one of you signs that deed of trust, the other owner has not given the power to sell to the trustee, and, accordingly, there can be no foreclosure sale. The lender still has the right to sue both of you on the promissory note you both signed, but foreclosure is not possible.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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