In its last session, the Arizona legislature amended the statutes governing Purchaser Dwelling Actions, A.R.S. 12-1361 et seq., and Homeowner Association Dwelling Actions, A.R.S. 33-2001 et seq., relating to claims against Sellers for alleged construction defects in homes. Some of the changes codify current Arizona case law, and in a couple instances, legislate a different outcome in the future. The changes benefit construction professionals by (i) specifying what constitutes a construction defect, (ii) requiring notice of reasonable detail of all alleged defects and (iii) establishing a Seller's right to repair or replace all such alleged defects prior to a purchaser filing any action that alleges construction defects. Other changes benefit purchasers by broadening the definition of “Seller,” lengthening the tolling period for statutes of limitations and repose, and prohibiting a Seller from requiring a release in exchange for repair or replacement. Additional changes amend scope, application, process and time periods. The statutory changes, which are described in more detail below, take effect July 3, 2015.
Changes in Scope or Application
Definition of Seller. The definition of “Seller,” was revised to include “construction professionals,” and broadly defined “construction professionals” to include subcontractors and suppliers. This change (i) codifies existing case law holding that a purchaser could bring a breach of warranty action against a builder even though the purchaser has no privity of contract (direct contract) with the builder,[1] and (ii) statutorily overrules a 2013 Court of Appeals decision holding that lack of contractual privity precludes homeowners from asserting claims against subcontractors for breach of warranty of workmanship and habitability.[2] Now, purchasers have the statutory right to sue subcontractors, suppliers and other parties defined as “Seller” directly for alleged construction defects.
Definition of construction defect and material deficiency. The legislature added a definition for “construction defect” which is defined as a “material deficiency” in the design, construction, manufacture, repair, alteration, remodeling or landscaping of a dwelling that is the result of one of the following: violations of construction codes, the use of defective material, products, components or equipment, or the failure to adhere to generally accepted workmanship standards in the community. The amendments added a definition for “material deficiency” which is a deficiency that actually impairs structural integrity, functionality or the appearance of a dwelling unit, or that is reasonably likely to cause such impairment in the foreseeable future if not repaired or replaced. This new definition means that minor issues that cause no impairment are not considered construction defects.
Effect of ADR provisions. Previously, because the article did not apply if the sales contract or community documents included reasonable alternative dispute resolution (ADR) provisions, a Seller could “opt out” of the statutes by including ADR provisions in the contract or community documents. This exception has been stricken. The ADR provisions still apply, and they become applicable after the repair and replacement process has been completed. This change now legislates a different result in the future for those contractors who have, in the past, successfully sought dismissal of purchaser dwelling actions based on the argument that the ADR clause in a construction contract divested the superior court of subject matter jurisdiction.[3] The Seller’s election to enforce the ADR provisions does not negate, abridge or otherwise reduce Seller's right to repair or replace.
Right to Repair or Replace
Notice requirements. Purchasers may no longer send notices of defects that are representative samples. Instead, all alleged defects must be noticed in reasonable detail, all of which the Seller has an opportunity to repair or replace. The “reasonable detail” required in the notice of alleged construction defects has been expanded to include a description of the impairment to the dwelling. A Purchaser may, at any time including after a dwelling action has been initiated, amend the notice to include later-identified alleged construction defects, after which Seller’s right to repair or replace are applicable. If the matter is already in litigation, the court shall, upon request of the Seller, provide the Seller sufficient time to repair or replace the additional alleged construction defects. Notices of additional defects relate back to the original notice for purposes of tolling the statute of limitations and the statute of repose.
Notice of intent to repair. Sellers now have a statutory right, but not the obligation, to repair or replace alleged construction defects. The statutes formerly permitted Seller to make an offer to repair and the offer could be rejected by the purchaser; to the contrary, Seller is now permitted to send a notice of intent to repair or replace, which may not be rejected. Seller may exercise its right with respect to some, all or none of the alleged defects. A Purchaser may not file a dwelling action until the Seller has completed all intended repairs and replacements. Had this requirement been in effect then, there might have been a different outcome in a 2012 case where the defendant contractor had objected that the plaintiff homeowner had not responded in a timely manner and did not allow the defendant contractor to make repairs.[4] In that case, the court ruled that since the plaintiff was not required to permit the contractor to make repairs, the lack of response was inconsequential and caused no prejudice. Under the revised statutes, the homeowner will be required to permit the repairs.
Monetary compensation; releases. A Seller may offer monetary compensation in addition to or in lieu of repair or replacement, however the Purchaser may reject such offer of monetary compensation. A Seller is not entitled to a release or waiver in exchange for repairs or replacement, however, the parties may negotiate for a release in exchange for monetary compensation or other consideration.
Third party repairs. Sellers may now be unable to perform their own repairs or replacement, because a Purchaser may request that the repairs and replacements be performed by someone other than the construction personnel involved in the construction or design of the dwelling. In such event, the Seller may select the alternate contractor, subject to Purchaser’s consent, which consent cannot be unreasonably withheld.
Changes in Applicable Time Frames
Previously, a Purchaser had to wait 90 days after giving Seller notice of defects before proceeding with any dwelling action, or, in the event Seller failed to respond to the notice only 60 days. Now, a Purchaser cannot proceed with an action while the repair and replacement process is pending. After receiving notice of defects from a Purchaser, a Seller has 60 days to respond, and an additional 35 days to commence repair or replacement after sending notice to the Purchaser of Seller’s intent to repair or replace. If a permit is required, the required time period becomes the later of 35 days or 10 days after receipt of the permit. Purchaser must wait an additional “commercially reasonable” period of time for Seller to complete its repairs and replacements. As before, if the Seller does not respond to Purchaser’s notice within 60 days, Purchaser may proceed with a dwelling action.
Miscellaneous
Failure to comply. If a Purchaser fails to comply with the statutes before bringing a dwelling action, the action shall be dismissed. If dismissed after expiration of the statutes of limitations and repose time periods, any subsequent actions are time-barred as to Seller and Seller’s construction personnel. If Seller does not comply with the requirements of the Purchaser Dwelling Act, and the failure is not due to Purchaser’s fault or force majeure, Purchaser may commence a dwelling action.
Tolling of statutes of limitations and repose. Previously the statute of limitations and statute of repose were tolled for only 90 days after a Purchaser sent a Seller notice of alleged defects, which meant that even if an offer to repair had been accepted, a Purchaser might need to file an action in advance of the expiration of the statutory expiration period. Now, the statutes of limitations and repose are tolled during the repair and replacement period plus an additional 30 days.
No award of fees and costs. A.R.S. § 12-1364, which provided for attorney fees, expert witness fees and costs to be awarded to the prevailing party, has been repealed in its entirety. The practical effect of this is that the recovery of attorneys’ fees, expert fees and costs will be in line with other existing Arizona law that allows for awarding of fees in more limited circumstances.
Admissible evidence. Previously, the notices and responses pursuant to the Purchaser Dwelling Action statutes were not admissible in court. Now, the parties’ conduct, as well as repair and replacement efforts, are all fully admissible.
Changes in Homeowner Association Dwelling Actions
Detailed notice to homeowners. With respect to homeowners association dwelling actions, the notice to all members no longer must include the manner of funding an action, but now must include a statement that describes the nature of the action and the relief sought, the expenses and fees that the association anticipates will be incurred, directly or indirectly, in prosecuting the action, including attorney fees, consultant fees, expert witness fees and court costs. The notice must also describe the impacts on the values of the dwellings that are the subject of the action and on those dwellings that are not.
Compliance with homeowner association documents. Changes to the statute stating that that an action may only be filed after the association has authorized the action pursuant to the homeowner association documents provide a clear indication that the statutory process does not pre-empt or supersede the homeowner association documents. In addition, the association has an affirmative duty to demonstrate compliance with the homeowner association documents. Prior to filing an action, the association is required to provide the same notice and afford Seller the same right to repair or replace as is required for a purchaser. A Seller now has express standing to assert the failure of an association to comply with the procedures prescribed in the homeowner association documents or the statutes.
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Notes:
[1] Lofts at Fillmore Condominium Ass'n v. Reliance Commercial Const., 218 Ariz. 574, 190 P.3d 733 (2008). [back]
[2] Yanni V. Tucker Plumbing, Inc., 233 Ariz. 364, 312 P.3d 1130 (2013). [back]
[3] See, for example, Smith v. Clouse Const. Co., LLC, 2012 WL 5333576. [back]
[4] Simms v. Nance Const., Inc., 2012 WL 2476354 (2012). [back]
