Every new home—no matter if it is a single-family, townhome, duplex, co-op, condominium, or even modular home—comes with a ten year warranty as required by the New Home Warranty Program, which was enacted by the New Jersey Legislature in 1977 under the New Home Warranty and Builders’ Registration Act. While the New Home Warranty Program undoubtedly affords purchasers with an array of protections and avenues for redressing defects in newly constructed homes, it is not without pitfalls that the unsuspecting homeowner should be mindful of.

What does the New Home Warranty Program cover?

The first question you may be asking is: what does the New Home Warranty Program cover? The New Home Warranty Program is a ten-year phased warranty, which covers everything from grading to major structural defects. The availability of coverage for specific defects is directly tied to the warranty year. This means that during the first year of the program the warranty is at the peak of its protections, which diminish over time.

The first year of the warranty covers nearly all defects in workmanship or materials, including, but not limited to, concrete, masonry, stucco and cement plaster, carpentry and finished carpentry, waterproofing, insulation, siding, roofing, doors and windows, mechanical and electrical system defects, and major structural defects. After the first year of the warranty, the available coverage becomes more limited.

The second year of the warranty is limited to mechanical and electrical system defects and major structural defects. Years three through ten of the warranty are strictly limited to “major structural defects,” which is defined to mean “any actual damage to the load-bearing portion of the home, including consequential damages, damage due to subsidence, expansion or lateral movement of the soil (excluding movement caused by flood or earthquake) that affects its load-bearing function and that vitally affects or is imminently likely to vitally affect use of the home for residential purposes.”

Be Aware of the Election of Remedies Provision

Sounds great, right? Not so fast. Before you begin the process of filing your claim under the New Home Warranty Program there is one key aspect that you must be aware of, which is the election of remedies provision of the program. The New Home Warranty Program presents homeowners facing issues with their newly constructed home a strategic dilemma: file a claim under the New Home Warranty Program or file a lawsuit with the courts. The adage “when one door closes, another opens” does not apply here, at least with respect to the same defect. Once a homeowner elects a remedy, whether it be bringing suit against the builder or filing a claim under the New Home Warranty Program, the homeowner is bound to that decision and will be barred from changing course.

The election of remedies provision of the New Home Warranty Program is so stringent that under the applicable regulations the mere initiation of a claim under the New Home Warranty Program, i.e. simply submitting the initial paperwork, will bar a homeowner from turning to the courts for redress related to any defect submitted as a claim under the program.

For instance, Mr. and Mrs. Smith purchase a newly constructed home in New Jersey. During the first two years in their new home, life is great and Mr. and Mrs. Smith are not aware of any workmanship issues. However, during year three they notice water stains have appeared in their living room ceiling. Without knowing too much about the New Home Warranty Program, Mr. Smith says, “Not to worry, our home came with a ten year warranty. We’ll file a claim and get it fixed.” And so, Mr. Smith fills out the necessary paperwork and submits a claim under the New Home Warranty relating to the water leak. Several weeks later Mr. Smith receives a letter in the mail informing him that the claim is not covered as the home is in the third year of the warranty program, which covers only major structural defects and therefore the claim is denied. Can the Smiths now bring a lawsuit against the builder for the water leak? Unfortunately, the answer is they cannot and they now have no recourse for that defect.

The Bottom Line

Don’t be like Mr. Smith. Before you file a claim with the New Home Warranty Program consult with an attorney that is knowledgeable about the program and can advise you on the best course of action.

In an unpublished case addressing a peculiar repair, the Appellate Division recently reiterated one of the basics of common interest ownership: When in doubt, read your documents. Waldstein v. Highview at Hawthorne Ass’n, Inc., A-2281-05T1 (June 12, 2007).

Shortly after purchasing their town home as a resale in 2003, Plaintiffs Jay and Kathleen Waldstein discovered a broken sewer pipe was leaking water and sewage below the concrete slab that formed the lowest floor of their town home. Further investigation revealed that the pipe had ruptured when the slab failed as a result of a construction defect: the interior foundation of the home had never been built. Plaintiffs repaired the sewer pipe and rebuilt the floor slab, then requested reimbursement from the Homeowners’ Association.

After the Association declined payment, the plaintiffs brought a declaratory judgment action, asking the court to determine that the Association was responsible for the cost of the repairs and to award them fees and costs. The trial judge declined to do so, finding that, the Declaration of Covenants and Restrictions applicable to the development included no provision making the Association responsible for such a repair. On appeal, the Appellate Division agreed.

Plaintiffs relied on a provision of the Declaration that reads as follow:

Each townhouse Owner, by acceptance of ownership, agrees and covenants that if his townhouse, including any party walls, shall be fully or partially destroyed by fire or otherwise, the Association shall reconstruct said townhouse expeditiously, pursuant to plans approved by the Board of Trustees. Any such reconstruction shall be subject to all other applicable provisions of this Declaration and applicable governmental regulations.

Plaintiffs also pointed out Declaration provisions requiring the Association and the Owners to carry fire and casualty insurance as well as extended coverage.

The appellate judges rejected Plaintiff’s argument, limiting the Association’s responsibility to reconstruct under the cited provision to situations in which a townhouse is fully or partially destroyed by fire or similar casualty. Because Plaintiff’s repairs were necessitated by defective construction, the Association was not required to repair or reconstruct.

The court also rejected Plaintiff’s alternative argument that the Association was required to reimburse them since it maintained a reserve account for repair, replacement and improvement. Analyzing the Declaration as a whole, the judges concluded that the reserves were explicitly intended to fund repair, replacement and improvement of common property and the exteriors of the townhouses. No provision required the Association to fund the repair and reconstruction of an interior structural flaw in a town home, caused by a construction defect.

Finally, the court rejected Plaintiff’s argument that an easement provision granting the Association the right to enter a town home to repair breaks of leakage in the water, sewer or sprinkler systems that threaten damage to common property obligated the Association to reimburse them, finding that no evidence suggested that the leak below Plaintiff’s town home threatened the common property in any way.

The Waldsteins’ futile attempt to pass their repair bills on the Association is another reminder that no one formula sets forth responsibility for repairs and maintenance in common-interest communities. New Jersey law permits sponsors and developers great flexibility in designing the maintenance provisions of their communities, and the many variations in governing documents reflect factors such as marketing decisions, architectural requirements, and site anomalies, among others. Careful reading and analysis of the governing documents, that is, the Declaration or Master Deed, is always the first step in determining responsibilities for performing and paying for repairs.

In a recent New Jersey case, a New Jersey Superior Court Judge offered the following opinion on the Home Owner warranty at issue in that case:

“And as I have indicated during the course of oral argument, the homeowner warranty is required by law, but as I used to do when I was practicing, I used to tell my clients in the strongest terms possible, that this is a useless piece of paper. And I truly believe that. Having gone through the process in private practice, with the few clients that wouldn’t listen to me, and did go through with this homeowner warranty and arbitration, it is an utter waste of time if you are a homeowner. The only remedy you actually get is if your house literally falls down on your head, then you will get compensation in satisfaction. Other than that it is just a feel good thing that when people walk away from a closing table, they think they have some kind of a security blanket. They don’t. In this particular situation … some of these people encounter problems with these houses in the first six months, – you know it is not unlike many of the tract houses that are built in New Jersey. Some of these things are put together with a staple gun. You know, that is how they put these together. [….] I am well aware of the RWC program, the homeowner warranty program, and the election of remedies. It is set up with the specific goal in mind that there is declining coverage for the benefit of the homeowner, it declines. This is a program, even though it is distinguished by the Legislature, as a homeowner warranty, it is basically a safety net for the builder, as opposed to the homeowner.”

Cesard v. D.R. Horton, Docket No. MON-L-3147, Monmouth County, Law Division, Civil Part, Transcript of Decision December 1, 2006.

In New Jersey, under the “New Home Warranty and Builder’s Registration Act“, N.J.S. 46:3B-1, et. seq. home builders are required to provide a warranty for their customers.

The warranty must cover ordinary defects in a new home for two years from the original purchase date, and then offer coverage against “major structural defects” in years 3-10. You can see the particulars at N.J.S. 46:3B-3b.

Builders may choose to provide a private warranty, from companies like Residential Warranty Corporation (“RWC”), or 2/10 Warranty. The builder may, if he chooses, also rely upon a state-run Homeowner Warranty program administered by the New Jersey Department of Community Affairs. This program is funded by mandatory payments from home builders, and just like the private warranty programs, purports to offer protection from most construction defects for the first two years and against Major Structural Defects therafter. The law was passed to protect new homeowners and to afford them recourse against builders in the event that a problem arose with the home. Unfortunately, it does no such thing.

The first problem with these warranties is that, in years 3-10, they only cover “major structural defects.” The statute defines this as “actual damage to any load bearing portion of the home.” N.J.A.C. 5:25-1.3 This means, practically speaking, that the house has to collapse, or be in imminent danger of collapse, before the warranty is even applicable. Normal problems like leaks, cracking, excessive settling, malfunctioning plumbing, mechanical or electrical systems, are not covered beyond 2 years. It does not matter if your home has cracks in the foundation, slab, walls, or structural elements. Generally if nothing has failed, you will likely not be covered. The private companies interpret “Major Structural Damage” as strictly as possible, and generally do not find any warranty coverage for even severe problems. The other issue to be aware of, especially with the private warranty companies, is that they hire local inspectors to observe the home and report back to the company. The inspectors often do a very cursory job, and are only charged with visual inspections. They will not remove siding, open walls, or move dirt back from foundations. As you can imagine, it is difficult to find evidence of damage to the structural elements of a house if you are not willing to move dirt or open walls. So naturally, these inspections frequently result in a finding of “no coverage”.

Of course, most homeowners do not have severe problems with the foundation or framing of their houses. They have leaks which they don’t notice for several years, or they have increased maintenance costs because of shoddy workmanship. Since these types of defects are generally the sorts of things a builder will fix in the first two years anyways, the HOW program offers no real benefit to most homeowners.

Secondly, and most importantly, the New Home Warranty and Builder’s Registration Act contains, at 46:3B-9, the “poison pill” of the statute.

Availability of any legal remedy to owner; election of remedy
Nothing contained herein shall affect other rights and remedies available to the owner. The owner shall have the opportunity to pursue any remedy legally available to the owner. However, initiation of procedures to enforce a remedy shall constitute an election which shall bar the owner from all other remedies. Nothing contained herein shall be deemed to limit the owner’s right of appeal as applicable to the remedy elected.

Read the bolded language. Yes, if you file a claim under the HOW program, or any private warranty program, you may be forever barred from pursing your claims in another forum, which means you cannot sue the builder in court. There are several reported decisions in which homeowners tried to get their homes fixed under the HOW program, and the builder either failed to follow up, or did an equally shoddy job repairing the home, and those homeowners were prevented from chasing the builder and/or his subcontractors in court because they had chosen initially to pursue the HOW claim.

In the case cited at the top of this article, Cesard, homeowners submitted a claim to RWC, which then inspected their homes and determined that the warranty did not apply to their claims – they had no warranty coverage. These same homeowners were thrown out of court because they had “initiated a procedure to enforce a remedy.” It apparently didn’t matter to the Court that the homeowners really had no remedy (i.e., their warranty claims had been denied by RWC. The language in 46:3B-9, as argued by the builder’s attorney, and as interpreted by the Judge, meant that these homeowners, with substantial problems with the construction of their homes, were out of options. Their warranty coverage was inapplicable, and since they had gone through the trouble of finding that out by dealing with the warranty company, they had precluded themselves from pursuing their claims in court as well. This is surely not what the Legislature intended when it enacted a bill to protect homeowners.

Now you understand why the Judge feels the way he does about the HOW program. It is useless and deceiving. If you believe it will offer you some help, you are likely to be disappointed by the result. If you pursue a claim – perhaps even if you inquire about a claim – you may prevent yourself from ever suing your builder. Defense attorneys believe that this “election of remedies” means that our justice system is like a game show. You get one choice in the beginning, and if you choose what’s behind Door No. 2, you might not get the justice you are entitled to. You might get a box of rocks or a trash bag full of hair. Your builder gets off scott-free with your money, and you get stuck with a brand-new house that also happens to be a fixer-upper. Be warned.

In 1978, the Legislature adopted The New Home Warranty and Builders’ Registration Act, N.J.S.A. 46:3B-1 to -20 (Act). Participating homeowners are permitted to make claims to the Program for defects caused by (1) Afaulty workmanship and defective materials due to noncompliance with the building standards,” (2) faulty installation of plumbing, electrical, [and] heating and cooling delivery systems or major construction defects.” N.J.S.A. 46:3B-3b(1), (2) and (3).

The process of filing a claim is as follows: The builder must inspect and repair the defect(s) covered by the warranty within 30 days of the homeowner=s notice. If the builder does not, the homeowner may file a formal Notice of Claim and Demand with the New Home Warranty Program. The New Home Warranty Program is then responsible for providing a means of claims resolution. The process begins with a mediation by an independent third party in an attempt to resolve the issues amicably. If there is no agreement reached, or if any part of the dispute remains unresolved after the mediation, the process may then proceed into an arbitration meeting. As a result of the meeting, the arbitrator will render judgment within a few weeks. This award is legally binding on both parties. The arbitrator cannot award money damages, but can only determine whether or not a defect exists, whether the builder will repair or replace the defect, and the time in which the repair work is to be completed. The arbitration award, however, is not appealable through the program.

If the parties do not agree with the arbitration, the Bureau of Homeowner Protection, New Home Warranty Program will appoint a staff member to conduct a hearing to review the defects in the home and render a written decision. The decision is binding on all parties, but can be appealed to the Office of Administrative Law within 15 days of the decision. If a builder refuses to repair or replace defects as directed in the written arbitration award or the Bureau decision, the State Plan then assumes financial responsibility for correction of the defects in the home. The program will then take administrative action against the builder, such as revocation or suspension of the builder=s registration.

While the intent of this program is to protect new homeowners, the program has several significant flaws.

First, during the first year of a new home=s warranty, warranty coverage extends to defective systems, workmanship, materials, plumbing, electrical and mechanical systems, appliances, fixtures, and equipment, and major structural defects. During the first two years, the mechanical, electrical, and plumbing systems and major structural defects are covered. During the third through tenth years of coverage, only major structural defects are covered. Therefore, any serious problem that is not deemed Astructural@ in nature and is not discovered in the first two years of ownership, will not be covered by the Warranty. As many homeowners know, many serious latent defects take several years to reveal themselves. Those homeowners find themselves shut out of the Program.

Second, the only remedy that can be provided by the Warranty Program is forcing the builder to return to the home to make repairs. This remedy may not always be satisfactory to the homeowner and may involve repair rather than replacement of the defective item. This is also unappealing to many homeowners because the same person who could not, or would not, do the job properly the first time is forced to return to the home to do additional work.

Third, after filing a claim, an arbitrator will make a decision on any claim made against the builder, as well as the remedy. The decision of the arbitrator is final and in many cases may not be appealed to the courts. Therefore, if the homeowner is not satisfied with the decision or the remedy after completing the arbitration process, they may be forced to pay for the costly repairs themselves.

Homeowners need to consider the limitations in the Warranty Program and understand what their rights and remedies are before filing a claim. Therefore, the Program may not be the right option for a homeowner who wants to have their most valuable investment repaired properly.