Locked In, No Exit in Sight

Many Rueful Buyers Try to Escape Builders' Ironclad Contracts

Lisa and Reggie Starr thought they were getting a good deal when they signed a contract to buy a new six-bedroom house in Woodbridgealmost a year ago. But after they had trouble selling their own house and wanted to get out of the deal, the fine print in their contract became a very big obstacle.

"There's no contingency for the sale of your home. There's no contingency for financing. 'No refund will be due to you' -- it's clearly written in the contract," said Lisa Starr, who admits that she did not fully understand the document when she signed it. "You get all excited. You're about to build your dream house. I wasn't looking for anything to go wrong."

Now, after rereading the contracts and consulting lawyers, the Starrs and many other would-be new-home buyers are finding that the sales agreements they so enthusiastically signed just a year or two ago have left them little wiggle room as settlement day approaches. Indeed, some consumer advocates and real estate lawyers who have been fielding calls from remorseful buyers in recent months say few contracts are as rigid and one-sided as those for new home sales.

Prepared by builders' attorneys, the contracts are "written in a way to give every possible edge to the home builder," said Allen J. Fishbein, director of credit and housing policy at the Consumer Federation of America. Some developers have added certain provisions that further strengthen the contracts, bit by bit, over the past decade, some attorneys said. As a result, contracts became more prevalent during the frenzied real estate boom that block consumers from getting any "remedy" beyond reimbursement of their earnest money, or that prevent them from taking the dispute to court but instead force them into arbitration, when differences of opinion arise.

Builders, on the other hand, say the contract provisions protect them against buyers frivolously trying to extricate themselves from completing purchases. They say that buyers weren't complaining about the contracts during the boom, when values jumped by tens of thousands of dollars, with buyers earning a profit even before they went to settlement.

Of course, every home sales contract is different. Some are more consumer-friendly, and an increasing number of builders are willing to work with buyers to keep the deal alive, especially since new buyers aren't exactly knocking down their doors these days.

But some buyers are trying to get back their deposits just the same, and at times are finding that persistence can prevail. After initial protests from the builder, one would-be buyer was released from her contract after arguing that a job transfer from Rockville to Baltimore met, albeit barely, a "change of circumstance" clause in her contract that gave her an out if her new job was more than 50 miles away, said Harvey S. Jacobs, a real estate attorney in Rockville who represented her.

And some buyers have been striking back at what they perceive as an imbalance in power between builders and buyers. In a recent round of lawsuits filed in several local jurisdictions, attorneys have challenged the validity of certain builder contracts because they lack "mutuality of obligation" on the part of the builder and fail to give the buyer any "remedy" -- other than return of the deposit -- even if the builder breaches the agreement. Put in plain language, the attorneys contend that the builder doesn't have to build or sell the house to the buyer and that the buyer can't do anything about it, even if the buyer lost money on the sale of a house or got stuck renting an apartment.

There have not yet been judgments or verdicts in these cases, but some would-be buyers are getting settlements instead. In one case settled recently in Fairfax County Circuit Court, 16 home buyers in a McLean subdivision sued to get back deposits on homes contracted for a collective $20 million.

Alexandria-based real estate attorney Beau Brincefield Jr., who filed the lawsuit on behalf of the buyers, argued in court filings that the contracts allowed Reston-based NVR to walk away without recourse because the terms of the contract didn't set a date by which NVR had to go to settlement; freed NVR from liability for any damages; provided no remedy to the buyer if the builder didn't hold up his end of the bargain; and required the buyer to waive any right to "specific performance" of the contract, which meant that the buyers couldn't compel NVR to build and sell them the house.

"Unless both parties are bound, neither party is bound," Brincefield said in an interview, quoting from a decision in a contract dispute case rendered by the Virginia Supreme Court in the early 1900s.

NVR disagreed with Brincefield's assessment, saying that limitations on remedies do not undermine a contract's validity. NVR's attorneys argued that the contract did not lack mutuality, and that even if it did, mutuality was established after the company built the homes with upgrades and features as specified by buyers in their contracts.