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Phillip C. Querin, Partner
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
House Bill 3539
[October 2003]
Background
House Bill 3539, which was recently passed by the
Oregon Legislature, has an interesting history. Originally sponsored
by Representative Merkley in the 2001 legislative session as House
Bill 3842, it took almost everyone in the real estate industry by
surprise. While perhaps well-intended, it was poorly drafted and
ill-conceived. In summary, it required that sellers of residential
property consisting of 1 to 4 units, give their purchaser a list
of all persons with whom the owner has entered into a construction
contract within the previous two years if the owner has not fully
paid that person (or the person disputed that full payment was made)
together with a copy of any notices of right to lien, claims of
lien, pleadings in any foreclosure action, satisfactions of lien
or waivers or releases of right to lien received by the owner. Most
sellers – even contractors – would have been hard-pressed
to comply. In addition, HB 3842 required that sellers give their
buyers a “cautionary notice” about the risk of construction
liens clouding title to the new property after closing of the sale.
HB 3842 neglected to specify at what point in the transaction the
notice had to be given, but it did make noncompliance a class B
misdemeanor with up to six months’ imprisonment or a $2,000
fine, or both.
Needless to say, given the criminal penalty for noncompliance,
everyone from title companies to Realtors® became concerned
about potential liability, if they failed to appropriately apprise
home-sellers of their legal obligation to give buyers the necessary
documents and cautionary notice.
Once lawyers and industry experts had a chance to
focus on the new law, they quickly realized that something had to
be done to correct this poorly drafted law that was already in effect.
Accordingly, in the 2002 Special Session, a sunset provision was
passed saying that the law would not go into effect until January
1, 2004 – thus giving legislators a chance to re-write a new
law which, when passed, would supercede the old House Bill 3842.
The result is House Bill 3539.
Summary of HB 3539
In Oregon, claims of lien for certain types of labor,
material or services supplied to real property can be created and
exist for a period of time before they have to be recorded in the
public records (i.e. “perfected”). This period can generally
last up to 75 days after the person has ceased to provide labor,
rent the equipment or furnish materials, or 75 days after completion
of construction, whichever is earlier. On rare occasions, these
lien claims can become recorded on property after it has been sold
to the new owner, even though the debt upon which the lien is based,
belongs to the prior owner. It is this risk that HB 3539 seeks to
address.
Seller Alternatives
House Bill 3539 deals with this problem by providing
that for all residential transactions of 1 to 4 family dwellings,
the “owner of record” (i.e. the seller) must provide
to the home buyer one of the following forms of protection against
the risk of unrecorded liens arising after closing of the sale1:
The new law requires that the seller of residential
real property is required to take one of the following actions to
protect buyers from construction liens that are not yet recorded
on the date of sale:
- The seller must purchase or provide title insurance to help
cover any construction liens that are recorded after the buyer
completes the purchase of the residence.
- Escrow may be instructed to retain money until the status of
all construction liens is resolved after the purchase of home
is complete.
- The seller may maintain a bond or letter of credit until the
status of all construction liens is resolved following closing.
- The seller may obtain waivers from every person claiming a right
to lien against the property in an aggregate amount of $5,000
or more.
- The parties may simply wait to close the purchase of the residence
until 75 days after the completion of construction.
Alternatively, the seller may obtain a signed written waiver of
the above protections from the purchaser. This waiver cannot
be contained in the body of the real estate sale agreement, but
may be signed thereafter all the way up to closing. The form of
waiver is set out in the House Bill. It summarizes the seller’s
alternatives described above, and contains the following caveat
below which the buyer is to sign:
Under Oregon law, you may waive the requirements that apply to
the seller of the residential real property. By signing this document,
you agree to waive these protections and accept the risk that
the property you are purchasing may be subject to a lien that
is recorded after the date of sale. By waiving your rights, you
may become liable for payment of the lien even if the contractor
has been paid in full. Before signing this waiver, you may wish
to consult an attorney.
Not later than the date of closing, the seller is required
to complete, sign and deliver to the buyer a form specifying either
(a) the method that the seller has selected to comply with the requirements
of law or (b) that the law does not apply to the sale of the subject
property. The form of notice is to be designated by Construction
Contractors Board rulemaking. Violation of this subsection of the
law is a Class A Violation.2
Real Estate Licensees Not Liable for Seller Noncompliance
Real estate licensees, when acting in their professional capacity
cannot be held liable in any criminal, civil or administrative proceeding
arising out of the failure of a seller to comply with this law.
However, this does not mean that licensees do not have to be informed
about the law. Undoubtedly, buyers, when presented with the waiver
form, which will presumably be the most prevalent, will turn to
their Realtors® for direction.
Application of House Bill 3539
House Bill 3539 applies to the following sales of residential property:
- A new single family residence.
- A single family residence where the sales price for original
construction or contract price for improvements completed within
three months prior to the date of sale of the property is $50,000
or more.
- A new condominium unit.
- A condominium unit where the sales price for original construction
or contract price for improvements completed within three months
prior to the date of the sale of the property is $50,000 or more.
- A new residential building (up to four units and used for residential
purposes only).
- A residential building where the sales price for original construction
or contract price for improvements completed within three months
prior to the date of the sale of the property is $50,000 or more.
Violations and Penalties
In addition to any other remedy or penalty provided by law, a buyer
may bring an action to recover up to twice the amount of actual
damages caused by seller’s violations of the obligations described
above. The court may award prevailing party attorney fees. Actions
brought for violations of HB 3539 have a two-year statute of limitations.
There are several defenses to claims of violation, including: (a)
That there has been no enforcement or attempted enforcement of any
lien claim against the property arising before the date of closing;
(b) That the claim of lien is invalid; or (c) that the seller has
satisfied the lien or obtained the necessary releases.
A violation is not considered to have occurred during the period
that the validity of the lien is disputed in a judicial proceeding
or Contractor’s Board proceeding. Needless to say, the new
law does not require payment of a lien that is not otherwise valid,
nor does it apply to lien claims arising out of materials, equipment,
services or labor requested by the buyer.
When the seller is an Oregon licensed contractor, failure to comply
with HB 3539 may become the basis for suspension or revocation of
the contractor's license, refusal to issue or reissue a license,
assessment of a civil penalty or any combination of these sanctions.
Significantly it is also made a violation of the Unlawful Trade
Practices Act, which can carry with it claims for punitive damages.
Conclusion
Is House Bill 3539 an improvement over House Bill 3842? If measured
by length, the actual text of HB 3539 is approximately 13 pages
long. HB 3842, its predecessor, was not quite two pages in length.
Hopefully, the added length to this new law represents more attention
to detail. Certainly, the criminal sanctions have been deleted;
deadlines for compliance have been added; and the oppressive condition
that sellers provide buyers with reams of paperwork covering the
two years preceding sale, have been eliminated.
But the original purpose of the law was to protect the public against
unscrupulous contractors who sold homes without paying their subs,
thus leaving a new home buyer saddled with having to do so. But
the criminalization for noncompliance under the old law, was akin
to using a sledgehammer to kill a mosquito.
To the extent that HB 3539 has now decriminalized the law and eliminated
the requirement that seller’s provide mounds of paperwork
to their buyer, the new law is an improvement. But is it too broad
in scope? Would it not be sufficient to limit its application solely
to contractors, where the risk is greater? The new law does not
seem to have any standards establishing the burden of proof buyers
must establish to prevail against a seller. Nor is there a distinction
between intentional concealment of unpaid liens by sellers and builders
versus negligent or inadvertent nondisclosure. What if the nondisclosure
is the result of title company error? Most buyers will someday become
sellers. So the legislature’s efforts to create a law protecting
today’s buyers will someday be imposed upon those same buyers
when they get ready to sell.
One last note: curiously, HB 3539 has an emergency clause attached
to it. This means that it will be come effective immediately
upon signature by the Governor. As of the time of this writing,
it has not yet been signed. But there is every indication that it
will become law shortly – so be prepared to discuss it with
your clients when the time comes.
FOOTNOTES
1
As is noted later in this article, it appears that the choice
of protection that will be given is up to the seller, not the buyer.
2
A Class A Violation is an offence punishable by a fine of up to
$600. Violations are not punishable by a jail sentence.
© Copyright 2003. Phillip C. Querin,
Davis Wright Tremaine. No part may be reproduced without the author’s
express written consent.
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