Prior to entering into a contract to purchase a tiny house, you should do your homework on the tiny house builder, including obtaining a Tiny House Builder Report. We would also recommend that you ask to speak to previous customers of the tiny house builder to further understand how your tiny house builder was to deal with.
Having made the decision to engage with a tiny house builder, you will then be presented with a standard form of contract on the tiny house builder’s terms. These terms may vary greatly between tiny house builders. Some of them may be very basic one or two page documents and others may be more extensive contracts. In any event, there will be certain key risk areas you will want to understand thoroughly before committing to the contract.
Probably the most important consideration for your contract is the mechanism for determining the price. Some standard form building contracts referred to the price as being “Fixed”, but this can be misleading as often the contract contains various mechanisms for the price to be adjusted (usually only upwards). It is also likely that the price will contain various “tags” or exclusions, which are items that the tiny house builder excludes from the calculation of the price. Examples of such items may be the costs of delivery or installation, site works (if applicable), foundation work, electrical or painting work. It is important that you fully understand these exclusions so that you can price these exclusions and consider them in the context of your overall budget.
The contract will also likely maintain mechanisms for the price to be varied in certain circumstances. These circumstances may include when events occur outside the tiny house builder’s control, variations requested by you, or an inability to source building materials. If these circumstances arise, you need to closely review the mechanism by which the price is subsequently adjusted. Often this will be based on the tiny house builder’s hourly rates plus a percentage markup. This is where the price of the build can blow out. You should discuss these mechanisms with your lawyer and try to negotiate changes to limit them.
You are likely also to be required to provide staged payments at certain times of the build. This is not uncommon, but the contract needs to clearly define when a stage payment is triggered, and it is important that you check on progress (ideally in person) before making such payments.
It is likely that the tiny house will be built at the manufacturing site of the tiny house builder. The contract therefore needs to clearly explain who takes the risk in the tiny home as it is being constructed. When we talk about risk, we are mainly concerned with who is responsible for insuring the tiny house during construction.
The contract will also explain when title transfers to you, which will often be when all amounts have been paid. The tiny house builder will likely expect all amounts to have been paid prior to delivering and installing the tiny house. Again, this is not uncommon, but any disputes regarding the calculation of the price will delay delivery and installation (see comments above). Ideally, you should discuss with your lawyer options for amending the contract so that title in the tiny house transfers to you during construction.
Prior to entering into the contract, we recommend that you obtain a credit check cheque and a security interest check on the Personal Property Securities Register on your tiny house builder. These reports are an important part of your due diligence. You should also discuss with your lawyer inserting clauses into the contract allowing you to take security over the tiny house under construction and check how the security will operate in priority to any other security interests registered against the tiny house builder.
Do not be lulled into a false sense of security by a basic one or two page agreement. In some ways, these basic agreements are more problematic than a fuller contract because it will leave many issues unanswered. After you have made staged payments, the power will be transferred to the tiny house builder in the event of dispute. The level of professionalism of the tiny house builder contract will also give you some context in which to consider the systems and processes of the tiny house builder.
This article has examined three key issues when entering into a tiny house contract, but we would always recommend that you engage with your lawyer to understand the contract before committing to such a significant personal investment.
Andrew Skinner has over 20 years of experience as a commercial lawyer and is a director in the law firm Urlich Milne as well as being Vice Chair of the Frame and Truss Manufacturers Association. Andrew’s email address is andrew.skinner@uml.co.nz. This article is not intended to be relied upon as legal advice
