The Case for Reforming Chapter 40

Amendments to Chapter 40 enacted in the 2003 legislative session substantially altered how Chapter 40 functions. Among other things, the changes created an overly broad definition of a construction defect. The broad definition, combined with an entitlement for attorneys to collect fees, which courts have interpreted must be paid even when virtually all defect claims are ultimately rejected in court, created a litigation friendly environment. In Nevada, our “right to repair” law is neither a real right nor a real opportunity for repair — and it is easily circumvented by attorneys pursuing a “sue first” mindset.

Chapter 40 was created with good intentions — a homeowner with a problem should give notice to their builder, and the builder should have an opportunity to inspect and repair the problem in a timely manner. However, the intent of Chapter 40 has been sidestepped by the litigation incentives added into the Chapter 40 system. Those incentives have distorted the intent of Chapter 40 and placed homeowners and homebuilders in an adversarial position from the beginning to the end of the process. Rather than hearing about a defect from a concerned homeowner, the first time a builder generally hears about a problem is upon receipt of a hostile letter from an attorney. Once the attorneys are involved, the homebuilder and the homeowner, the actual stakeholders in the dispute, rarely communicate and instead turn the matter over to counsel to fight it out.

An Obstacle to Economic Recovery

Three years after the end of the recession, Nevada’s housing engine remains stuck in low gear. Fixing Chapter 40 will create new jobs in the housing sector. Getting housing back to pre-boom levels would add nearly 40,000 jobs throughout Nevada and generate $336 million annually in new tax revenue.

First-Time Homeowners Hardest Hit

Since the well-publicized HOA scandal, multifamily for-sale starts in Nevada have plunged by 84 percent. The threat of construction defect lawsuits makes construction of new condominiums and townhouses an unacceptably risky activity for builders, subcontractors and their insurers. Homebuilders are taking every precaution they can, which has meant simply not investing in the multifamily construction Nevada so desperately needs. The result is that thousands of young Nevadans looking to buy their first home are stuck in rental housing, facing ever-increasing rents.

Prescription for Reform

For more than a decade, the Nevada Legislature has failed to take even a single step to reign in Chapter 40 abuse. In 2015, that must change. Legislators of both parties must come together to enact reforms that will allow Chapter 40 to achieve its original purpose of bringing homeowners and builders together to ensure that construction defects are repaired quickly and inexpensively. The prescription for reform is simple:

Restore Clarity: Any law designed to encourage prompt resolutions of disputes must have clear rules, definitions and predictable procedures that all parties understand and are required to comply with. Since Chapter 40 was enacted, loopholes in the law have been exploited to file frivolous claims and drag out lawsuits.

Align Incentives: Prompt resolution of disputes depends on all parties having an incentive to work cooperatively toward an outcome that is fair to everyone. The current system rewards attorneys for bypassing new home warranty claims in favor of filing lawsuits over even the simplest of defects. Once a suit is filed, the longer the case drags out, the greater the fee recovery. Treating attorney fees the same in a Chapter 40 case as they are in other civil lawsuits will drastically reduce Chapter 40 lawsuits, while preserving a homeowner’s right to sue when necessary. Similarly, encouraging builders to make settlement offers early in the process will encourage fair and prompt settlements.