Attention Washington property owners and developers: You may be a general contractor without knowing it
October, 2007
Without great fanfare, the Washington legislature recently made subtle, yet significant, changes to Washington's Contractor Registration laws (RCW 18.27 et seq.). These statutory changes create implications, both in terms of civil and criminal penalties, to owner-developers and others alike.
Generally, the Contractor Registration laws deal with the regulation, registration, and licensing of contractors. Historically, a contractor's failure to comply with the registration requirements could lead to civil fines and criminal prosecution. The legislature, acting under pressure to better protect consumers, expanded the definition of a contractor; stiffened the consequences for violations and strengthened the Department of Labor and Industries' enforcement powers against unlicensed contractors.
The biggest change occurred in defining who is required to be licensed. RCW 18.27.010(1) now defines a contractor as:
. . . any person, firm, corporation, or other entity who or which, in the pursuit of an independent business undertakes to, or offers to undertake, or submits a bid to, construct, alter, repair, add to, subtract from, improve, develop, move, wreck, or demolish any building, highway, road, railroad, excavation or other structure, project, development, or improvement attached to real estate or to do any part thereof including the installation of carpeting or other floor covering, the erection of scaffolding or other structures or works in connection therewith, the installation or repair of roofing or siding, performing tree removal services, or cabinet or similar installation; or, who, to do similar work upon his or her own property, employs members of more than one trade upon a single job or project or under a single building permit except as otherwise provided in this chapter. "Contractor" also includes a consultant acting as a general contractor. "Contractor" also includes any person, firm, corporation, or other entity covered by this subsection, whether or not registered as required under this chapter or who are otherwise required to be registered or licensed by law, who offer to sell their property without occupying or using the structures, projects, developments, or improvements for more than one year from the date the structure, project, development, or improvement was substantially completed or abandoned. (emphasis added)
As a result of these changes, businesses engaged in real estate development activities, even on their own property, must now register. For example, under the old law, a developer who subdivided their own property and made required plat improvements would have previously fallen outside this definition. Now, that same developer fits squarely within this definition, especially if the developer does not "occupy or use" their work for more than a year after substantial completion of the improvements.
Notwithstanding this broadened definition of "contractor," there are still a variety of exemptions that apply. For example, someone who "constructed an improvement" on their own property or personal residence was exempt from registration unless the improvement was constructed "with the intention and for the purpose of selling the improved property." So, one who built a home on their own lot for their own use was exempt, but if that same person builds a house for resale purposes, registration is required. This exemption has been narrowed and now states:
Any person working on his or her own property, whether occupied by him or her or not, and any person working on his or her personal residence, whether owned by him or her or not but this exemption shall not apply to any person who performs the activities of a contractor on his or her own property for the purpose of selling, demolishing, or leasing the property;
The "activities of a contractor" include one who, for their own property, employs members of more than one trade upon a single job or project or under a single building permit. Arguably, then, a homeowner who employs multiple trades for typical "pre-listing" improvements may no longer be exempt from registration requirements. Likewise, the real estate "flipper" who buys and updates a home may also no longer be exempt from registration. Also covered may be the real estate investor who buys a home for rental purposes but improves the home prior to leasing it.
If you are now required to register, the amendments also raise the stakes against those who fail to do so. RCW 18.27 is a strict compliance statute. Washington courts have held that a defense of ignorance will not protect the unwary. Instead of being a misdemeanor, it is now a "gross" misdemeanor if one violates this law. In addition to failing to register when required, a violation occurs if a contractor hires an unregistered subcontractor. Clearly, the legislature is shifting the burden to the owner-developer to ensure their subcontractors are also licensed and bonded.
Failing to register may also create an unforeseen impact on the ability to enforce purchase and sale contracts or leases. RCW 18.27.080 provides that contractors are not allowed to bring a claim for breach of contract "for which registration is required . . . without alleging and proving that he was a duly registered contractor . . . at the time he contracted for the performance of such work or entered into such contract." If an owner performs work on their property that requires registration with the intention of selling or leasing the property, the purchaser or lessee may be able to invoke RCW 18.27.080 as a defense to enforcement of that contract or lease.
In addition to imposing what could be significant civil and criminal penalties for failure to comply and the potential limitations on contract enforcement, non-compliance may also increase exposure (in the latent defect or warranty context) to owner-developers related to the purchase and sale. While violation of RCW 18.27 does not give a purchaser a separate cause of action against an owner-developer, it could be used in litigation as evidence of malfeasance. The amount of any increased liability or exposure would depend, in large part, on the actual issues encountered in a purchase and sale context and what, if any, warranties were given. Despite these uncertainties, these new changes will require all property owners and developers who perform work on their property to take a closer look to determine if they must now register as a contractor.
Until the courts help clarify these new amendments, the safest course of action is to register. While there is certainly time and cost involved, the alternative may prove even more costly.
If you have further questions about the new registration requirements, or would like more information on how to register, please contact your Bullivant attorney.