PLEASE NOTE: This article only applies to North Carolina. This article is designed for general information only. The information presented in this article should not be construed to be formal legal advice nor the formation of an attorney/client relationship. This article addresses only one aspect of the statutes of limitations with regards to construction contracts. Please contact your attorney if you need further information.
In order to avoid potential open-ended liability for an indefinite period of time, the North Carolina Legislature has enacted various statutes of limitations. The time in which to file a lawsuit regarding improvements to real property is primarily governed by two statutes, N.C. Gen. Stat. §1-50 and N.C. Gen. Stat. §1-52. First, N.C. Gen. Stat. §1-50 sets an outside time limit of six years for filing a lawsuit to “recover damages based upon or arising out of the defective or unsafe condition of an improvement to real property.” The lawsuits covered by this limit include, but are not limited to, breach of contract for the construction or repair of an improvement to real property, damages for negligent construction or repair, damages for personal injury, death, or damage to property, damages for economic or monetary loss, contribution or indemnification for contract or tort damages associated with improvements to real property, and actions against materials suppliers, developers, architects, surveyors, contractors associated with an improvement or repair to real property. Second, within the six year period, N.C. Gen. Stat. §1-52 specifies a three year limitation that begins to run when the plaintiff discovers or should have discovered the defect. Since the discovery of defects is largely outside of the control of the builder, this article primarily discusses the limits of §1-50.
Since the expiration of the six year limit apparently extinguishes the right to sue a builder, it is important to know the date that this limit begins to run. According to §1-50, the six year limit starts to run from the later of (1) the specific last act or omission of the defendant giving rise to the cause of action or (2) the date of substantial completion of the improvement. While on its surface, the statute seems self-explanatory, there has been a fair amount of litigation over exactly what this means. The statute goes on to state that substantial completion is the date when the property is completed to the degree needed so that the owner can use the property for the intended purpose. While the owner may be able to “make do” in a partially completed building, the intent of the statute is to start the statute running from the date that the owner can use the property as intended and in the intended manner.
The Court of Appeals clarified this issue in 1999 in a residential setting in the case of Nolan v. Paramount Homes, 135 N.C. App. 73 (1999). In this case, the builder constructed a single family home, and a certificate of compliance was issued by the inspections department on June 6,1991. The buyer closed on the house on December 9, 1991. The builder completed some punch list work on March or April 1992. The buyer filed a lawsuit on October 23, 1997, within 6 years of her purchase, but more than 6 years after the certificate of compliance was issued. The court found that the punch list work was not related to the damages claimed by the owner and therefore, it did not keep the statutes of limitations from expiring. The Court of Appeals held that, when the certificate of compliance was issued, the house could be used for its intended purpose as a residence and was therefore substantially completed. Therefore, the time limits of N.C. Gen. Stat. §1-52 began to run as soon as the certificate of compliance was issued.
The end result is that, in residential settings, the statute of repose, §1-52, begins to run as soon as the certificate of occupancy or compliance has been issued by the inspections department. Please note that §1-52 allows the parties to establish the date of substantial completion by written agreement. Therefore, it is recommended that a method for determining the date of substantial completion be included in all construction contracts. §1-52 also contains some provisions that may affect its applicability. For example, the time limits in §1-50 do not apply if the defendant commits fraud or has been willfully or wantonly negligent.