Implications of “Selling” Or “Renting Out” A Construction License

Legal and ethical questions arise whenever a licensed contractor decides to rent out his/her practicing license to third parties. In such an arrangement, the qualified contractor does not perform actual supervision or management of a project as the law requires. The great danger is that the person in possession of the license is an impostor and, in extreme cases, may have no knowledge of construction. Such arrangements are not only unlawful, but they are also considered as ethically wrong. A building contractor is a person who undertakes or purports to have the capacity to, whether by oneself or through others, construct, change, repair, demolish, or perform any other related activities on as structure or building. The current paper will review legal and ethical implications that accrue when a licensed contractor issues out his/her license to an unlicensed person. It will explore consequences from both parties, i.e. for both the licensed contractor and the unlicensed contractor.

The Legal Need for Licensing of Building Contractors

Building contractors are required by the state to possess a contractor’s license. In California, contractor licensing is provided for in Business & Professional Code. License requirements are meant to protect the public from unqualified and unscrupulous practitioners (Friedman, Berry, & Freed, 2013). The provisions afford a strict deterrent element and may be highly harsh to unlicensed contractors. This is in appreciation of the possible harm that could occur when unlicensed practitioners are allowed to supervise and manage construction (Friedman, Berry, & Freed, 2013). In turn, these laws also encourage contractors to obtain licenses.

Implications for the Licensed Contractor

A licensed contractor who willingly rents out the contractor’s license to an unregistered property owner without conducting supervision or management of the construction work is liable to various legal and ethical detriments relating to construction (Friedman, Berry, & Freed, 2013). While the law may not be explicit about the licensee’s legal liability, in most cases this person will be found liable alongside the unlicensed contractor. The following are possible implications that may befall the licensed contractor.

Suspension of Contractor’s License

Such contractor runs the risk of being stripped of his/her license. Many builder regulation boards resort to the suspension of licensing whenever the holder engages in fraudulent activities relating to construction (Friedman, Berry, & Freed, 2013). In Rhode Island, suspension or revocation of registration may occur if the contractor engages in dishonest conduct to the detriment of the public (Fenn, Hutchings, & Burr, 2008). After an administrative hearing, the suspension is usually issued after the contractor is allowed to defend himself /herself before the board or tribunal.

Suit for Misrepresentation

The licensed contractor exposes himself/herself to a suit for fraudulent misrepresentation. By allowing his/her license to be used by an unlicensed contractor, the licensed contractor engages in an activity aimed at misleading the public. Unregistered contractors pose a threat to both consumers and duly qualified contractors. For instance, unregistered contractors may not have insurance to protect consumers (Sale, 2007). Consequently, any harm caused by them to the public may not be compensated by means of insurance.  Therefore, a cause of action is allowable against a registered contractor who knowingly aids in activities of an unregistered counterpart.

Criminal Liability

Florida has criminalized engagement in contracting work without a valid license (Landau, 2011). Section 489.127 of Florida Statutes outlaws the act of impersonating a certificate holder or registered contractor. The section also prohibits an individual from presenting the certificate of another person as his or her own. These two offenses call for convictions if proved. A licensed contractor who assists an unregistered builder in lying to the public about being duly registered or certified may be held criminally liable for the offense of aiding and abetting an unlicensed contractor (Dudley, 2007). According to Landau (2011), unlicensed contracting in Florida is a first-degree misdemeanor calling for penalties of up 1 year in jail and a $1,000 fine.

Suit for Unjust Enrichment

A contract, which allows a licensed contractor to earn money through renting out the contractor’s license, engages in an illegal act. As a result, all money earned through such illegal agreement constitutes unjust enrichment. A property owner who feels defrauded by such an arrangement may opt to sue the construction company and the licensed contractor jointly. In such case, the court may require the contractor to refund the money obtained through the unlawful agreement.

General Effects of Illegal Contracts

In addition to the above implications, the licensed contractor is likely to incur general implications of being a party to an illegal contract. Illegal contracts are ordinarily unenforceable. They are void and therefore not actionable under law. When the licensed contractor suffers from the breach of a contract by the unlicensed construction company, he/she cannot sue for damages or specific performance. For instance, in case the construction company refuses to pay for the use of the license, he/she may not sue this construction company to enforce such payment. Courts do not enforce unlawful activities even when it is evident that the plaintiff has suffered damage.

Implications for the Unlicensed Contractor (Construction Company)

Activities of an unlicensed contractor have dire consequences for both the property owner and the unlicensed contractor. The legislature in most states envisions statutes that prohibit selling or renting of licenses by licensed contractors. In this scenario, the contractor who uses the license of a licensed contractor can be called an unlicensed contractor. By renting or selling the license, the licensed contractor relinquishes the right of supervision, management, and control over the construction process. Implications for an unlicensed contractor are as follows.

The Loss of Contract

The loss of a contract may take the form of nullification of the entire contract or other ways as prescribed by law. October of 2006 marked a turning point for the legal definition of licensed and unlicensed contractors. After the elimination of the “cure” provision in July of 2000, more qualifications were added as to what an unlicensed contractor meant. The case of Castro v. Sangles illustrates implications of contracting with an unlicensed contractor (Dudley, 2007). In this case, the plaintiff signed an agreement with the defendant who was an unlicensed contractor. Castro felt unsatisfied with the construction and filed, alleging a breach of contract. The court dismissed the case on grounds that the contract was unenforceable based on the fact that the defendant was an unqualified contractor. Despite the repeal of the “cure” rights, the case of Palms v. Magil Construction of Florida, Inc. set precedence for suits pending before July of 2000 when the court eliminated the clause. The court held that the application of the amendment could be an infringement upon the substantive rights of the contractor.

The Loss of Lien or Bond Rights

Lien rights are only limited to licensed contractors who have satisfied legal requirements of the jurisdiction under which they operate (Dudley, 2007). Amendments in 2005 sought to preclude demands for a surety on an unlicensed bonded contractor. Thus, if the property owner fails to pay the unlicensed contractor, he/she cannot take lien.

Cause of Action for Code Violations

An unlicensed contractor who performs duties without due regards to the law breaches building codes in several states. An example is the Florida Building Code. However, this does not apply to a case when the contractor has obtained the permit legally and the requisite authorities have carried out all the required inspections before the issuance of the permit. It only applies to a case when a person has had prior knowledge of existing violations. In the case of Comptech Intern, Inc. v. Milam Commercial Park Ltd, the court held that the clause that exempted personal injury or damage did not cover economic losses in case of code violations.

Treble Damages

These are damages occurring as a result of the contractor’s negligent activities occurring in the state where the activities took place. In the case of Hancock–Gannon Joint Venture 11 v. McNully, the court denied awarding of damages to the subcontractor because the damages incurred were not personal (Dudley, 2007). The court in this case could award up to three times damages that the law prescribes if the contractor is unlicensed as the court held in Swartz v. Rockey et al.

Administrative Remedies

Remedies accrued against the unlicensed contractor performing activities without due regards to the law are apparent. A party can apply for a permanent or temporary injunction to prevent an unlicensed contractor from conducting any activities. The court can also impose fines on unlicensed contractors. The law prohibits aiding and abetting unlicensed activities by a licensee.

Criminal Sanctions

Criminal sanctions can be added to the administrative remedies. An unlicensed contractor who advertises his/her services commits the offense in the form of a first-degree misdemeanor (Dudley, 2007). An unlicensed person who has had a prior conviction for violating Subsection 1 and is found guilty again commits a third-degree felony (Dudley, 2007). Felony of the third degree also occurs when an unlicensed person violates Subsection 1 during a state of emergency declared by the relevant authorities.

Possible “Disgorgement” Action

Disgorgement in construction is the act of ordering repayment or refund of ill-gotten funds by an unlicensed contractor (Dudley, 2007). In Vistaman Designs v. Silverman, the attorney fees paid to a lawyer who was not authorized to conduct his services in the state of Florida were ordered to be reimbursed to the client. This is a reflection that disgorgement is not only limited to the construction field.

Cause of Action Resulting From Unfair Trade Practices

This course of action is possible in some states (Dudley, 2007). For instance, the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) provides for the classification of unfair trade practices as unlawful. The same Act provides for the institution of private causes of action for unfair trade practices. In the case of Anden v. Litinsky, the court affirmed the judgment against an unlicensed contractor whose activities led to damages due to an unprofessional construction. Furthermore, according to DeLong (2012), deviating from the property owner’s construction plans also amounts to an unfair trade practice.

Property Owner’s Responsibility

In construction, the property owner has the duty to ensure that the construction company uses its license (Dudley, 2007). This is done to ensure complete legal responsibility of the construction company. For instance, in Florida the state law only permits construction to be undertaken by licensed contractors (Dudley, 2007). Various sites provide information about registered contractors in any given state or county. The object of providing such information consists in assisting property owners to solicit services of only those contractors that have the relevant certificate. In almost all states, property owners are held liable when they fail to exercise due diligence in ensuring that the relevant body has certified the contractor whose services they order. Such liability may take the form of compensating third parties who incur injuries on the owner’s property.

Lack of Recourse

When the contractor performs substandard work, there can be no recourse against such contractor in case there has been the lack of due diligence on behalf of the property owner because courts do not enforce unlawful agreements as this would defeat justice (Dudley, 2007). Since the contractor is aware that no suit can address the work that does not conform to workmanship standards, he/she may become complacent. The result is poorly constructed structures that may harm both the homeowner and third parties. However, the homeowner may obtain recourse through civil action.

Legal Duty to Prevent Injury

It is the duty of a property owner to prevent injury to persons who come to their property. Three classes of persons are offered to show the limits of the duty of care by the property owner. Firstly, invitees are persons who come onto the property for business purposes. It is thus the property owner’s duty to ensure that the invitees do not meet any harm during their visit to the property. Steps taken towards ensuring a safe environment should be reasonable. Secondly, licensees are also protected by law as property owners have to ensure that they do not encounter any danger on the property. Licensees are persons who visit the property on social or personal grounds. Lastly, trespassers are persons who are not legally authorized to be on the said property. Though they are not expressly covered by the property owners’ duty of care, any willful injury to them is prohibited by law. Knowledge of the owner that the property is frequented by trespassers should translate into ensuring a safe environment for them to prevent injury. Under the umbrella of trespassers, there are included trespassing children. Property owners are expressly required by law to ensure that children trespassing on their property are safe regardless of any ongoing work.

Insurance Cover

The property owner has the duty to comply with all insurance regulations regarding all persons working on the property. The exception to this is the licensed contractor who by law is required to take care of his/her insurance cover. This involves taking out a liability insurance policy in case of claims. The property owners’ liability insurance policy intends to protect both property owners and landlords from claims made against their properties. The two classes of persons required by law to ensure safety standards should do everything possible to prevent the occurrence of injury.

Conclusion

It is apparent that renting one’s construction license to third parties can have adverse consequences. Firstly, the party issuing out the license places himself/herself in a legal quandary, which could result in the discontinuation of his/her license, suits for misrepresentation, unjust enrichment, and criminal liability in addition to general effects that come from illegal contracts. Secondly, the unlicensed contractor to whom the licensee issues out his/her license also stands to face some legal consequences. He/she could lose the contract, he/she lacks the bond or lien rights of a licensed contractor, and he/she could face a possible disgorgement action and a suit based on unfair trade practices. If the property owner knows about the situation, but fails to take resource early enough, thus allowing the unlicensed contractor to undertake the construction, he/she also falls under legal liability.

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