When are Developers or House Flippers Exempt from Having a Contractor's License?
As a house flipper, renovating and selling a property without a licensed contractor might be tempting. But a significant consideration must be whether an unlicensed flipper can sue its licensed and unlicensed contractors for breach of contract. The answer is no unless the flipper is exempt from Contractors State License Law. (See generally Business and Professions Code §7031.) In California, “no person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required . . . regardless of the merits of the cause of action brought by the person . . .” (Business and Professions Code §7031(a).)
The requirement that contractors be licensed provides minimal assurance that all persons offering such services in California have the requisite skill and character, understand applicable local laws and codes, and know the rudiments of administering a contracting business. (White v. Cridlebaugh (2009) 178 Cal.App.4th 506, 517, citing Hydrotech Systems, Ltd. V. Oasis Waterpark (1991) 52 Cal.3d 988, 995.)
The protections afforded by Business and Professions Code section 7031 extend beyond those who hire an unlicensed contractor. The class protected by Business and Professions Code section 7031 includes those who deal with a person required by the statute to have a license. “When the person required to have a license is a general contractor, then the protected class includes subcontractors, materialmen, employees and owners dealing with the general contractor.” (Lewis & Queen v. N.M. Ball Sons (1957) 48 Cal.2d 141, 153.)
As a rule in California, anyone who modifies real property must have a contractor's license. California Business & Professions Code §§7000-7191 defines a “contractor” as synonymous with “builder” and is
any person who undertakes to or offers to undertake to, or purports to have the capacity to undertake to, … , or does himself or herself or by or through others, construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building … or other structure, project, development or improvement, or to do any part thereof, including … the cleaning of grounds or structures therewith, … , whether or not the performance of work herein described involves the addition to, or fabrication into, any structure, project, development or improvement herein described of any material or article of merchandise. ‘Contractor' includes subcontractor and specialty contractor. …
(Bus. & Prof. Code §7026.)
House flippers (owner-builders) must be licensed unless they meet certain exemptions. Business and Professions Code section 7000 et seq. (Contractors State License Law) states the exemptions. A property owner is exempt from having a contractor's license under the following conditions:
(1) An owner who builds or improves a structure on his or her property, provided that both of the following conditions are met:
(A) None of the improvements are intended or offered for sale.
(B) The property owner personally performs all of the work or any work not performed by the owner is performed by the owner's employees with wages as their sole compensation.
(Bus. & Prof. Code §7044(a)(1).)
(2) An owner who builds or improves a structure on his or her property, provided that both of the following conditions are met:
(A) The owner directly contracts with licensees who are duly licensed to contract for the work of the respective trades involved in completing the project.
(B) For projects involving single-family residential structures, no more than four of these structures are intended or offered for sale in a calendar year. This subparagraph shall not apply if the owner contracts with a general contractor for the construction.
(Bus. & Prof. Code §7044(a)(2).)
(3) A homeowner improving his or her principal place of residence or appurtenances thereto, provided that all of the following conditions exist:
(A) The work is performed prior to sale.
(B) The homeowner has resided in the residence for the 12 months prior to completion of the work.
(C) The homeowner has not availed himself or herself of the exemption in this paragraph on more than two structures more than once during any three-year period.
(Bus. & Prof. Code §7044(a)(3).)
The first exemption does not usually apply to developers and house flippers because they intend to sell the property they are improving. Likewise, the third exemption doesn't typically apply as the property is not the flipper's principal place of residence, nor will the flipper have resided in the property for 12 months before the completion of the work.
As a result of the preceding, law-abiding house flippers are either licensed or rely on the second exemption, the use of licensed contractors.
The Second Exemption (Bus. & Prof. Code §7044(2)): The Property Owner Must Contract Directly with Duly Licensed Contractors and Not Intend to Sell More than Four Single-Family Structures in a Calendar Year.
Under this exemption, a flipper interested in renovating their property must hire and contract individuals who are legally licensed for their respective trade on the jobsite. For residential properties, the flipper must not intend or offer to sell no more than four single-family structures.
The developer can intend to sell more than four single-family structures if it contracts with a general contractor for the construction. (Bus. & Prof. Code §7044, subdivlaw. (a)(2).) Here, a “single -family residential property” means real property improved with one to four dwelling units or a unit in a residential stock cooperative, condominium, or planned unit development. (Bus. & Prof. Code § 10018.08.)
Developers and house flippers must adhere to strict regulations to ensure project success and avoid legal risks, including citations from the Contractors State License Board and the inability to hold contractors and subcontractors accountable for non-performance.
This article provides basic information and does not constitute legal advice. It does not establish an attorney–client relationship. Readers should get guidance from a skilled attorney about their individual legal issues. We do not guarantee the accuracy, completeness, or timeliness of the information supplied, and we accept no responsibility for any actions taken or not done based on this information.
