3-Day Right to Cancel – Contractors Beware

Every contractor who does residential work knows about a home owner's three-day right to cancel. But what you may not know is how vicious this innocuous little form can be. Here's a short quiz to test your understanding. Answers are below.

True or false?

1. The 3-day right to cancel is a federal notice and isn't required in most states.
2. There no harm in skipping this form. It's safe to leave it out of your contracts.
3. If you decide to include the notice in your contract, one copy is enough.
4. The 3-day right to cancel is required only on major home improvement jobs.
5. The 3-day right to cancel is required only if you extend credit to the owner.

First, something that should be obvious: Don't start work, don't deliver materials, don't schedule crews until three business days after the contract is signed. When a contract is cancelled under federal law (12 C.F.R. 226.15), you have to undo the deal at your own expense. Any lien you thought you had is cancelled. You're liable for twice any finance charge up to $1,000 plus costs and attorney fees.

Answer to Question 1 – Not required in most states.
False. The 3-day right to cancel is a federal right. But it's a right granted in all states any time you do work on the principal residence of the owner. Even if your state has its own 3-day right to cancel, you still have to deliver the federal form, filled out with the date of signing, your mailing address and the last day to cancel.

Answer to Question 2 – It's safe to skip this form.
False. It's not safe at all. Omitting the 3-day notice gives the owner three years to cancel (§ 226.15-b).After cancellation, you have the right to take materials back. But you have to make a full refund! Imagine making a full refund on a home improvement job three years after completion. More on that later.

Answer to Question 3 – One copy of the form is enough.
False. 12 CFR 226.15-b requires that each owner receive two copies of the cancellation notice. If two adults are living in a home, it's safe to assume that both are owners. Delivering less than four copies of the 3-day right to cancel is like delivering none at all. See Weeden v. Auto Workers Credit Union, Inc., 1999 U.S. App. LEXIS 5272.

Answer to Question 4 – Required only on major jobs.
False. The federal 3-day notice is required on every job that qualifies as the principal residence of the owner, whether a custom home, home improvement or home repair. There is no threshold dollar amount. Even replacing a water heater gives the owner 3 days to cancel. In a true emergency, the owner can waive the right to cancel with a written statement.

Answer to Question 5 – Required only if you extend credit.
False. The 3-day right to cancel exists on every job that could result in a lien on the owner's property. And that's every job because all states give contractors a construction lien for their work.

Don't let this happen to you.
A few years ago Alma and Robert Johnson needed a little work done on their front porch at 65 Stanford Street, Providence, Rhode Island. Interstate Contractors got the job. They finished the work and got paid -- $12,400. Unfortunately for Interstate, their work was better than their contract. I'll explain.

Two years later, the Johnson's had some financial reverses. Their home fell into foreclosure and the Johnsons filed for bankruptcy. One of their creditors had a smart attorney with the good sense to pull out the contract for that front porch job. Turns out, Interstate's contract wasn't quite right. There wasn't any federal 3-day cancellation notice. That was Interstate's Mistake One. The Johnson's could still cancel the job, two years after completion, and get a full refund under federal law. Great! But it gets better.

Rhode Island gives owners a 3-day right to cancel – but only if the owners don't get the federal right to cancel notice. Well, the Johnsons never got their federal notice. So Rhode Island's law applied. Interstate must have known that. Interstate's contract with the Johnsons included the Rhode Island 3-day cancellation notice. Unfortunately, the Rhode Island notice wasn't quite perfect. It wasn't in 10-point bold type. And one part of one paragraph was missing. Bingo! Interstate's Mistake Two.

So the Johnsons canceled under Rhode Island law. Interstate now had 20 days to refund the full $12,400. Too bad. They didn't make it. And that was Mistake Three. Failure to make a full refund in 20 days made Interstate liable to the Johnson's creditors for double the contract amount -- $24,800. And that was the award of the court. (I'm not making this up. See 239 B.R. 255.)

Like I said, that federal 3-day notice can be full of nasty surprises.

My recommendation: Don't be an Interstate. Use quality contracts that comply with both your state law and federal law. You'll find plenty here and here.

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