Multifamily Document Reform Implementation Frequently Asked Questions

Latent Defects Escrow

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1.  10/23/2012
Is the Escrow Agreement for Latent Defects (HUD 92414M) required on 221(d)(4) Final Closings when Performance and Payment Bonds were used at Initial Closing? Or is the guarantee for latent defects still covered by the Performance and Payment Bonds based on language in the Construction Contract requiring the contractor to guarantee for one year defects resulting from faulty workmanship or materials?

If the general contractor provides assurance of performance as prescribed in the Construction Contract in the form of bonds (using form HUD-92452M), Section 2.10(J) of the closing guide provides that “no action is required, as it [the bond] remains in effect for two (2) years from the date on which final payment under the construction contract becomes due…” Additionally, see Section 8 of the Performance Bond as follows: "8. Any suit, action or proceeding by reason of any default whatever shall be instituted within two years after the date Owner declares Contractor in default under the Contract. If this limitation is deemed to be in contravention of any controlling law, this Performance Bond is deemed amended so as to substitute the minimum period of limitation permitted by such
controlling law for the above limitation." Thus, unless state law prevents the bond from covering the two year period, a separate latent defects escrow will not be needed when using bonds as completion assurance.

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