Published on: November 20, 2013
“And then the one day you find
Ten years have got behind you
No one told you when to run
You missed the starting gun.”
That line, from Pink Floyd’s classic album The Dark Side of the Moon, has particular meaning for condominium associations contemplating construction defect litigation and similar claims, because for these and other tort claims (essentially negligence and other claims which do not arise from or relate to a contract or a statute), timing is critical. Miss a filing deadline and you’ll find the courthouse door slammed shut, precluding any possibility of recovering damages even if the association is entitled to them.
Two parts of a single Massachusetts statute – Massachusetts General Laws, Chapter 260, Section 2b – establish the time within which tort actions concerning the design and/or construction of improvements to real property (buildings, roads, etc.) must be filed. While both of the statutory provisions affect the viability of a construction defect claim, each has a significantly different application and effect.
The statute of limitations portion of the statute requires claims to be filed either within three years after a claim accrues (generally defined as when the defective work or deficient design were completed) or, if the defect is “inherently unknowable” or not reasonably discoverable by inspection, within three years of when the construction defect was discovered or reasonably should have been identified. For example, if the roof a contractor installed in January of 2011 begins leaking in March of 2012, the three-year clock does not begin ticking until the first significant leaks appear (unless there was evidence that should have been noticed before then).
The statute of repose portion of the statute requires suits to be filed within six years after either the “opening of the improvement to use,” or “substantial completion of the improvement and the taking of possession for occupancy by the owner”, whichever occurs first. We can quibble (and, not surprisingly, plaintiffs and defendants do) about exactly what that phrase means or when the six year period begins to run. But one thing is certain – any claims not brought within the statute of repose period are barred and subject to dismissal if a lawsuit based upon such claims is commenced.
Using the example of a roof constructed in 2009, the association must commence its lawsuit in 2015 regardless of when or if the defect becomes apparent. If the first significant water leakage doesn’t appear until 2016 (after the running of the statutory period), the association is out of luck and the responsible parties are off the hook. Even if the association could prove conclusively that the roof was improperly constructed and caused significant damage, the association‘s claim will be barred.
Who Will Sue?
The two statutory timetables play out differently and create different challenges depending on when in the development and construction process the common area design or construction defects are discovered. The issues are most complicated for communities still controlled by the developer, and it’s not hard to understand why this is true.
In a phased development, defects in buildings constructed during the earliest phases may surface long before the developer has turned over control to the owners. An owner-controlled board could sue the developer, if necessary, to compel him to make the repairs or pay for them. While a developer in control of a board has the same fiduciary obligation as owner-elected trustees to protect the association’s interests, it is probably safe to assume that few developers will be inclined to sue themselves.
The sound you hear in the background is the clock ticking loudly on the statutes of limitation and repose. Remember – the statute of limitations starts to run at the time of construction or when a problem with the construction is discovered; the statute of repose runs for only six years from the completion or initial occupation. Construction defect claims may be barred by the statute of limitation or statute of repose before the control of the association has passed to the unit owners
While this situation is more likely to occur in a phased development setting where a number of years may separate the opening of the first building and the completion of the last one, the problem can also arise in a condominium consisting of units located within a single condominium building. In all cases, a developer may retain control until a large percentage of the individual units have been sold, which, depending on market conditions, could be years after the condominium building was completed and the first units sold.
For owners facing the statutory deadlines, time is of the essence; for developers, not so much. The knowledge that they may avoid both litigation and liability if owners miss statutory filing deadlines could give condominium developers a strong incentive to ignore or conceal construction defects or to drag their feet on correcting them in order to run out the statutory clocks.
To preserve their ability to hold the developer and any other potentially responsible parties accountable for construction defects and financially responsible for the necessary corrective work, unit owners may be forced to initiate legal action before they control the association by bringing what is known as a derivative suit.
As a first step, a group of concerned owners – and the larger this group, the better ― should ask the developer to repair at no cost to the unit owners or to the condominium association all of the identified construction defects. This demand can be presented informally, as a polite request, or formally, in a demand letter written by an attorney. The threat of legal action alone may persuade developers to hasten the transition to owner control of the association and, occasionally, convince them to correct the identified deficiencies, or both.
If the developer rejects or ignores their request, a unit owner group can attempt to pursue a “derivative action,” asking the court to let them “stand in the shoes” of the condominium association to bring claims against the developer and other parties that the developer-controlled association has refused to pursue. Of course, any damages the court awards would go to the association, not to the unit owners’ group.
While a derivative action may deal with the statutory filing deadlines, it has significant disadvantages for owners – primarily related to cost. Because they don’t yet control the board or the association’s budget, owners will initially have to bear the burden of funding the legal costs. The developer may contest the action (using association funds to do so) and some owners – possibly many of them – may not support, or be willing to finance, the cause.
Moreover, although the plaintiffs in a successful derivative suit may be compensated by the association/common funds for their out-of-pocket legal costs, there is no guarantee that they will be able to recover their expenses. Even if they do, the owner’s group may have to fund the litigation for an extended period of time.
After the transition event, when owners do control the association, the statutory timing issues become somewhat less complicated, but no less important. As noted earlier, the statute of limitations on negligent construction and related claims is three years and the statute of repose six. While those statutory time frames are specific, many aspects of the statute are fact-driven, vague, and not particularly well-suited to application in a condominium development. These uncertainties make the already complicated statutory time constraints on construction defect claims even more complicated.
Wiggle Room and Ambiguity
The statute of limitations begins to run when the association’s claim “accrues,” a concept subject to different fact situations and different interpretations of the facts. Developers will no doubt argue that the statute of limitations has expired on defects because the association discovered or “should have discovered” their existence more than three years before the lawsuit was started; condominium associations will contend that the statute of limitations was tolled (delayed) because the defects were ‘inherently unknowable” or not readily observable within that time frame. Further complicating matters, the tolling periods may vary for different defects in different buildings.
The statute of limitations clearly creates potential wiggle room and uncertainty for both sides, but especially for condominiums; it can be difficult for defendants in a construction defect suit to convince a court to dismiss claims that weren’t brought within the three-year statutory period short of a full blown trial. The statute of repose can’t be delayed because a defect was not discovered within the six year period, but it still contains considerable ambiguity for condominiums.
The six-year clock in this statute begins to run on the date an improvement was “opened to use” or was “substantially completed” and taken possession of by the owner, whichever occurs first. In a single-family house, a commercial office building or other structure owned and occupied by a single entity, substantial completion and occupancy are usually marked by the issuance of a certificate of occupancy and a real estate closing at which the owner completes the purchase of the property. But in a condominium development, what constitutes the “improvement’’ referenced in the statute? Is each building a separate “improvement” with its own statute of repose? Is the entire development in a phased condominium a single improvement, in which case the statutory period would not begin until all buildings, common areas and facilities had been substantially completed? And when is a multi-unit building “open to use” or substantially completed and possessed by the owner? Is it when the first unit in the building is completed, when the first unit is sold and possessed by an individual unit owner, or when all of the units in a single building have been completed?
Massachusetts courts haven’t provided many definitive answers to some of these questions. It is clear, however, that developers will argue in favor of using the earliest possible starting date for the statutes of limitation and repose. Boards would, therefore, be well-advised to do likewise by calculating their filing deadlines as conservatively as possible. In a multi-phase development, the safest course would be to assume separate deadlines for each building, based on their respective completion dates ─ usually pegged to the date on which the certificate of occupancy was issued either for the building or for the first unit sold, which ever occurred first. For a building completed in 2014, the six-year window would close in 2020; for a building completed in 2015, the filing deadline would be in 2021. Associations won’t lose anything by filing before the statutory deadline but they could lose everything by filing after it.
For that reason, the board of a newly created condominium should move quickly after the transition to owner control to ensure the association’s ability to sue the developer and other parties potentially responsible for construction defects, should litigation be necessary. Two immediate steps are essential:
- Retain an attorney (if the board hasn’t done so already) to represent the association and advise it on the numerous legal issues involved – advisable regardless of whether construction defects are identified; and
- Commission an engineering study to document structural and design flaws, analyze the cause, and assess the scope of work required to correct the problems.
Even if it doesn’t identify any significant design or construction issues in the condominium buildings and common areas warranting litigation, an engineering study may still be useful in providing both peace of mind for owners and valuable information that can be used to prepare a common area reserve study. The engineering study can also help the association’s attorney advise the board on whether and how to pursue a construction defect claim.
The attorneys representing developers, architects, engineers and contractors are all keenly aware of the statutory time limits governing construction defect litigation; boards need to be equally aware of those time limits and of the serious risks they can incur by failing to meet them.By John Shaffer