DON’T LET CONSTRUCTION DEFECTS BECOME A NEVER-ENDING HEADACHE: Roadmap to Handling Construction Defects

Construction defects range in severity, and when and how they are noticed. Some problems can be obvious, like a leaking roof, or subtle, like cracking caused by soil problems that develop years after construction. Some problems may be easily fixed while others are potentially catastrophic. But in condominiums, the one element that is always true is the association will be responsible for repairing any defects in the common areas unless another responsible party can be held accountable.

When construction fails to deliver protection against damage and instead allows roofs to leak, walls to crack, plumbing to break or mold to grow, the construction may be considered defective and may be actionable.

Often, the ease of repair and the severity of the problem will influence whether or not the builder or contractor will make repairs absent the threat and force of litigation by an association.

With new construction, developers and contractors will frequently respond to the first complaints of a serious problem to address the issue. Of course, the hope is that effort proves successful and everyone is satisfied. When that satisfaction is short-lived, however, as it often is, and subsequent attempts to persuade the builder to correct the defect fail, it is time for the board and manager to seek answers from qualified professionals.

Construction defect scenarios are always fact-based; no one-size litigation advice will apply to all of them. But for boards and managers considering construction defect litigation, the following general guidelines highlight some of the issues that should be considered and the most important steps that should be taken:

Commission an engineering study to identify the scope and source of the construction defects and deficiencies and the estimated cost of repairs.

An engineering study should be commissioned as soon as construction defects and/or deficiencies are discovered or suspected, or immediately upon the transition from developer control, whichever happens first. As to the latter point, even if there is no evidence of construction flaws at the time, the study can identify latent problems and it can provide documentation to support a future construction defect suit. If problems are identified pre-transition, when the developer still controls the board and access to association funds, owners may want to consider commissioning the study at their own expense, because the developer will have little incentive to identify problems he or she may be required to correct. Owners who foot the bill for the study may be able to recover the cost from the association after the transition. More importantly, is to be aware that the engineering study is often preliminary in nature, and should be kept confidential and protected against disclosure to anyone outside of the board (or unit owner committee) and its counsel.

Pay attention to construction litigation deadlines.

There are two that are critical:

• The statute of limitations requires plaintiffs to file suit within three years of when they discover a defect or reasonably should have discovered it. If the board discovers widespread leaks but ignores them for four years, the litigation window will be closed, along with the possibility of requiring the developer to pay for the repairs.

• The statute of repose sets a flat six-year limit on construction defect suits. That clock starts running when buildings or improvements are “put into use” (usually when the certificate of occupancy is issued) or when they are “substantially completed,” whichever occurs first.

Buildings in a phased development may be subject to different statutory deadlines and the board will have to carefully track all of them.

If problems are identified before the transition, and if the developer control period is likely to extend past either of the statutory deadlines, owners may have to sue the developer on the association’s behalf, because the developer is unlikely to sue himself. This “derivative action” is hardly ideal, because owners would have to pay the legal expenses from their own funds. But it may be necessary to preserve the association’s future rights to recover damages from the developer.

Evaluate the pros and cons of filing suit.

This cost-benefits analysis, which boards should undertake with the association’s attorney, should consider: the extent of the problems, the cost of repairing them, the likelihood the litigation will be successful and the prospects of recovering damages from the developer. As a general rule, the costlier the repairs and the stronger the association’s legal arguments, the more appealing the litigation option will be. The reverse is also true. Even if the claim is strong and the prospects of litigation success are high, it may make more sense for the association to pay for relatively modest repairs rather than incurring the legal costs and emotional strains that are byproducts of any litigation. In evaluating the litigation pros and cons, it is important for boards to remember that the goal is not to punish the developer, however justifiable or satisfying that may seem; the goal, rather, is to correct the problems while reducing as much as possible the association’s out-of-pocket costs.

Even under the most favorable circumstances, the association is unlikely to be made completely “whole.” For one thing, plaintiffs can’t recover legal costs in a construction litigation claim. Further, the damages a court awards may not entirely cover the cost of correcting the problems. The board’s cost-benefits analysis should consider those limitations. Also possibly arguing against a legal fight: pending litigation could make it difficult for owners to sell their units or refinance them.

Consult an attorney as soon as the board identifies or suspects suspect construction defects.

Making the litigation decision and planning the litigation strategy early can reduce the association’s legal costs and improve its chances of litigation success.

Review the association’s governing documents and relevant state laws. 

Either or both could limit the association’s ability to sue the developer. For example, some documents require boards to obtain prior owner approval or to attempt arbitration before initiating a suit. Statutes in some states (Massachusetts isn’t one) require plaintiffs to give developers a chance to correct problems before filing suit against them.

Limit the damage.

The developer may be responsible for the faulty roof, but he won’t be required to repair the water damage to units and common area that occurred while the board was deciding whether to sue. The board must take reasonable steps to mitigate the damage. The association may be able to recover the cost of essential repairs if it successfully sues the developer, but the board should notify the parties being sued that the repairs are being made and document them.

Don’t expect insurance to cover construction defect damage.

Most policies specifically exclude this coverage.

Negotiate before filing suit.

Litigation may be essential but it is rarely the first choice. Allow contractors or developers to make necessary repairs if they are willing and able to do so. But have an outside expert (the firm that did the engineering study, for example) dictate the scope of the repairs required, monitor the work and verify that the repairs have resolved the construction defects. The board should sign an agreement releasing the developer from liability only after the repairs have been completed and approved by the association’s expert, and it should be reviewed by the association’s counsel before it is signed. Also, the release should apply only to the specified defects and the repairs addressing them. The association should not release the developer from additional defects it may discover in the future.

If your association is facing possible construction defects, please contact Jennifer Barnett or Seth Barnett.