Rent Real EstateAddressing Construction Defects in Homeowner Associations
One of the first orders of business for a new homeowner association Board of
Directors is to conduct an evaluation of the physical condition of the
premises and determine if there are any structural defects which need to be
repaired.
Most purchase agreements for new construction in a homeowner association
contain a 12 month express warranty for materials and workmanship. In
addition, there is a common law implied warranty of habitability which also
exists to cover latent defects for a specified period of time after
discovery. Lastly, most states have a statute of limitations on these types
of defects running from the date of defect discovery and usually a set
period of time from the actual completion of construction.
Determining the Scope & Extent of the Defects - New construction requires a
"breaking-in" period involving building settlement, seasoning of lumber,
concrete drying, etc. Statute of limitations permitting, it is recommended
that an association experience a full cycle of seasons prior to commencing
the final inspection process. Serious defects apparent to the untrained eye
should obviously be handled on an ongoing basis and owners should be
reminded to report defects promptly.
The Spring Walk Through - Designate a committee to walk the grounds and
inspect the premises to make note of obvious physical defects. Chipping
paint, cracked masonry, dead shrubbery, etc. should be specifically
identified by location. Often a builder will request to participate to
create his own "punch list".
How to Assess the Damages - Since a Board generally consists of lay people,
they should hire a qualified and licensed architectural/engineering firm
that is experienced in dealing with multifamily residential developments.
The selected candidate should be given the Board’s inspection report and
then compile a comprehensive report containing:
Scope, extent and locations of defects
Building code violations (if any)
Cause of defects
Recommended procedures for repairing defects
Itemized costs for any repairs to be made
Anticipated remaining useful life of all major amenities (roofs, parking lots, siding. etc.)
The purpose of the report is three-fold:
(1) to establish a basis for discussions with the developer for possible settlement of developer liability;
(2) to establish an initial basis for potential litigation, and,
(3) to provide the Board with information to help establish proper reserves for future repairs and replacements.
Commencing Negotiations - Once the engineering report has been completed,
the developer should be notified in writing as to the extent and scope of
the defects and should be invited to meet informally to discuss the issues.
The association should provide a copy of the report to the developer in
advance.
If the developer is willing to discuss the issues, an association should be
prepared to refute the customary defenses:
Ordinary wear and tear not covered by warranty
Lack of preventive maintenance
Negligence
Waiver of the implied warranty
A developer should be given a reasonable opportunity to repair construction
defects. As a practical matter, most experienced developers budget for after
sale repair work. However, the Board should consider if:
(a) The developer has a track record for living up to his word;
(b) This is merely a stalling tactic, or
(c) The repair work will be worse than the original construction.
When Negotiation is Unsuccessful - If the developer is uncooperative, the
Board needs to determine if the scope of repairs warrants the expense of
legal action. The Board should also get a legal opinion as to the legal
theories of recovery and the risks and liability involved in pursuing
litigation.
Advising the Membership - Due to the potential for enormous costs and
lengthy delay, it is important that the Board remember that the owners will
underwrite the cost. A special meeting should be called to meet with the
Board, attorney and engineer to discuss the ramifications.
Final Resolution - Lawsuits may drag on for years while costs escalate and
the buildings deteriorate. The Board’s time, patience and nerves will likely
be stretched to the limit. These possibilities must be carefully evaluated.
An alternative of negotiation should be seriously considered recognizing
that accepting a piece of the pie may be bigger, after a lawsuit is
finished, than the whole pie. Get good advice, don’t act rashly and keep the
idea of compromise in clear view.
Thanks to attorney Jordan I. Shifrin for excerpts from his excellent book "Guilt by Association".
For more information on this subject, see www.Regenesis.net.