Construction Law Bulletin: Perils in Condominium Development

May 2019
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Joseph A. Cleves, Jr., Esq.

Introduction

Many major metropolitan areas are seeing a rise in interest for luxury condominium developments because of booming demand. Historically, these ventures have been linked to elevated risk profiles. This is due, in part, to unreasonable expectations of end-users, coupled with the availability of an association to take on the burden of litigation. These inherent risks have pushed many developers away from the condominium structure. However, with increased demand, many are returning to these developments. The major parties in condominium projects can take certain steps to protect themselves from the common risks. This article will explore the options available to the proactive developers.

The Developer

Foremost, the developer should use a single asset entity to develop the project. This will allow the developer to isolate liability to the assets of the entity developing the project. By its very nature, the single asset entity will protect the developer’s other projects.

Marketing materials are a hotbed for liability. Many states impose statutory liability for misleading advertising literature for condominiums. Developers should ensure legal counsel has reviewed all marketing material together with relevant design documents. Developers should avoid broad and vague representations, which create a ripe area for claims. Maintain dimensions shown through the design and construction process. Represent only features known to be in the final product. Finally, be aware of a change to a design plan that can lead to an unintentional, but misleading statement.

To ensure adequate protection, the developer should carefully develop an insurance program for the condominium, and the design and construction processes. Insurance is a vital part of resolving claims during, and after, the construction process. It is not a product on which to pinch pennies.

Many claims arise because of mold, which can often be drastically overblown. To avoid exposure, the developer should be proactive. Educate employees and the condominium management company about indoor mold. Have a specific person with knowledge and authority in each organization to receive mold complaints and respond quickly. Document the process thoroughly in your business records.

Value engineering is attractive to all developers. Maximizing profits is a natural thing to pursue. However, a developer needs to carefully monitor value engineering decisions to ensure they will not hurt the project.

Keeping in mind the above recommendations can drastically reduce exposure for a developer, making condominium projects more profitable and attractive ventures.

The Design Professional

Design professionals are on the receiving end of many condominium lawsuits. This is partially because many developers will use a single purpose entity. This leaves the design professional as the only viable target once an issue occurs down the road. Many times, it is also unclear whether the complained of issue is a design or construction defect.

The design professional should carefully craft and document key construction features, such as waterproofing, drainage and structural components. These features are front and center as topics in litigation based on design claims. Documentation verifying compliance with design documents can keep the design professional from being dragged into litigation, without which the defect’s cause would be unclear. Attention to the selection of components for windows, sliding glass doors and any roofing systems will also pay dividends.

To ensure adequate design, peer review of all drawings and specifications can help catch potential issues early. The design professional can also obtain written verification from component manufacturers. They should attest that the components are strong enough to meet applicable building envelope and building code requirements.

Design professionals often hesitate to visit the site frequently. But as set forth above, this may be in the design professional’s best interest.

The Construction Manager

Like the developer, the construction manager should monitor value engineering decisions and ensure they will not hurt the project. Just as the design professional, the construction manager should memorialize construction progress through video and photography. This is especially vital for work that the contractors will cover during construction. The construction manager should also require checklists on likely fail points and complex areas of the structure. Detail is paramount. For example, the checklist should specify “all PHAD hold-downs in place and nailed with 16d commons” instead of “check framing.”

The construction manager should also require that major component manufacturers visit the job before substantial completion. This is the best way to ensure that the construction meets their pre-requisites for any warranties. The construction manager should also obtain written warranties on products or work before final payment to manufacturers or suppliers. Claims related to these components can be large. Having manufacturer approval will help alleviate defenses were the component to fail.

The construction manager should prepare a maintenance manual for the condo association that recommends periodic inspections of common areas and units respectively. This manual can be incorporated into the condominium documents.

The Drafter of Condominium Documents

Locating experienced legal counsel is critical for the preparation of the condominium documents. State laws can be nuanced; so experience matters. That being said, there are some broad considerations for any development.

First, the drafter should consider incorporating mold waivers and exclusions in condominium documents, as well as purchase contracts. As discussed above, mold is a large contributor to condominium claims. Moreover, many times the mold results from the actions of the unit owner, or association, not defective construction or design.

Second, requiring the condo association to perform inspections called for in a maintenance manual is a feature that will force proper upkeep. The condominium documents should provide for a waiver and indemnity where the condo association and unit owners do not perform recommended maintenance. The condominium documents should also make mandatory an annual inspection of the common areas. Contracts should mandate participation by the construction manager, architect, developer and a condo association representative. This arrangement should continue until the applicable statute of repose expires.

Third, if state law permits, the condominium declaration should mandate a super majority of board members to begin a lawsuit. A 75% majority is a good and reasonable threshold. The documents should also require that a claimant show merit as a prerequisite to any legal action. If possible, the recommendation from a third-party professional can be required. This could come from an expert licensed in the pertinent discipline, or from a panel of knowledgeable individuals.

Fourth, the preparer should consider mandatory mediation/arbitration for dispute resolution. The prevailing party should recover for attorney fees, court costs and expert expenses. This will help ensure that claimants only assert viable and serious claims. The condo documents should also contain a waiver of the right to a jury trial.

Finally, requiring the developer’s consent before modifying these safeguards as long as it owns any units will solidify the protections. Afterward, the threshold of at least 75% of all unit owners should have to approve any modification to the safeguards described above.

Conclusion

Condominium projects will always be risky ventures but taking the precautions set forth above can minimize baseless claims that are otherwise encouraged by the inherent nature of condominiums.

Joseph A. Cleves, Jr. is an attorney in Taft’s Construction practice, which advise industry participants, including owners, contractors, design-builders, developers, architects, subcontractors, engineers and material suppliers, on all aspects of public and private construction projects. To learn more, click here.