So you bought a new condo. One of the reasons you chose new construction over a resale was its ‘plug & play’ aspect–nothing to do once you’ve gone to settlement, right?
Um, no.
When the owner’s board takes over from the developer, a laundry list of vital decisions must be made within a fairly short period of time. If board members are unaware of this, much can be lost–at the expense of all owners. Here’s our not short and fairly comprehensive list of considerations new boards must weigh.
The Basics First
The association has a board comprised of appointees and elected officers. At the inception of the home owners association, the project developer appoints members of the board and is in full control. When homeowners gradually join the board, the developer maintains a majority voting share by retaining the most seats through appointees. Once a pre-determined percentage of sales is reached, usually 70% to 75%, the homeowners association turns over to a board of owners, while the developer retains the majority vote until the project’s final sale. At this stage, the developer transfers full ownership of the association to the homeowners and no longer has legal or financial responsibility, except under the provisions of DC’s Code § 42-1903.16. Warranty against structural defects; limitation for conversion condominiums; exclusion or modification of warranty.
Code § 42-1903.16. Warranty against structural defects; limitation for conversion condominiums; exclusion or modification of warranty
Board members (and all owners) should familiarized themselves with the required warranty required of the developer in Code § 42-1903.16. and of the warranty provisions in their purchase contracts. DC law requires developers to file a performance bond or other security in the amount of 10% of the estimated cost of constructing the condominium, to be available to satisfy the developer’s warranty liability under the DC Condominium Act for a two-year period from the date of the first sale.
Developers can’t be exempted from this warranty by using “sold as is” language for any residential condo unit. For conversion condominiums sold “as is,” the warranty applies to any components installed, or work done by the developer unless a more extensive warranty is given by the developer in writing.
With relation to this warranty, there are several crucial steps to taking control of the board. Even if board members have no knowledge of development, real estate or the legal process, there is information available to help. Start by reviewing these online resources:
- Association boards should not delay in addressing building defects which would otherwise result in increased damage/deterioration, necessitating additional expense. A board should hire a qualified professional to evaluate the construction quality of the project while the enforcement period for any statutory or other rights is still in effect. This evaluation should be made by an engineer or architect or contractor with specialized training and experience in evaluating construction quality, and selected by the Board, not the developer.
There are many guides boards can follow to hold developers accountable for issues discovered in the inspections performed. Here are some tips and information that may prove valuable:
STRUCTURAL DEFECTS
Survivor’s Guide To Defect Resolution
In the “Survivor’s Guide To Construction Defect Resolution in the District of Columbia,” lawyers at Levin Law Group LLP explain that associations are not always aware of their rights when their projects are impacted by defective construction. Associations may not know how to remedy the defective conditions, and in particular, how to compel the project’s developer to address them. Steps are outlined.
This second article on “Structural Defects” focuses on the warranty against structural defects and explains how warranties work and how to make claims against the developer’s security to fund warranty repairs.
TRANSITION STUDIES AND LEGAL CLAIMS
Transition Studies And Legal Claims
In “Transition Studies & Legal Claims, A Guide for Washington DC Condominiums,” Nicholas Cowie of Cowie & Mott, P.A. explains how newly constructed and converted condominiums in DC often contain concealed or “latent” construction defects. Left undetected and unrepaired, defects in the construction of a condominium can cause extensive damage over time, requiring associations to assess their members substantial repair costs that could have been avoided by making timely developer warranty claims. The article provides a general overview of how Washington DC condominium associations transitioning from developer control can proactively and successfully identify defects and resolve construction defect claims with condominium developers and builders.
ASSOCIAITONS & OWNER’S RIGHTS
The purpose of this guide is to help association managers and boards understand the construction defect resolution process and how to take full advantage of the association’s legal rights. However, this book is not intended to constitute legal advice to the reader and should not be relied on as a substitute for consulting a lawyer licensed to practice law in the jurisdiction where the legal advice is sought.
Legal Representation
Hire Your Own Attorney & Engineer
Association boards should not delay in addressing building defects which would otherwise result in increased damage/deterioration, necessitating additional expense.
A board should hire a qualified professional to evaluate the construction quality of the project while the enforcement period for any statutory or other rights is still in effect. This evaluation should be made by an engineer or architect or contractor with specialized training and experience in evaluating construction quality, and selected by the Board, not the developer.
Research
DC Code For Structural WarrantiesHow To File A DC Structural Warranty Claim
*It is highly recommended to retain legal counsel before taking any action
Disclaimer: Additional Amendments may be available. Check on dc.gov
DETAILS:
New Construction Or Conversion Warranties
From the “Survivor’s Guide to Construction Defect Resolution in the District of Columbia” by The Levin Law Group LLP:
- Express Warranties
Express warranties are warranties voluntarily and specifically provided by a developer in its sales agreements. They are of some value, but their value is often limited. The reason is that express warranties are typically for a short duration, and the unit owner or association is usually required to take formal action to enforce the warranty before the warranty runs out. Often the warranty period is only one year. But serious defects may remain hidden and not become obvious until several years after unit sales. Thus, by the time an association board or individual homeowners realize there is a problem, express warranty rights may already have run out.
- Statutory Warranties
A. Bonding Company Liability Under the Condominium ActUnder the Condominium Act there is a statutory warranty against structural defects, and structural defects are broadly defined. The warranty period for the statutory warranty against structural defects is two years. For common area defects, that warranty period usually starts to run on sale of the first unit. For structural defects within the unit themselves, the warranty period starts to run separately on the sale of each unit.Before sale of any units, the developer must post with the District a performance bond or other security in the amount of 10% of the estimated cost of constructing the condominium, to be available to satisfy the developer’s warranty liability under the Act.To take advantage of this bond or other security, the association (for common area structural defects) or an owner (for structural defects within a unit) must provide the developer, the surety and the District with written notice of the structural defect within the applicable two year warranty period.The notice must include an engineer’s report describing in detail the defects and their scope along with three detailed contractor estimates describing the work to be performed and the estimated cost of that work.An agency within the District will determine if the notice of claim is timely and if the defects are structural defects and if so, the scope of those defects. If the developer refuses to do the work required, the agency will hire a contractor to perform the work the Agency determines needs to be done, and will call upon the surety to supply the funds to pay for that work up to the amount of the bond.If the claimant or surety disputes the Agency’s determination, that party can file suit in the Superior Court to overturn the Agency’s determination.The Act does not describe what happens if the bond amount is insufficient to correct the structural defects.In many situations the bond provisions of the Act will not provide an adequate remedy if the cost of repair exceeds the bond amount, the defect is determined not to be a structural defect, or the defect is initially hidden and as a result the notice of claim is not filed within the two year warranty period.
- Condo Act Warranty
As noted in the preceding section, under the Condominium Act, there is a two year warranty against structural defects. The warranty applies to newly constructed condo projects, and in conversion projects to the extent that a structural defect arises out of work done by the converter. An agency of the District will enforce the warranty, but only to the extent of the surety bond posted to support the warranty, and the bond amount is limited to 10% of the estimated cost of construction. However, to invoke the Agency’s authority to apply the bond to fund the cost to repair the structural defect, a detailed notice of claim must be filed with the Agency within the two year warranty period.If this is not done, or the bond amount is insufficient to fund the needed repair cost, the claimant can file suit against the developer directly for the full amount of the repair cost. But the claimant must do so within five years from commencement of the warranty period.
- Common Law Implied Warranties
If the association or its unit owners fail to take legal action within five years after commencement of the warranty term, they lose the right to enforce the Condominium Act warranty against structural defects.However, while the DC courts have not yet clearly decided the issue, there may also be a “common law implied warranty of habitability”. If so, structural defects may result in a breach of that common law warranty. As noted above, it is unclear whether the District courts will apply the common law implied warranty of habitability to the sale of condominium units. So we don’t know whether such a warranty can be disclaimed by the developer, and if so, under what circumstances.If the District Courts do apply a common law warranty of habitability to newly constructed condo projects and/or to conversion projects, the applicable statute of limitations is likely to be three years. But that three year period is likely to be measured from when the warranty breach was or should have been discovered rather than from when the warranty went into effect.Given the fact that there is a Condo Act warranty, a claim based on a common law implied warranty would probably be worth making only if the defects were latent and therefore not discovered in time to bring an action within the limitations period under the Condo Act. That limitation period is five years from commencement of the warranty, irrespective of when the warranty breach is discovered.
- Negligence Liability
The Condo Act warranty, and any common law warranty that might apply, would permit an association or its unit owners to take legal action against the developer but not against the contractors who actually performed the construction.In order to impose liability on the contractors, the claimant would have to sue them on the basis that their negligence was what created the defects. However, the “economic loss rule”, if applied, limits and may totally eliminate negligence liability in connection with the construction of real estate.The District appellate court ruled in 2014 that it was adopting the economic loss rule for negligence claims. However, we don’t yet know how the courts will interpret and apply the economic loss rule in the context of a claim for negligent construction. So we don’t yet know what impact the court’s adoption of the economic loss rule will have on the ability to sue a contractor or the developer for negligent construction. However, the economic loss rule should have no impact on a claimant’s right to proceed against a developer based on the Condo Act warranty or any applicable common law implied warranty. To be noted is that any negligence liability claim would be subject to a three year statute of limitations. However, that three year period would not start to run until the claimant knew or should have known of the defect.And if the economic loss rule does not bar the claim, a negligent construction claim may be possible against not only the contractors but also the developer. If so, even if a Condo Act warranty claim is lost because it was not filed within five years from the warranty inception date, if the defect was latent, a claimant may still be able to make a claim against the developer on a negligence theory, provided of course that legal action is taken within three years from the date the defect was or should have been discovered.
- Liability Under the Consumer Protection Procedures Act
Under the CPPA, a developer may be liable to an association and/or its members for failing to disclose significant defects at the time units were sold, regardless of whether the developer actually knew of those defects.There would be many advantages to a claimant in including a CPPA claim as part of any lawsuit against the developer.A. There is a three year statute of limitations applicable to a CPPA claim, but the statute doesn’t start to run until “discovery” of the defects. B. The CPPA opens the door to a possible recovery of treble damages.C. Under the CPPA, a punitive damage award may also be possible.D. Under the CPPA, a prevailing plaintiff may be entitled to an attorney fee award. Such an award normally is not possible under a Condo Act warranty claim, a common law implied warranty claim or a negligence claim.
Board Transition For New Construction Or Conversions
Transition is usually accomplished at a special meeting held for the purpose of electing homeowners to serve on the Board of Directors. Once the owners are in control, the real work begins! The only thing that ends at that meeting is the developer’s control over the functioning of the association not his responsibility to it, and probably not his involvement and interest in it. He may still be selling homes and may still retain seats on the Board. The newly elected owners now have a huge responsibility. They must insure that (1) the developer provides the association with any and all pertinent information; (2) the association reviews that information and questions the developer on any vague or ambiguous issues; and (3) the Board develops a strategic plan to go forward from that point. One of the first steps a new Board should take is an audit of the association’s financial situation. It is important for members of the Board, as well as all the owners, to satisfy themselves that while the developer was in control, all income and expenses were properly accounted for. That includes, but isn’t limited to, the financial obligation of the developer himself, if any, and aggressive pursuit of delinquent accounts. All association boards, but especially condominiums, should consider hiring a professional engineer to perform a comprehensive inspection of the property and its physical plant. This will serve two purposes: (1) it will determine if there are any warranty defects that may be the responsibility of the developer; and (2) it will serve as the basis for a repair and replacement reserve analysis. Such an analysis will estimate the useful life of a component, such as a building roof, the projected cost to replace it, and how much money needs to be set aside to ensure that special assessments are not necessary to maintain the association’s assets into the future. Good legal advice can also be important to the community. The association should retain independent counsel who is well versed in community association law, and who can ensure that the developer abides by his legal obligations and commitments. The following are examples of the types of documents an association should determine the existence and location of during the transition from developer to member control. This list is by no means exhaustive, but can serve as a checklist to guide you. Keep in mind that jurisdictional requirements may vary in terms of time frames for developer responsibility, and specific transition documents:
- Original (or certified copy) of all recorded documents for homeowner associations and condominiums
- Recorded copy of Declaration or Master Deed
- Articles of Incorporation
- Copies of filings
- Certificate of Good Standing
- Copies of annual reports filed
- Bylaws
- Recorded (condominiums)
- Non-recorded (homeowners associations
- Complete set of Board meeting minutes
- Duly adopted rules and resolutions
- Schedule of recordation dates
- All other files and records
- An accounting of association funds and financial statements, from the date the association is first entitled to receive funds through the date the developer/declarant control period ends.
- Any audits performed during the developer control period
- Current operating budget
- Copies of all past budgets
- Current statement of account balances, including that of developer
- Current accounts payable information
- Invoices both past/paid and outstanding
- Current reserve/replacement schedule
- Association bank accounts, checking accounts, certificates of deposit, etc.
- All association insurance policies
- Complete roster of unit owners and their addresses, as shown on the official records of the association
- Roster of mortgagees by unit, with addresses, to the extent that the association has such, and to the extent the information is available
- Any and all contracts in which the association is a contracting party.
- All association books or records held by or controlled by the developer.
Warranty And Physical Facilities Items
- Complete set of site plans and as-built drawings, including detailed measurements and dimensions.
- Any approved landscape plan
- Recreational facilities plan
- Storm and sewer system plans and diagrams
- Roads and parking areas
- Written warranties of the contractors, subcontractors, suppliers, and manufacturers, if any, involved in the construction and/or maintenance of the association’s facilities.
- List of manufacturers of products and specifications used in the maintenance, repair or replacements in or on common areas or common elements
- Copies of any bonds or letters of credit posted with any state or local agency
- Schedule of quantities of the following:
- Square footage of roof
- Square footage of all paved areas on the association property
- Square footage of lawn surface
- Square footage of exterior surface of each building
- Confirmation of compliance with the local authorities
- Completion bonds, either in place or already released
- Traffic and safety regulatory signage
- Fire code compliance
- Designation of roadways and site lighting, both public and private
Throughout the transition process described above, professional management can and should serve as advisor to the Board, custodian of the association’s books and records, and the entity to which the Board turns to assist in the development of long-term plans and goals to make sure that a community’s early due diligence translates into future continued success and financial stability for the owners.
Source: Developer-Homeowner Transition
Listings, resource links and information quotation are not endorsements. Laws and codes change over time, Be sure to check for updates on official sites and seek the advice of qualified professionals for your situation. Nothing in this article should be taken as legal advice. We are Realtors, not attorneys, and may not provide legal advice.