A construction defect is a constructed item with a condition that deviates from the accepted architectural plans, building codes, and/or industry standards. One example would be walls that are missing vapor barriers.
According to Greenstein, the first thing an association should do if a construction defect is found is to evaluate the concern and determine if it is in fact a defect. This is done by contacting an expert for a professional opinion. The next steps would be to determine the full nature of the deviation, the cost associated with its repair, and whether or not any consequential damages exist or will later result because of it. Once the defect has been fully assessed, it may then be necessary to contact the developer. The developer should be contacted and advised of the problem if the association believes the developer may be able to remedy it, and if it is in the best interest of the community for the developer to do so, Greenstein explained. Giving notice gives the developer a chance to fix the defect, or at least witness the defect firsthand. Notice is often given through certified mail, or however stated in the sales contract. Some states may have a statute of limitation outlining at what point an association may still request repairs from the developer. If there is a much larger problem, Greenstein said, and it is one that the developer cannot fix, the association will most likely have to file suit or make the repairs itself.
“Like most issues under contract law, the longer an association waits to notify the developer in writing of the defect and then bring a law suit, the better the chances that the developer will prevail. It is critical to give the developer a written notice of the defect as soon as it is determined and then to speak with your attorney, even before hearing back from the developer. Many developers are known to push off any complaints of defects until the association loses its rights to pursue a claim,” Greenstein explained.
Defects found in any of the common property elements are to be handled by the association, and they are determined to be either the responsibility of the association or the developer. Though the association does not have a contract regarding this with the developer, Greenstein noted, it can often claim the implied warranty of habitability, which requires the constructions to be defect-free and suitable for habitation. In some cases, the association or developer may even be responsible for defects in individual units if the defects are part of the original construction. However, unit owners are usually responsible for addressing any defects over which they have exclusive ownership, such as within the general bounds of their unit; this would include everything from the paint on the drywall and inward.
“Both the association and the individual unit owners have implied warranties and often express warranties. In addition, Minnesota has some of the most liberal implied warranties of any other states,” Greenstein said. The implied warranties, however, tend to greatly outlast the period of any express warranty. Furthermore, he stated that Minnesota has statutes limiting the period of time in which a claim can be reported after the defect has become known.
How can an association complete necessary repairs quickly, while still pursuing any claims that have been made against the developer?
According to Greenstein, an association has the fiduciary responsibility to maintain, repair and protect the common elements of the community, even if some are found to have been built incorrectly. Emergency repairs must be made, if necessary. The association needs to be able to collect the cost of repairs from the responsible parties, yet they must not allow the defects to worsen. Allowing defects to worsen would both breach the association’s fiduciary duty and increase the amount of damages that need to be recovered, Greenstein said. If the developer outright refuses to fix the defect, then the association will have to act to the extent that it is responsible for the defect. Besides that, a lawsuit against a developer may take a few years to resolve.
The key for pursuing damages is to document everything. Greenstein advised that the association should give prior notice to the contractors and/or developer if it hopes to recover the full amount of the cost of re- pairing the defect. Again, giving notice through certified mail or written means goes back to the importance of proper documentation. Giving notice allows the developer to view the defect firsthand before it is fixed, not necessarily to make repairs. The association could pay its expert to photograph the defect so as to provide more detailed and accurate reports, otherwise, the contractor fixing the defect should be required to provide these items. Regardless, the repair should be thoroughly documented throughout the entire process.
Furthermore, even if the developer claims that a warranty has expired, it is still not definitive. Greenstein said the association should still have its attorney look into all potential implied warranties. The post-transition board also has full authority to make changes to the rules and regulations set in place by the developer’s board.
Arbitration in construction defect claims may or may not be mandatory and varies by state, Greenstein noted. Though it may not be mandatory, it is allowed if all parties involved in the claim agree to arbitration. The arbitration process is similar to that of a court proceeding, except without a jury. Arbitration is also a way for a company to try to reduce its losses, so it is often a developer’s preferred method for settling a claim. Sometimes they even go so far as to mandate arbitration, instead of litigation, by putting it in the bylaws or the owners’ purchase agreements, Greenstein explained. Because of this, some states have made it difficult for developers to force associations on this matter. Arbitration can be just as expensive as litigation, so many associations would rather just go to court.
Even if a construction claim goes to court, some courts may refer the case to arbitration, knowing that extensive expertise will be needed. Some states may even require arbitration from the outset in certain situations, he said, depending on the parties involved and the amount of damages at hand.