Source: Construction Executive, May 2012
By: Paul Breitner and Doron Weiss
The feeling of accomplishment that accompanies the completion of a new condominium building can sour when buyers raise claims of construction defects after closing on their units. A dream project can quickly become a nightmare if flaws, either patent or latent, are discovered after the developer turns over the project and leaves the site. Who is accountable for any necessary repairs?
As with many legal questions, the answer depends. Historically, the condominium purchaser would look for relief under the common law warranty of fitness and merchantability and allege the unit does not meet code; the plans and specifications were not fit for their intended use; the construction was not completed in a workmanlike fashion; or the premises are unfit and uninhabitable. Under current law, this remedy—which runs from the developer, contractor and subcontractors to the purchaser of the unit—remains one of the most powerful tools in a buyer’s legal arsenal.
Common Law and Statutory Warranties
A warranty of fitness and merchantability for a unit’s intended purposes runs for specific periods. For example, in Florida the warranty runs for either three years after completion of each condominium building or for one year after control of the condominium association was transferred to unit owners other than the developer, whichever occurs last. The warranty of fitness regarding the work performed and materials supplied by the contractor, subcontractors and suppliers runs for a period of three years after the completion of construction for the roof and structural components of the building, and for a period of one year after completion of construction for all other improvements and materials.
The choice between common law and statutory warranties is not mutually exclusive. However, the benefits and burdens differ. The statutory warranty runs for a finite period from an objective date in time; the common law warranty does not. The statutory warranty cannot be waived or disclaimed by contract, but the common law warranty can. The statutory warranty comes from the developer, the contractor, and all subcontractors and suppliers, while the common law warranty extends only from the developer. Furthermore, unlike the common law warranty, the statutory warranty is not restricted to first purchasers; rather, it inures to the benefit of each owner and his successors.
In a down real estate market, developers may offer incentives to buyers in the form of specific express warranties. Under such circumstances, the developer may extend or broaden the scope of its common law and statutory warranties. Express warranties are binding on the developer and create a direct route of recovery for purchasers of condominium units seeking to capitalize on the developer’s greater exposure to liability when construction elements go awry.
Misrepresentation and Concealment
Additionally, the developer may be held liable for construction defects based on pre-purchase misrepresentation or concealment. When the developer fails to deliver something promised in the contract, it is in breach. When it misrepresents what it can actually deliver, the developer is liable for misrepresentation.
Misrepresentation is broader than breach of contract. It can be either intentional or negligent in character and can take the form of negligent misrepresentation, active concealment or an intentional omission of material facts. Relatedly, if a developer knew of unresolved construction defects prior to a sale and failed to disclose the defects, a purchaser may have a claim for fraudulent concealment.
In addition to the common law and statutory warranties, alternative causes of action may be raised by condominium purchasers who believe their units have construction defects. Under a negligence claim, even remote purchasers may be able to sue the original contractor for a failure to meet the standard of reasonable care in safeguarding those who could foreseeably be placed in peril. Although a greater degree of proof is required to prevail in a negligence action in contrast to a breach of warranty claim, negligence claims generally have a longer and more flexible statute of limitations, allowing more time for discovery of any defect. Additionally, an action in negligence may attach to design professionals, but a warranty action would not customarily stand against them given their lack of privity of contract with the purchaser. The architect or engineer will be held to a duty of reasonable care for the design.
While an action in negligence usually cannot be levied against a contractor after it completed work on a unit and after the owner accepted the unit, courts have recognized an exception where the defect is latent and cannot be discovered by a reasonably careful inspection. The statute of limitations for latent defects generally does not begin to run until the defect is, or should have been, discovered. This could extend the life of a defect clause (where the warranty claim may have lapsed) by allowing a negligent action to pick up when warranty is no longer available.
If the cost of repairs or restoration is less than the diminution of value, then damages usually are measured by the costs of repairs or restoration. The law seeks to prevent a unit owner from being overcompensated or from otherwise receiving overlapping recovery. The concept of economic waste also comes into play when discussing defect-caused damages. A party is entitled to recover the cost of repairing a defect so it complies with the contract. If this results in economic waste, damages will be the diminution of value between the property had it been built in accordance with contract specifications and the one actually built.
Claims often can be countered by discoveries that the condominium association or unit owner failed to perform routine maintenance and by the assertion that the contractor adhered to applicable building codes and standards in effect at the time of construction. Contractors and developers can show the building is in substantial compliance with all contractual requirements and any deviation from plans and specifications is “de minimis” and does not affect the value of the unit. A claimant will lose credibility if he seeks damages above and beyond the purchase price of a unit when claiming the existence of defects that are either imminently remediable or merely aesthetic.
Understanding that determining fault isn’t clear cut, all parties involved in the development, construction, sale or purchase of a condominium unit should anticipate the worst. The inevitability of claims should encourage more careful contract drafting and analysis to minimize the extent of misunderstandings that are bound to occur. Better safe than sorry is an axiom worth heeding in this situation.