Far too often, feelings of elation and the excitement of purchasing a new condominium can sour when the buyer becomes aware of one or more construction defects. A dream unit can become a nightmare once flaws, both patent and latent, are encountered after the developer has turned over the project and left the site. Who is accountable for the necessary repairs?
The answer, as with many legal questions, is, “it depends.” Historically, the condominium purchaser would look to the common law warranty of fitness and merchantability for relief, specifically alleging as grounds that the unit does not meet building and zoning codes or that the construction was not completed in a workmanlike fashion, that the plans and specifications were not fit for their intended use or simply that the premises are unfit and uninhabitable. However, the statutory implied warranty of fitness and merchantability, which runs from the developer, contractor and subcontractors to the purchaser of the unit, remains one of the most powerful legal tools.
For example, in Florida, the warranty of fitness as to the work performed and supplied by the contractor, subcontractors and suppliers runs for a period of three years from the completion of construction. The warranty of fitness and merchantability for the unit’s intended purposes running from the developer on the other hand extends for three years after completion of each condominium building or for one year after control of the condominium association has been transferred to unit owners other than the developer, whichever occurs last. This period cannot exceed five years in any event.
The choice between common law and statutory warranties is not mutually exclusive. The benefits and burdens do stand in contrast though, in that the statutory warranty runs for a finite period from an objective date in time while the common law warranty does not. The statutory warranty cannot be waived or disclaimed by contract while the common law warranty may be. The statutory warranty runs 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 but inures to the benefit of each owner and his or her successors.
It should be noted that, in a “cold” real estate market, developers may attempt to obtain an advantage by providing specific warranties, thus creating a selling point and greater incentive for their prospects. Under such circumstances, the developer may extend or broaden the scope of its common law and statutory warranties. These express warranties are binding on the developer and create a clear route for unit purchasers seeking to capitalize on the developer’s greater exposure to liability when construction elements go awry.
In addition to the common law and statutory warranties, there are other alternative causes of action available to condominium unit purchasers who find themselves struggling with property defects. One is negligence. Under this theory, even remote purchasers have standing to sue the original contractor for any failure to meet the standard of reasonable care to safeguard those who may 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 have distinct advantages for the unitpurchaser. In such actions, the statute of limitations is usually longer and more flexible, allowing more time for discovery of any defect. Additionally, an action in negligence may attach to design professionals such as architects and engineers, against whom a warranty action would not customarily stand, given their lack of privity of contract with the purchaser. The design professional will be held to a duty of reasonable care as to design.
Interestingly, while an action in negligence usually cannot be maintained against a contractor after the contractor has completed its work, turned the unit over to the owner, and the unit has been accepted by the owner, courts have recognized an exception where the defect is latent and cannot be discovered by a reasonably careful inspection. The statute of limitations for such latent defects does not begin to run until the defect is discovered. This has the practical effect of extending the life of a defect clause (where the warranty claim may have lapsed) by allowing a negligence action to pick up where warranty is no longer available. However, actions for latent defects generally must be commenced within ten years after the date of actual possession by the owner, or the potential claim expires. A word of caution, however – the statute of limitations for such negligence involving latent defects begins to run when the defect is discovered or should have been discovered with reasonable diligence. This can shorten the life of a negligence claim considerably.
Fraudulent or Negligent Misrepresentation
Additionally, the developer can be held liable for construction defects based on breach of contract or misrepresentation. When the contractor fails to deliver something promised within the contract, it is in breach. When it misrepresents what it can actually deliver, it is guilty of falsification. Misrepresentation is broader than breach of contract in that 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.
Developers may also be liable for construction defects found in converted units. Certain condominium statutes contemplate that developers converting rental units into condominiums shall warranty the fitness and merchantability of such residential units, as to roof, structural, fireproofing, mechanical, electrical and plumbing, for some period of time. The developer may hedge this obligation by establishing reserve accounts for enumerated capital expenditures, and deferred maintenance covering the items otherwise contained within the aforementioned warranty of fitness. Similar to the new-construction warranties, the conversion warranty inures to the benefit of
each owner and successor owner.
When no one is prepared to accept fault for a given construction defect, the unit owner inevitably turns to litigation. The unit owner or the owners collectively may not limit their action to the developer, choosing rather to include all involved contractors, subcontractors and suppliers. The rationale in suing all potentially at fault parties is to circumvent the risk that the statute of limitations may prevent future suits against any one of these parties during the pendency of the suit against the developer. These usual suspects are often joined by various other co-defendants as the circumstances may dictate. Successor developers, the corporate parent of a developer corporation, officers of a developer corporation, design professionals, lenders, and the individual sellers of pre-owned units may unhappily find themselves in these construction defect lawsuits.
Generally, lenders also have been found liable where they have controlled the construction or become an active participant in a project. Lenders may have to account to unit owners for construction defects when they foreclose on and then complete a construction project, in effect, becoming the developer mid-stream. When the lender morphs into the developer, it opens itself to claims from unit purchasers for express representations and for patent construction defects and breaches of warranties resulting from flaws in the portion of the project they complete.
Once claims are made, they are predictably countered by allegations that the condominium association or unit owner failed to perform routine maintenance or that the contractor adhered to applicable building codes and standards in effect at the time of construction. Contractors and developers will argue that the building is in substantial compliance with all contractual requirements and that any deviation from plans and specifications are de minimis and do not affect the value of the unit. Claimants can expect to be accused of failing to mitigate their damages, or, in a negligence action, that they are comparatively negligent in failing to inspect and/or maintain the premises.
Understanding that determining fault is neither clear cut nor easy, all parties involved in the development, construction, sale or purchase of a condominium unit would do well to anticipate the worst. The inevitability of claims should encourage more careful drafting and contract analysis at the front end in hopes of minimizing the extent of misunderstandings which seem bound to occur. Better safe than sorry is an axiom worth heeding.