Can your Association readily file defect claims against developers?

What happens when a condominium has a construction defect? A construction defect is a problem in the workmanship or in the materials used to build a structure, which ultimately causes harm to a person or property, usually amounting to huge financial damages.

 

The common solution for many community associations in this circumstance is to file defect claims against the developer of the condominium. Under Florida law, an association can bring claims against a developer within 10 years from when the original construction was completed.

 

But filing construction defect claims is not as easy as it sounds. In this episode of Community Association Matters, we speak with commercial litigator Phillip Joseph who co-chairs the law firms of Ball Janik. He identifies four common obstacles that associations face which prevents them from filing defect claims against developers…

 

Board inaction

 

Philip gives three instances of inaction where board inaction can hinder a defect claim:

 

The first instance is when a board member holds off filing defect claims due to conflict of interest. Imagine a board member reluctant to bring in claims on behalf of the association because it would hinder his chance of selling his unit.

 

The second instance is when the board does not take necessary steps to properly investigate the association’s properties for defects such as retaining consultants, engineers, architects, and attorneys to look at possible construction and design issues, and to give advice so that the board can file defect claims.

 

The third instance is when the board is faced with the reality of construction defects— instead of filing claims, they are paralyzed by the enormous responsibility before them. Board members may tend to hold off on decision making or would want to delegate that responsibility to owners.

 

Developer’s ‘poison pills’

 

Phillip says that many developers, in an attempt to avoid construction defect claims, put anti-litigation provisions or ‘poison pills’ in governing documents. These hinder or prevent boards and community associations from bringing claims.

 

The most common poison pills are the following:

• to get a majority vote (75-80%) of owners to approve filing for a claim;
• to give only a short period of time for owners to make the vote (around 60 days);
• to get owners to approve a maximum litigation budget; and
• to have owners specially assessed, i.e. all owners have to pay upfront prior to litigation procedures

 

Though these anti-litigation provisions are often unenforceable, the board should still be careful when dealing with governing documents and should seek counsel with specialized litigators.

 

Florida state laws

 

There is a statute in Florida which says that if poison pill provisions are put in the governing documents, Florida law will most likely invalidate those provisions (making them unenforceable). Unfortunately, this only applies to homeowner associations and not condominium associations.

 

But according to Phillip, though there isn’t a statute directly on point for condominium associations as there is with homeowner associations, if you have a similar poison pill provision that you saw in a case from a different state, like the Trustees of Cambridge Point Condominiums case in Massachusetts, then a Florida court looking at those provisions would basically decide the same as the Massachusetts court.

 

Trends in the industry

 

A significant interest of developers, building contractors, and design professionals in Florida’s economy means a lot of ongoing constructions throughout the state. As a result, there are a lot of claims being brought all throughout.

 

But what is the trend among other states? On one hand, Maryland in 2018 has gone on one extreme by taking matters into their own hands. Maryland legislators no longer waited for a court to decide these issues: they instead specifically passed laws that prevented developers from including poison pill provisions in governing documents.

 

On the contrary, Utah passed legislature in 2017 which made it extremely difficult for associations to bring claims against developers. First, the board must send notice to all its owners that it’s going to sue. Second, 75% of voting owners must be in favor of proceeding. Lastly, all owners must pay 10% of all the fees and costs of the anticipated litigation.

 

All states have different trends with regard to legislature, but ultimately, Phillip believes that the solution is to raise the board associations’ awareness about poison pill provisions and educating them to go forward with bringing in claims when necessary.