Transition from developer to unit-owner control of a residential community association generally unfolds in one of two ways. In many instances, the “Transition” process is uneventful – there are no major design or construction defects and the sponsor/developer works with the association board to amicably resolve all outstanding matters such as completing punch-list construction items, making sure the association’s reserves and other accounting matters are complete, release of bonds, etc.

While a peaceful Transition is often accomplished between a unit-owner board and sponsor/developer, there are unfortunately some instances when Transition is not so easy and litigation ensues.

Typically, Transition litigation arises when there are major design/construction defects which are too costly for the sponsor/developer and the contractors to voluntarily repair. When Transition litigation becomes inevitable, the following are three important steps a board can take to minimize costs and maximize potential recovery:

Continue Reading Navigating the Transition Litigation Process to Minimize Costs and Maximize Potential Recovery

Every new home—no matter if it is a single-family, townhome, duplex, co-op, condominium, or even modular home—comes with a ten year warranty as required by the New Home Warranty Program, which was enacted by the New Jersey Legislature in 1977 under the New Home Warranty and Builders’ Registration Act. While the New Home Warranty Program undoubtedly affords purchasers with an array of protections and avenues for redressing defects in newly constructed homes, it is not without pitfalls that the unsuspecting homeowner should be mindful of.

What does the New Home Warranty Program cover?

The first question you may be asking is: what does the New Home Warranty Program cover? The New Home Warranty Program is a ten-year phased warranty, which covers everything from grading to major structural defects. The availability of coverage for specific defects is directly tied to the warranty year. This means that during the first year of the program the warranty is at the peak of its protections, which diminish over time.

The first year of the warranty covers nearly all defects in workmanship or materials, including, but not limited to, concrete, masonry, stucco and cement plaster, carpentry and finished carpentry, waterproofing, insulation, siding, roofing, doors and windows, mechanical and electrical system defects, and major structural defects. After the first year of the warranty, the available coverage becomes more limited.

The second year of the warranty is limited to mechanical and electrical system defects and major structural defects. Years three through ten of the warranty are strictly limited to “major structural defects,” which is defined to mean “any actual damage to the load-bearing portion of the home, including consequential damages, damage due to subsidence, expansion or lateral movement of the soil (excluding movement caused by flood or earthquake) that affects its load-bearing function and that vitally affects or is imminently likely to vitally affect use of the home for residential purposes.”

Be Aware of the Election of Remedies Provision

Sounds great, right? Not so fast. Before you begin the process of filing your claim under the New Home Warranty Program there is one key aspect that you must be aware of, which is the election of remedies provision of the program. The New Home Warranty Program presents homeowners facing issues with their newly constructed home a strategic dilemma: file a claim under the New Home Warranty Program or file a lawsuit with the courts. The adage “when one door closes, another opens” does not apply here, at least with respect to the same defect. Once a homeowner elects a remedy, whether it be bringing suit against the builder or filing a claim under the New Home Warranty Program, the homeowner is bound to that decision and will be barred from changing course.

The election of remedies provision of the New Home Warranty Program is so stringent that under the applicable regulations the mere initiation of a claim under the New Home Warranty Program, i.e. simply submitting the initial paperwork, will bar a homeowner from turning to the courts for redress related to any defect submitted as a claim under the program.

For instance, Mr. and Mrs. Smith purchase a newly constructed home in New Jersey. During the first two years in their new home, life is great and Mr. and Mrs. Smith are not aware of any workmanship issues. However, during year three they notice water stains have appeared in their living room ceiling. Without knowing too much about the New Home Warranty Program, Mr. Smith says, “Not to worry, our home came with a ten year warranty. We’ll file a claim and get it fixed.” And so, Mr. Smith fills out the necessary paperwork and submits a claim under the New Home Warranty relating to the water leak. Several weeks later Mr. Smith receives a letter in the mail informing him that the claim is not covered as the home is in the third year of the warranty program, which covers only major structural defects and therefore the claim is denied. Can the Smiths now bring a lawsuit against the builder for the water leak? Unfortunately, the answer is they cannot and they now have no recourse for that defect.

The Bottom Line

Don’t be like Mr. Smith. Before you file a claim with the New Home Warranty Program consult with an attorney that is knowledgeable about the program and can advise you on the best course of action.

The November 16, 2016 issue of the Wall Street Journal ran an article about Celebration, Florida, which is the master-planned community built by The Walt Disney Company in 1996. The title of the article summarized the state of affairs in Celebration as follows: “There Is Little Celebration in the Town Disney Built: Mold, leaks, rot are hurting the 1990s utopia; ‘they’re harassing my team.’” My initial thought was that if this can happen to a community built by the world’s most famous mouse, it is little wonder that a large portion of my practice involves representing community associations in lawsuits against developers and architects for construction and design deficiencies.

Continue Reading Disney-Built Community Faces Serious Construction Deficiencies

Stark & Stark Shareholders Randy Sawyer and Andrew Podolski have successfully settled the Lakeside at North Haledon Condominium construction defect case for $7.4 Million.

The case involved serious design and construction defect claims which caused damage to common elements from water infiltration through and around stucco, manufactured stone veneer (MSV) and other exterior cladding systems, plus roofs, windows and balconies. This is an impressive result because the case involved challenging insurance coverage issues related to policy exclusions for synthetic stucco trim and the lack of proof of consequential damage to sheathing and framing.

Continue Reading Lakeside at North Haledon Condominium Construction Defect Case Successfully Settled for $7.4 Million

Stark & Stark Shareholders Thomas J. Pryor and Donald B. Brenner have successfully settled the Bay View Condominium construction defect case for $3.1M. Shareholder Randy Sawyer, along with Associates Gene Markin, John Prisco, and Tara Speer were all part of the team effort that achieved this settlement.

The case involved design and construction defect claims which caused damage to common elements from water infiltration through and around brick and other exterior cladding systems, plus roofs, windows and a plaza over a parking garage. Stark & Stark is particularly proud of this result because the case involved challenging insurance coverage issues related to the lack of proof of consequential damage to sheathing and framing.

Continue Reading Bayview Condominium Construction Defect Case Successfully Settled for $3.1 Million

The good news is that owners can reduce construction costs and risks. Following are Stark & Stark’s Top 10 tips for owners to consider:

  1. Refinance. You can cut construction costs, improve loan terms, and reduce risks by taking advantage of low interest rates, rising property values and available financing.
  2. Obtain Competing Proposals. You can save money and reduce risks by obtaining proposals and information from competing contractors and choosing the best for your job.
  3. Expedite Documents. You can save money and reduce risks by expediting the negotiating and drafting of construction contracts, lien and claim waivers, and other documents you need.
  4. Cap Costs. You can limit construction costs to a guaranteed maximum price and also require that work be approved in advance in writing.
  5. Ensure Timely Completion. You can avoid delays by including deadlines and liquidated damages if work is not timely completed.
  6. Ensure Satisfactory Completion. You can prevent problems by including protections you need, including, adequate insurance, indemnification, payment and performance bonds, and lien and claim waivers and releases.
  7. Ensure Compliance. You can avoid fines and penalties by ensuring that all contractors and subcontractors timely obtain permits and approvals and comply with laws, codes, ordinances, rules, regulations, and restrictions.
  8. Obtain Insurance. You can cut costs and reduce risks by obtaining and reviewing all insurance policies to ensure that they are up to date and you and other parties actually have adequate insurance.
  9. Avoid Ambiguity. You can prevent problems by ensuring that contracts, plans and other documents say what you mean, do not conflict, and that any ambiguity will not be interpreted against you.
  10. Include Other Protections. You can cut costs and reduce risks by including other rights you need in your jurisdiction, including rights to withhold payment, limit your liability, pursue the dispute resolution option you choose, and recover damages and legal fees.

These are just a few ways you can reduce construction costs and risks with the help of experienced counsel. Evaluating these issues requires careful review on an individual basis. The attorneys at Stark & Stark can help you address these and other issues.

For a newer community association board that has recently undergone transition from developer to unit owner control, there is significant temptation to accept a quick, lump sum settlement from the developer to “settle” any remaining punch list items. New board members are often in active and frequent communication with the developer, including any developer-appointed (non-unit owner) representatives who are still sitting on the board. In addition, developers are often willing to work with associations up to and during transition to resolve any outstanding construction issues. With a seemingly cooperative developer on the one hand, and the immense costs posed by litigation on the other, boards frequently adopt a “take what we can get” approach to resolving outstanding issues with a developer rather than digging in and using the threat of litigation to leverage a better settlement. At best, this approach will most likely result in the association leaving money on the table; at worst, it will cost unit owners tens of thousands in future special assessments.

When a developer sells 75% of the units in a condominium or home owner association development, majority control of the association board is turned over to unit owners from the developer (who, up until this point, had its own representatives controlling the board). During this process, known as Transition, a developer’s primary concern is to pave the way to selling off the remaining units, obtain releases of its performance bonds and, most importantly, get the association to sign a litigation release that will prevent the association from ever suing the developer in the future. In order to get a litigation release, the developer will often offer a seemingly large sum of money. Often, the amount the developer offers actually exceeds the cost to fix any open punch list items that have yet to be completed. This seemingly generous offer by the developer is designed to tempt the board into quickly releasing the developer from any future claims.

Continue Reading Tempted By A Quick Transition Settlement? Not So Fast!

Stark & Stark’s nationally recognized Construction Litigation group has scored some recent victories, advocating for community association and condo community clients while negotiating two major settlements in complex construction defect litigation claims for nearly $10 Million.

Most recently, the group skillfully negotiated a settlement on behalf of a Condominium Association in excess of $5.75 Million for a complex construction defect case against more than 45 defendants involving damages from water infiltration to 188 condominium units spread over 26 buildings. Stark & Stark Shareholder Andrew Podolski took the case from inception, developed and implemented the strategy, and otherwise put the case together for a jury trial. Trial was scheduled to begin on May 23, and was expected to run more than 2 months. The ramp up of trial prep activity and the looming trial date ultimately brought the defendants to the table for rigorous settlement negotiations. Drew was ably assisted in the litigation of the case by Associate John Prisco, who took some of the depositions, helped plow through a mountain of discovery materials, and did outstanding work on numerous motions and assisted with trial preparation.

Continue Reading Stark & Stark Scores Recent Settlement Victories for Condo Communities Totaling Nearly $10 Million

Community associations are often given common elements in transition that incur damage from design and/or construction deficiencies. Associations typically have limited funds. Even those with ample financial resources are usually governed by Boards whose members are keenly aware of the fact that the Association’s funds are trust monies that need to be carefully managed and wisely expended.

Most board members do not have construction experience and are not lawyers or design professionals. They often do not know what to think when advised by counsel and engineering professionals that invasive testing is needed to permit investigation and documentation of the Association’s claims. Even when confronted with evidence of water infiltration, which they suspect or know may be causing damage, many association have an initial inclination not to want to spend a lot of money on engineering and forensic investigations. Once limited, preliminary testing shows a problem exists, and litigation becomes necessary, the question becomes, “How much testing is needed to support the association’s claims?” This blog is intended to help give some perspective to boards facing such a decision.

In Federal and most State courts, admissibility of scientific expert witness testimony is governed by the “Daubert” standard articulated in Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993). The key purpose of the Daubert standard is to ensure that the proposed expert testimony is both relevant to the issues in dispute and the evidence in support thereof is reliable.

Under Daubert, “the test of admissibility is not whether a particular scientific opinion has the best foundation, or even whether the opinion is supported by the best methodology or unassailable research. Rather, the test is whether the ‘particular opinion is based on valid and reliable methodology. The admissibility inquiry thus focuses on principles and methodology, not on conclusions generated by the principles and methodology. Once admissibility has been determined, then it is for the trier of fact to determine the credibility of the expert witness.” In re TMI Litig., 193 F.3d 613, 665 (3rd. Cir. 1999).

Generally, expert testimony is permitted when:

  1. The expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue
  2. The testimony is based on sufficient facts or data
  3. The testimony is the product of reliable principles and methods
  4. The expert has reliably applied the principles and methods to the facts of the case

Many state courts have adopted nearly verbatim Federal Rule of Evidence 702. For example, the New Jersey Rules of Evidence state:

“If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education may testify thereto in the form of an opinion or otherwise.”

It is impossible for any association to afford to pay for its experts to invasively test every inch of a building. That is why courts allow parties to use limited invasive testing done by experts to support an opinion that the same conditions found in the limited testing exist everywhere on the buildings. This process is known as “extrapolation.”

The trial Judge is the gatekeeper of the evidence the jury gets to hear at trial. As a general matter, the use and admissibility of expert testimony based on extrapolation supporting claims of damages caused by design and construction deficiencies is based on an evaluation by the Judge of:

  1. The randomness of the sample
  2. The size of the sample

A detailed discussion of these concepts is beyond the scope of this blog. Generally, a sample must be randomly selected for its results to be fairly extrapolated. It has been said that a random sample is one in which each member of the population has an equal probability of being selected for inclusion in the sample. Absent random selection of samples, courts fear the occurrence of “selection bias.” This can be countered by proper planning. For example, if you have a case where there is suspected damage from water infiltration through exterior walls, your expert could do a reasonable number of moisture probes of each side of each building, augmented by invasive test cuts in selected locations.

The case law on allowing experts to extrapolate from their findings is extremely fact sensitive and voluminous. It is imperative that your attorney be familiar with it in order to plan the investigation with your expert. In some cases, you may even need the services of a statistical expert. What is clear is that the Association needs to have counsel and its experts devise a plan for how to provide sufficient testing to satisfy the Daubertrequirements for admissibility. That process will then allow the Association to understand how much money it needs to spend in order to prove its case and collect damages through mediation or trial.

Earlier this year, the New Jersey Appellate Division reversed a Bergen County trial court decision, which had dismissed a construction defect case filed by a condominium association more than six years after the condominium complex was substantially completed, but less than six years after the association received the transition engineering report identifying construction defects. Finding the Association had six years from the date of substantial completion during which to file suit, the trial court rejected the Association’s contention that the running of the limitations period was effectively tolled until after the unit owners took majority control of the Board and received a comprehensive transition engineering study identifying various construction defects. See Palisades at Fort Lee Condo. Ass’n v. 100 Old Palisade, LLC, 2016 N.J. Super. Unpub. LEXIS 193 (App. Div. Feb. 1, 2016).

In reversing the trial court, the Appellate Division recognized the application of the discovery rule in the context of condominium defects, holding that for statute of limitations purposes, the Association’s claims accrued, triggering the running of the six-year limitations period, when it received the transition report. That was the first time the unit-owner-controlled Board was “reasonably aware that it had actionable claims regarding the full range of construction defects.” The Appellate Court categorically rejected defendants’ arguments that the Association should still be time barred because at the time the transition engineering study was produced, the Association still had a reasonable time left to assert claims within six years of the date of substantial completion of the work. Appreciating the legislature’s intent to give injured plaintiffs six years to file suit, the Appellate Panel found that the statute of limitations, by its plain terms, affords a plaintiff the full limitations period to file suit after accrual of the cause of action. See N.J.S.A. 2A:14-1.

In the case of the Palisades, the Association’s cause of action accrued on June 13, 2007, the date it received the transition engineering report prepared by Falcon Engineering. As such, the Association had until June 13, 2013 to file suit for construction deficiencies in the common elements. The Association’s complaint filed in May 2009 was therefore timely, not barred by the statute of limitations, and consequently improperly dismissed by the trial court.

While it remains to be seen whether the Supreme Court will grant certification and evaluate the Appellate Court’s decision, the current state of the law is as it should be—the statute of limitations does not begin to run on an Association’s construction defect claims until the unit owners have full control of the Association’s governing Board and have sufficient facts upon which to assert claims for construction defects.

The requisite “facts” are almost always contained within a transition report prepared by engineers, who are hired by the Board, after the developer sells 75% of the units and the unit owners take majority control of the Board. For prior to then, the developer controls the Board and has no incentive to perform the engineering work and discover construction defects, the disclosure of which will undoubtedly be bad for business and have an adverse impact on sales.