Articles Posted in Community Associations

Read the first part of this article here.

You’re in your car heading home when you turn into your condominium development. That road you just entered, it’s a common element. On your route to your unit you pass by the club house and community pool— these are common elements as well. You’re finally home as you pull into your driveway—which, by the way, probably isn’t a common element, but rather most likely a limited common element. You enter your unit. In the case of a condominium, does your unit qualify as a common element, limited common element, or strictly unit owner property? The answer, in fact, is that the unit you just entered is likely a combination of all three. This article will take a closer look at this distinction.

A typical condominium development is comprised of numerous structures that usually include the building or buildings that house individual condominium units, more often than not a club house as well as other lands and improvements such as community pools, fitness centers, playgrounds, etc. These buildings, lands and improvements can be classified as common elements, limited common elements, or unit property. When you purchase a unit in a condominium development, you are in fact not only purchasing ownership rights to a particular unit, but are also acquiring an interest in the common elements and limited common elements. So, what are these common and limited common elements and how do they differ from unit property?

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Generally speaking, a contractor’s commercial general liability (“CGL”) policy is designed to cover personal injury or property damage caused by an accident resulting from the contractor’s work. The policy is not meant to be a guarantee of the contractor’s work and therefore does not cover damages to the work itself – instead, these are known as “business risk” damages. The concept that is inherent in every agreement for the performance of construction work is the risk that the work will be done improperly.

By selecting a particular contractor, the owner has to make a business judgment as to the qualifications and reliability of the selected contractor, and therefore assumes the risk that the work will be done incorrectly. If the work is done improperly and needs to be corrected, the contractor, and ultimately the owner, bears the burden of repairing or fixing that faulty work. The contractor’s insurance is not a performance bond guaranteeing the work; instead, the commercial general liability insurance is designed to cover any unexpected damages that arise from the contractor’s work, such as damage to other property caused by the faulty work.

Consider a roofer hired to install a new roof on a building. Once completed, the roof is the roofing contractor’s “work.” If the roofer installs the wrong type of shingles, but does everything else correctly, the only “damage” to speak of would be to the roof shingles themselves, i.e. the roofer’s work. The cost of replacing the shingles is therefore that “business risk” not covered by insurance.

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Pursuant to the Planned Real Estate Development Full Disclosure Act (“PREDFDA”), N.J.S.A. §45:22A-21 et seq., a developer of a proposed condominium development that is subject to the registration requirements of PREDFDA must establish an association responsible for the management of the common elements and facilities of the proposed condominium development. N.J.S.A. §45:22A-43. The developer is required to organize the association prior to the filing of the master deed or declaration of covenants and restrictions. The association may be established as a for-profit or nonprofit corporation, unincorporated association, or any other form permitted by law.

No matter the nature of the association, its responsibility is the same – “the administration and management of the condominium and condominium property, including but not limited to the conduct of all activities of common interest to the unit owners.” New Jersey Condominium Act (the “Condo Act”), N.J.S.A. §46:8B-12. The powers of the association are vested in an executive board that is tasked with carrying out the responsibilities of the association. Upon the formation of the association, the developer will appoint representatives to sit on the executive board and carry out the duties of the association. However, as the developer begins to sell units in the condominium development, pursuant to PREDFDA and the Condo Act, the developer is required to surrender control of the executive board to unit owners elected by the members of the association. This process is known as “transition.”

PREDFDA and the Condo Act require that no later than 60 days after the sale of 25% of the “lots, parcels, units or interests, not fewer than 25 percent of the members of the executive board shall be elected by the owners.” N.J.S.A. §45:22A-47; see also N.J.S.A. §46:8B-12.1. Once the developer sells 50% of the units, etc., within 60 days thereafter 40% of the membership of the executive board is to be comprised of unit owners elected by the owners. Final transition, and complete surrender of the executive board by the developer to the unit owners, occurs once the developer has sold 75% of the units in the development.

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No matter whether you are a first time home buyer or veteran repeat purchaser chances are you have been mentally preparing for the deluge of paper that accompanies this major purchase. The sheer magnitude of documents is understandably overwhelming. Document after document is slid across the shiny, polished conference table in your attorney’s office. At a certain point you become automated; sign here, initial there—a few hours later and you may have just signed your first born child away. Yet, when purchasing a condominium or townhouse keep your wits about you and break out your reading glasses because there is one document you want to read—the Public Offering Statement.

A developer of a community development is required under New Jersey’s Planned Real Estate Development Full Disclosure Act to register the planned development with the Division of Housing and Development in the State Department of Community Affairs. In connection with its registration, the developer must also submit a proposed Public Offering Statement. Once approved, the Public Offering Statement must be freely available to all prospective purchasers prior to the closing of the unit.

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In a decision that has renewed the faith of condominium law practitioners in our state’s judicial system, the New Jersey Appellate Division recently issued a strongly worded opinion in Port Liberte II Condo. Ass’n v. New Liberty Residential Urban Renewal Co. et. al., 2014 N.J. Super. LEXIS 19 (App. Div. Jan. 21, 2014) (approved for publication on January 31, 2014), that has prevented a grave injustice and allowed unit owners to control their own fates by having the power to validate unauthorized decisions of the board.

In what has been exclaimed as a “big win” for condominium associations and unit owners, the Appellate Division has determined that a condominium board’s decision to file suit without taking a pre-litigation vote, required by the association’s bylaws, can be affirmed at a later time by the membership and cannot be challenged by the defendants. Designed to protect the financial interests of the unit owners, the bylaws cannot be used by defendant developers and contractors to suppress those very same interests. Non-homeowners, therefore, do not have standing to challenge unauthorized or procedurally defective decisions of the board to start suit.

Faced with widespread construction defects in the common elements of its 225-unit community with a price tag in excess of thirty million dollars for repairs, the Port Liberte II Condominium Association filed suit in 2008 against those responsible, the Developer and the contractors that built the development. Several years into the law suit, the defendants sought dismissal of the entire action because the Association had not obtained a community vote to approve the filing of the suit, as required by a provision of the bylaws drafted by the Developer. To rectify that oversight, the Association held two separate votes to ratify the original filing of the suit, the first in October of 2009, which was approved by the community 72 votes to 3, and a second in October of 2011, which was approved by a vote of 65 to 1. Armed with these two examples of overwhelming support in the community for the lawsuit, the Association opposed the defendants’ motions to dismiss the case arguing that the defendants, as outsiders who owned no units in the community, had no standing to enforce the bylaws, and, even if they had such standing, the original filing of the suit was overwhelmingly ratified by the unit owners.

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Every day condominium associations battle delinquencies and employ creative strategies for collecting unpaid assessments. Sometimes ambitious collection efforts are successful – sometimes not. One aggressive strategy employed by associations is the appointment of a rent receivership for a vacated or abandoned unit owned by a delinquent owner. If successful, a receivership would entitle the association to collect rent for a unit it technically does not own and apply the monies received towards the owed arrearage. While the concept sounds good in theory, it is actually quite difficult to accomplish in practice given the likely upside down mortgage on the property, the inevitable foreclosure proceedings by the bank, and the fact that abandoned units are not occupied by paying tenants.

All those dissuading factors, however, did not stop one association from trying. Faced with over $30,000 of unpaid maintenance dues for two abandoned units, Woodlake at King’s Grant Condominium Association, made an application to the Chancery Court for an appointment of a rent receiver. The Chancery Judge denied the Association’s request finding that the “extraordinary remedy of appointing a rent receiver” was not appropriate under those facts and circumstances. The Association appealed and the Appellate Division issued an unpublished decision on April 1, 2014 affirming the judge’s denial of the Association’s application. See Woodlake at King’s Grant Condo. Ass’n v. Coudriet, 2014 N.J. Super. Unpub. LEXIS 714 (App. Div. Unpub. 2014).

Despite recognizing that the Association was seeking the appointment of a receiver so that it could rent out defendants’ vacant units and recoup some of the assessment monies owed by the defendants, the Appellate Court did not find legal support or plaintiff’s arguments persuasive in favor of forcing the defendants to rent their units or for allowing the Association to rent those units to new tenants. Even though the Association’s assessment liens would remain unpaid after a foreclosure sale because the mortgage liens on the units exceeded their fair market value thereby leaving the Association with no remedy, the Appellate Division found no authority in the bylaws or in the Condominium Act for providing the appointment of a rent receiver.

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The short answer is – Yes! The Condominium Act specifically obligates all unit owners to pay a proportionate share of the common expenses. Even where a unit owner waives the right to use a common element or abandons the unit there is no exemption from liability for common expenses. The Condominium Act, N.J.S.A. 46:8B-1 to -38, provides in pertinent part:

A unit owner, shall by acceptance of title, be conclusively presumed to have agreed to pay his proportionate share of common expenses accruing while he is the owner of a unit. . . . No unit owner may exempt himself from liability for his share of common expenses by waiver of the enjoyment of the right to use any of the common elements or abandonment of his unit or otherwise . . .
[N.J.S.A. 46:8B-17.]

The “or otherwise” language implies that the obligation of unit owners to pay the proportionate share of the common expense is absolute and does not yield to other considerations, such as disputes with the Association. See Holbert v. Great Gorge Vill. S. Condo. Council, 281 N.J. Super. 222 (Ch. Div. 1994) (plaintiff owner was obligated to pay for previously unpaid common expenses, plus interest, despite having brought suit against defendant condominium association for alleged mismanagement of condominium affairs).

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Under the statute of repose, no action to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property may be brought more than ten (10) years after the performance of “such services and construction.” N.J.S.A. § 2A:14-1.1. Essentially, the statute of repose provides that an injury occurring more than ten years after completion of improvements to real property does not give rise to a cause of action at all.

The New Jersey Supreme Court has held that the ten-year statute of repose for bringing an action against a contractor or an architect begins to run as of “substantial completion” of the real property. Russo Farms v. Vineland Bd. of Educ., 144 N.J. 84, 117 (1996). The Court defined “substantial completion” as the date when construction is sufficiently complete so that an owner can occupy or utilize the building. Therefore, generally when the architect certifies as much to the owner and a Certificate of Occupancy is issued attesting to the building’s fitness for occupancy, the real property is substantially complete and the statute of repose begins to run.

One important concept has evolved from recent developments of case law interpreting the statute of repose: the start date for the ten-year time limit of the statute of repose is not the same for all contractors and design professionals on a particular project; the start date differs depending on a party’s continued involvement with a construction project. See State v. Perini Corp., 425 N.J. Super. 62 (App. Div. 2012). The Perini Court engaged in a lengthy discourse of the relevant case law interpreting New Jersey’s statute of repose from which it derived three guiding principles: First, the trigger date is the date of substantial completion, not completion of every last task of the contractor; Second, separate trigger dates apply to subcontractors that have substantially completed their work, even if the improvement as a whole is not completed and ready for use and a certificate of occupancy has not been issued; Third, the trigger date for any single contractor runs from completion of that contractor’s entire work on the “improvement,” not from discrete tasks. [425 N.J. Super. at 74-75 (internal quotations omitted).] This means that certain contractors, who performed services on a job site early on, can benefit from a repose period that commences earlier than the date of substantial completion.

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The novel nature of condominium ownership, specifically the transition process, affects the statute of limitations analysis. The Planned Real Estate Development Full Disclosure Act requires that the developer of a condominium staff the board of trustees of an association and control the affairs of the association until seventy-five percent of the units in the development are sold. During that period of control, the developer is under a fiduciary responsibility to the association to act in the best interest of the association and its membership. Pragmatically speaking, however, a developer-controlled association is much different than a homeowner controlled association. Even if certain problems with construction are discovered during developer-control, it cannot be realistically expected that the developer-controlled board would take steps to investigate those defects and litigate, on behalf of the association, if necessary. Therefore, equity and common sense suggest that the earliest the statute of limitations clock could begin to run against an association for construction defect claims is the date of transition, at which time the unit owners take control of the board of trustees for the first time.

To this end, our courts recognize the inherent unfairness in allowing statutes of limitations to run against an association while the developer controls its board. The reason is clear – individual unit owners lack standing to assert claims for faulty construction affecting the common elements prior to transition. Thus, equity cannot support the running of limitation periods against an association that legally cannot assert its rights during the period of developer control.

In New Jersey, the Law Division decision in Terrace Condominium Ass’n v. Midlantic Nat. Bank, 268 N.J. Super. 488 (Law Div. 1993), clearly stands for the proposition that statutes should be tolled when the unit owners of a condominium are not in control of the Board. In Terrace, a condominium association brought an action against a bank that took over construction of the building. At the time the bank took over, some of the units had been sold, but construction was still continuing. Construction was later completed under the bank’s watch, and almost immediately its residents experienced numerous problems with water infiltration into their units. Midlantic, the bank/owner in question, engaged an engineer to document the problems and provide a solution. Most of these repairs were “short-lived or improper repairs to the most significant of the [] problems and generally had the effect of concealing the true causes of the problems.”

Transition occurred and the Association filed suit against Midlantic. Midlantic raised a statute of limitations defense as to several of the building warranty claims. The court found that because the bank had effectuated repairs, the statute of limitations did not run against the unit owners because they relied upon the bank to effectuate the proper repairs while in control of the Association. Additionally, the court found that, notwithstanding the repairs undertaken by Midlantic, the “unit owners had no control of the Association, and should not be bound by the period of time thereto.” This is true “even if each unit owner could have sued the Bank while the Bank was in control of the Association” and that “it may well be that ordinarily the right to make such claims should be tolled or deferred until the unit owners control the association.”

There is also an unpublished decision by the Appellate Division that directly addresses a condominium Association’s ability to control its own destiny. The Appellate Division decision captioned Skyline Condominium Assoc. v. Falkin, No. A-3913-98, A-3860-98, A-3792-98 (App. Div. September 10, 2001), is right on point. In the Skyline opinion, the Appellate Division was faced with the issue of “determining the first date that a plaintiff obtained the enforceable right to institute and maintain an action regarding the controversy” for the purposes of the entire controversy doctrine.

Recognizing the difficulty in running the statute of limitations clock while the individual unit owners are not in control of their association’s board, the Skyline Court concluded that the statute of limitations on an action for construction defects by a condominium association against a sponsor should be tolled until the unit owners control the association.

In New Jersey, construction defect claims are subject to a six-year statute of limitations, N.J.S.A. 2A:14-1, which is subject to the discovery rule, and a separate ten-year statute of absolute repose, N.J.S.A. 2A:14-1.1, after which potential causes of action no longer exist.

Under New Jersey’s discovery rule, the accrual of a cause of action is deferred until the injured person knows or should know that he has sustained an injury and knows or should know that an injury of which he is aware is attributable to the fault of another person. The discovery rule is an equitable principle by which an accrual of a cause of action is delayed until the injured party discovers, or by the exercise of reasonable diligence and intelligence, should have discovered, that he may have a basis for an actionable claim. Once the injured party knows that it has been injured and that the injury is the fault of another, it has the requisite knowledge for the period of limitations to commence running.

Put simply, for a cause of action to accrue, the injured plaintiff must have knowledge of both injury and fault. Lynch v. Rubacky, 85 N.J. 65, 70 (1981) (“the discovery rule centers upon an injured party’s knowledge concerning the origin and existence of his injuries as related to the conduct of another person”). This rule applies to complex construction defect cases involving hidden construction and design defects.

Among the relevant factors in analyzing whether the discovery rule applies are the nature of the injury and the difficulties inherent in discovering it. Vispisiano v. Ashland Chem. Co., 107 N.J. 416, 428 (1987). For example, in a toxic tort case, such as that presented in Vispisiano, diagnosing a plaintiff’s injury is but the first step in establishing a chain of causation. Id. at 429. The plaintiff’s suspicion that he had been poisoned, after comparing his symptoms to those of a co-worker, was not sufficient to accrue a cause of action, particularly in the face of his doctors’ repeatedly rejecting plaintiff’s concerns that he had been poisoned while working at a chemical plant. Id. at 436.

Applying the foregoing to the condominium construction defect setting gives rise to the argument that a plaintiff association’s cause of action accrues when it receives an engineer’s report (either during transition or afterwards) that first apprises the association of the defects afflicting its buildings and the suspected causes of those defects. However, it may be the case that the requisite knowledge is obtained at an earlier date when unit owner board members learn of defects.

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