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.
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.
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.
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.
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:
- 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
- The testimony is based on sufficient facts or data
- The testimony is the product of reliable principles and methods
- 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:
- The randomness of the sample
- 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.
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?
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.
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.
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.