Your community association may become aware of significant transition, design, and/or construction defect claims. This awareness may come from the association receiving complaints from unit owners, or perhaps your property manager or a transition engineering inspection report will have visually identified issues of concern. Whatever the source of the Board’s knowledge, in exercising its fiduciary responsibilities, the Board members may find themselves confronting a potentially expensive decision fraught with all kinds of financial and political consequences. Does the association litigate all the way to trial if necessary? Does the association file suit to posture that it is serious about litigation, and then settle without going through expensive depositions? Does it negotiate with the sponsor, knowing that the association will not litigate but will take whatever it can get?
It’s that moment that no homeowner wants to have. You just returned from vacation and were in the midst of stowing the suitcases under the house in your crawlspace. As you were exiting the crawlspace, something caught your eye—a wet spot on the concrete slab floor. It wasn’t a puddle, but it was clearly moisture.
Hoping for something minor, you began to poke around. During your search, you discovered that a portion of insulation in between the floor boards was soaked. While you removed what you thought was the problem, you saw a water leak dripping down a vertical pipe in between your walls.
Unfortunately, every homeowner will have to deal with a situation like this at one time or another. Fortunately, we have insurance for these very situations, however, knowing what to do and how to handle this situation will make a world of difference to both your mental health and to your wallet.
It has been several months since the New Jersey Supreme Court decided Cypress Point Condo Ass’n v. Adria Towers, LLC.
The issue in Cypress Point was whether rain water damage caused by a subcontractor’s faulty workmanship constituted “property damage” caused by an “occurrence” to trigger coverage under a condominium developer’s commercial general liability (CGL) insurance policy. Cypress Point, a condominium association, filed claims against Adria Towers, the developer, and its insurers, as well as various subcontractors. Adria Towers was also the general contractor on the condominium project and hired the subcontractors who performed the construction work. The Association alleged faulty workmanship during construction and claimed consequential damages.
Having construction work or renovations done on your home is certainly an exciting, but undoubtedly stressful time. In fact, the process from selecting a suitable (and experienced) contractor to completion of the project can be downright daunting at times. As a homeowner myself, who coincidentally is going through this very process as we speak, I know the difficulties of sifting through countless potential contractors, negotiating prices, and coordinating schedules and the like. As daunting as it may seem, there are certain steps a homeowner can take at the outset that will mitigate potential pitfalls during construction, ensure your project is constructed properly, mitigate construction disputes, and alleviate unnecessary stress.
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:
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.
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.
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.
The good news is that owners can reduce construction costs and risks. Following are Stark & Stark’s Top 10 tips for owners to consider:
- 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.
- 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.
- 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.
- Cap Costs. You can limit construction costs to a guaranteed maximum price and also require that work be approved in advance in writing.
- Ensure Timely Completion. You can avoid delays by including deadlines and liquidated damages if work is not timely completed.
- 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.
- 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.
- 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.
- 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.
- 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.