RIGHT TO
SUE ASSOCIATION
Q.
We live in a large townhome community, which has extensive common
areas. There are numerous construction defects associated with
the common areas. Unfortunately, the law firm which represents
the association has advised us that we no longer have the ability
to sue the developer due to the board's failure to take action
on a timely basis. Do we as individual homeowners have the right
to sue the association for the purpose of forcing it to correct
the construction defects?
A.
Yes. A condominium unit owner has legal standing to bring a claim
for damages against the association for the cost of remedying
defects to the common area. This rule has been established by
many court decisions. In accordance with California law and the
provisions included in most CC&Rs, the association is required
to maintain and repair the common areas. This duty to repair and
maintain the common areas exists, even though the association
may be required to special assess its members to obtain the money
to make the repairs. I strongly suggest you contact counsel to
discuss this matter. This is a complex area of the law. Top
BOARD REFUSES
TO SUE DEVELOPER
Q.
I live in a large condominium community with extensive common
areas. The community is only two years old. While we have several
serious construction defects, the board refuses to sue the developer
because they want to avoid litigation and would rather special
assess to repair the defects. Do I, as a member of the association,
have the right to sue the developer for these defects?
A.
Yes. As a member of a condominium association, you have standing
to file suit. You should immediately consult with a construction
defect attorney concerning your rights because they can be lost
if you delay taking action. Top
WHAT TYPE
OF LAW FIRM?
Q.
Do you recommend that our association hire a construction defect
law firm that represents only plaintiffs or one that represents
both plaintiffs and defendants?
A.
I recommend that you hire a firm that represents only plaintiffs.
A firm that represents defendants/insurance companies, may not be as experienced in maximizing the settlement amount. Top
SELECTION
OF LAW FIRM
Q.
The board of directors of our association is interviewing law
firms for a construction defect suit to be filed against the developer.
One large firm has advised us that we should not consider
our association’s general legal counsel because they are needed
to remain impartial and available to provide checks and balances. They also state that our
general counsel would have a conflict. What is your opinion?
A.
The firm you are referring to, obviously, does not provide general
counsel legal services to associations. I disagree with them. Your general counsel should
not be excluded for the reasons stated. Your selection of a law
firm should be based upon the firm’s experience, your comfort
with the legal team and the terms offered by the firm. Top
MOLD
Q.
We recently went into the attic of our townhome which is only
two years old because we thought we heard a mouse. We discovered that the roof
had been slightly leaking and that the plywood and framing is
moldy. What do you
suggest?
A.
You should immediately contact a law firm that has experience
with construction defects.
A two year old roof that leaks is undoubtedly defective.
Most importantly, the mold must be tested by an expert
and abated. Some types of mold are toxic
and can result in serious health problems. You should not delay. Top
CHANGING
ATTORNEYS
Q.
Our homeowners association hired an attorney more than two years
ago to represent us in a construction defect claim against the
developer. Our association
members have advanced over $90,000.00 for costs and we are not
even close to settlement. We have been informed that
the association members will be required to advance an additional
$30,000.00 to $45,000.00
for costs very soon. We are not satisfied with
our attorney and cannot afford to keep advancing costs. Can we change attorneys
at this stage?
A.
Yes. Under California law, a
client may always change attorneys. If you decide to make a
change, you should be aware that many knowledgeable, experienced
construction defect law firms will advance all of the costs on
behalf of the association. Top
WHO DECIDES
ON LAWSUIT?
Q.
Do members of our homeowners association have the right to vote
on whether to sue the builder of our townhomes for construction
defects?
A.
This is normally a power that rests with the board of directors. If your bylaws require the
vote of the membership before filing such a suit, your board should
call for a vote. This
would be unusual. Top
DEVELOPER
FILES FOR BANKRUPTCY
Q.
Our condominium building is only two years old and is falling
apart. There are
numerous construction problems. Our problem is that the
construction company filed bankruptcy after completing our project.
Are we out of luck?
A.
No. You should immediately contact
a law firm that has expertise with construction defects. Top
TIME LIMITATIONS
Q.
How much time does an association have to bring an action for
construction defects?
A.
A lawsuit against a builder for patent defects must be
brought within three or four years of substantial completion of
the project depending on the claim. There are two requirements
with regard to latent defects. First, lawsuits against
builders must be brought within a maximum of ten years from the
date of substantial completion of the project. The second requirement
in most cases is that the association file within three years
(four years under one theory) of the discovery of a particular
defect by the association or when, through the use of reasonable
diligence, the association should have discovered the existence
of the defect. Under the three years statute, courts are not highly
rigid on when "discovery" of a particular defect occurs. Generally,
the defect must be of such a magnitude that a reasonable person
should have discovered it. Other facts may affect your rights. You should consult with an attorney regarding this issue as soon as you are aware that your property may have construction defects. Top
OBTAINING
PLANS
Q.
Our homeowner association has serious water intrusion problems
in the common areas. We have attempted several times to obtain
a set of plans from the developer without success. What should
we do?
A.
Sections 19850 and 19851 of the California Health and Safety Code
require that every city or county maintain a copy of the plans
for every common interest development during the life of the building(s)
for which the building department has issued a permit.
These plans and specifications
are open for inspection and may be copied, with some limitations.
Your association board
should also contact an attorney who specializes in construction
defects as soon as possible. The "statutes of limitation" extinguish
the legal rights of the association after the passage of time,
as set forth in the various statutes. Top
DEVELOPER
RESPONSE
Q.
As a condominium developer, I would like to point out that the
present law in California discourages the building of condominiums
and other developments with homeowner associations. The primary
reason is that homeowner associations have up to ten years to
find construction defects and sue developers, architects, engineers
and contractors.
Consequently, building
homes that are included in homeowner associations has become very
expensive due to the high cost of insurance and expensive litigation
which ultimately is passed on to the consumer.
As much as 50% of any financial
settlement goes to trial attorneys and so called "experts" who
find defects. Attorneys who specialize in this field often solicit
business from home owner associations by telling these groups
that they will make money at no cost to the homeowners.
For small developers the
current system is very unjust because we are unable to get insurance
except at very high costs. To me it is quite obvious that these
costs are being passed onto the consumer.
In the contracting field
it is customary for the contractor to be responsible for defects
for twelve months after completion. Most states in the United
States have such a law, except California. The existing law (10
years) was passed as a result of strong lobbying by trial lawyers
in California who spent hundred of thousands of dollars to get
the law passed.
What is your response?
A.
First let me point out that the ten years within which homeowner
associations can sue a developer applies only to hidden defects.
These are defects that a person could not reasonably discover
such as the failure of a developer to insert fire blocks inside
walls. Defects that are reasonably discoverable have a limitation
of three or four years depending on the claim.
Lawyers specializing in
protecting consumers would never advise homeowner associations
that they can make money suing developers. Even if an association
prevails in court on every issue, the association must pay expert
fees, legal fees and other costs which are rarely fully recoverable.
The fact is that defective construction costs homeowners money.
Homeowners don’t make money when their building is defective.
You claim that the system
is unfair and against developers. This is not true. In fact, the
Building Industry Association strongly supported the recently
enacted California Civil Code section 1375. This law is the most
pro developer law ever approved by the legislature in the history
of the state. It makes suing a developer for construction defects
more difficult, more time consuming and more expensive.
You state that the cost
of litigation is increasing the cost of housing which is the fault
of trial lawyers. The fact is, if developers built buildings without
material defects or voluntarily repaired defects, there would
be no need for litigation. Defects are the cause of litigation,
not lawyers.
When someone dies in a fire
because fire blocks were left out of buildings or buildings slide
down a slope because of defective soil preparation, a trial lawyer
is the only person an association of homeowners can count on to
protect their rights. Top
MANAGEMENT
COMPANY HIRED BY DEVELOPER
Q.
We recently purchased a new townhome directly from the developer.
After moving in, I was elected to the board of directors and learned
that many owners are experiencing serious construction problems.
Our management company was hired by the developer. They seem to
minimize the significance of the construction defects. Do they
have a conflict of interest?
A.
Possibly, but not necessarily. I believe the fact that your management
company was hired by the developer, taken by itself, is insufficient
to cause alarm. However, you should inquire to determine whether
your management company obtains a substantial number of its property
management accounts from developers. If so, they may be inclined
to protect their source of business.
Some management companies
decline to accept property management accounts from developers
in order to avoid even the appearance of a conflict of interest.
Others obtain most of their business from developers.
My advice to investigate
throughly. Afterwards, if your board is not 100% satisfied that
your management company is totally loyal to your association,
make a change. Construction defects are a serious matter. Top
WHAT IS DEFECTIVE
CONSTRUCTION?
Q.
The board of directors of our homeowners association has informed
the members that we have defective construction and that we must
make a claim against the developer. What precisely is "defective
construction"?
A.
"Defective construction" includes defects in design, in construction,
in choice of materials or defects in the materials themselves.
A defect exists if a particular building component differs from
the developer’s intended result or differs from apparently identical
construction. The buyer’s reasonable expectations upon purchase
are important in this regard, along with any representations as
to the condition or quality of the property that were made by
the builder. Obvious defects are known as patent defects
and those which are not reasonably observable, but are later discovered,
are known as latent defects. Top
SIGNIFICANCE OF CITY OR COUNTY APPROVAL
Q.
Is a builder liable for damages even if the project was inspected
and approved by the City or County building inspector?
A.
Yes. If the project is defective, the builder may be liable even
if the project meets all applicable local codes, has been approved
by the building inspectors and has been built according to the
standards of the local community. In addition to liability for
negligent construction, or construction not meeting the standards
of the community, builders and sellers of mass-produced housing
are held to an implied warranty of fitness and are held strictly
liable for construction defects without a showing of negligence
or fault. Recent court cases have made it absolutely clear that
strict liability applies to builders of multi-unit condominium
projects. All that must be proven in court is that defects exist
and what appropriate correction is required. The measure of the
damage is the cost of repairing the defects, together with the
value of the loss of use of the property during the period of
injury. Top
PROVING DEFECTIVE
CONSTRUCTION
Q.
How do I prove that a construction defect exists?
A.
In most cases, it will be necessary to hire the services of experts.
Experts are professionals who have the necessary training, education
and experience to give testimony in court as to the cause of a
defect as well as the cost to properly cure the defect. For example,
if your roof leaks, an expert who has designed roofs, evaluated
other leaky roofs and knows how roofs should be constructed is
in an excellent position to testify as to the reasons your roof
leaks. Your lawyer cannot, in most cases, prove his case against
the builder unless he has qualified experts. Experts are available
for every aspect of residential construction. Expert’s services
usually run from $150.00 to $300.00 or more per hour. Top
RECOVERY
OF ATTORNEY'S FEES
Q.
What monetary damages can I recover in a lawsuit and can I recover
attorney’s fees?
A.
California courts are clear in awarding associations the cost
of repairing the defects. In some cases, your association can
also recover whatever reasonable fees you have had to pay for
your experts to investigate the cause of your defects and their
costs in supervising the repairs. The costs of doing temporary
repairs during and before the lawsuit to mitigate the damages
are also recoverable. If repairs require owners to vacate their
homes, reasonable relocation costs are included. Punitive damages,
or damages awarded to punish the builder and to deter similar
conduct in the future, may be awarded where the builder defendant
has shown a "conscious disregard" for the rights of the buyer,
such as where there has been a fraudulent concealment by the builder.
In some cases, attorney's fees are recoverable but not always.
In appropriate cases, it may be possible to obtain compensation
for loss in market value. Top
RESPONSIBILITY OF ASSOCIATION FOR REPAIRS
Q.
Is the association required to make repairs during construction
defect litigation?
A.
Every party to the lawsuit has the duty to lessen or mitigate
their damages where reasonably possible. In this regard, the association
should make reasonable repairs, assuming that sufficient reserves
or funds exist to do so, at least on a temporary basis so as to
prevent the property from being damaged to a greater extent. Top
BUILDER AGREES
TO MAKE REPAIRS
Q.
What should I do if the builder has agreed to make the necessary
construction repairs?
A.
It is prudent to consult a lawyer who can assist in locating an
independent expert to evaluate the builder’s investigation of
the problem and his proposed repairs. The same expert should oversee
actual repairs. Once repairs are agreed upon, the lawyer can draft
a proper settlement agreement that does not absolve the builder
of liability except for the limited and defined repairs being
made, and then only after the repairs have proved effective. The
builder will typically demand a broad form general release of
all future liability in exchange for making repairs. Such a release
may result in board of director liability should other defects
appear during the time remaining before the expiration of the
various statutes of limitation. For that reason, such a release
is rarely, if ever, recommended. In short, insist on a specific
limited release. Top
BUILDER IS
OUT OF BUSINESS
Q.
How do we recover for construction defects if the builder is out
of business, cannot be located, or is bankrupt?
A.
The most important asset is the builder’s insurance policy as
well as the policies of the various subcontractors. Even if the
builder cannot be located or is bankrupt, the various insurance
companies must defend and pay claims that are covered under the
policies. Builders almost always have insurance coverage because
it is almost impossible to obtain construction financing without
it. Likewise subcontractors are rarely hired unless they have
insurance. Top
WHO FILES
SUIT?
Q.
Who normally files suit against the builder in a construction
defect claim?
A.
An association has the legal capacity or standing to bring a lawsuit
for damages to the common areas, damages to the separate interests
which the association is required to maintain or repair, and damages
to the separate interests arising out of or related to damage
to the common areas that the association is required to maintain
or repair. As such, the association is the proper party to bring
an action for construction defects. Top
COST OF A
CONSTRUCTION DEFECT SUIT
Q.
How much will a construction defect lawsuit cost?
A.
The total cost of prosecuting a lawsuit will depend on a number
of factors, including the nature and amount of damages, the number
of parties, and the attitude of the parties. If the builder is
willing to resolve the matter reasonably and without the need
to file a lawsuit, the expense will be much less than if the builder
or its insurance company does not act responsively, forces the
filing of a lawsuit or requires the case to proceed through the
court system and potentially to trial. Some lawsuits are settled
within a relatively short period of time, while others are not
resolved until just before trial. Lawsuits can be expensive, and
close cooperation between the association, property management
company and attorney is necessary to reduce the costs as much
as possible. One of the major costs is the cost of expert consultants.
These costs will be included in the claim against the builder
and are usually recoverable.
Legal fees depend upon
the nature and extent of the defects and the size of the project.
Attorneys generally either bill by the hour or perform their
services for a percentage of any recovery. If the attorney
charges by the hour, expect to pay between $250 and $350 per
hour. If the attorney works on a contingency basis, expect
the fee to be between 28% and 40% of the gross recovery depending
on the size and complexity of the matter. Fees are always negotiable. Top
INSURANCE
COVERAGE FOR DEFECTIVE CONSTRUCTION
Q.
Will the association’s insurance company cover damages caused
by construction defects?
A.
Probably not. Association insurance companies almost always exclude
the types of coverage which provide benefits for construction
defects. The policy will, however, be reviewed by your lawyer
for possible coverage. Top
HOW DO WE
PAY FOR CONSTRUCTION DEFECT SUIT?
Q.
Where do we get the money to pay for a construction defect lawsuit?
A.
Several ways exist to raise money for pursuing your legal rights.
First, your association’s reserves are a good source. California
law allows associations to borrow from reserves as long
as it is repaid within specified time limits. Another source
is to increase your monthly assessments by the percentage
allowed in your CC&Rs
or to pass a special assessment. Also, certain banks provide
financing for these types of matters. Lastly, a small number
of law firms (which includes Michael T. Chulak & Associates)
are able to advance all or some of the costs. Top
SELLING OR
REFINANCING DURING LITIGATION
Q.
Can I sell or refinance my home during construction defect litigation?
A.
Yes. The board of directors has a fiduciary duty to investigate
construction defects and timely pursue a claim against the builder
to recover damages and to repair the problems. During this time,
California law requires a homeowner to disclose to a potential
buyer construction defects and litigation. Any such disclosure
may have an impact on sales. While in litigation, lenders are
usually cautious about refinancing. However, there are mortgage
companies that specialize in refinancing homes involved in litigation. Top
PAYMENT OF
EXTRA COSTS
Q.
Can our association be compensated for the extra costs we will
be required to pay our management company due to construction
defect litigation?
A.
Possibly. This cost is usually part of the claim made against
the builder. In addition, some law firms will reimburse the management
company for certain extra costs incurred so that the association
never gets billed for these costs. Top
MOLD
Q.
How often does mold result from water intrusion into roof and
wall areas?
A.
It is very common. It can cause physical damage to the building
as well as personal health problems. Top
NEARLY BANKRUPT ASSOCIATION
Q.
In addition to having construction defects, the developer of our
community association turned the association over to the home owners
in a nearly bankrupt condition. Can you help us determine what
happened to cause this situation?
A.
Absolutely. Quite often when we file suit against a developer for
construction defects, we seek an accounting to determine if the
builder paid all assessments due, during the marketing phase.
Sometimes the builder has not paid all assessments leaving the
association short thousands of dollars. In addition, we may find
that the initial budget provided to the buyers was inadequate
because the projected expenses were understated. In these situations,
we seek damages from the developer as part of the lawsuit. Top
