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Construction Defects

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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 in San Bernardino County 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 in Valencia 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


INADEQUATE DRAINAGE SYSTEM

Q. 
We live in a community of new single family homes in Anaheim Hills that has an association and common area. Behind our home is a common area hillside that is draining water onto our lot because of an inadequate drainage system. The water is starting to lift our patio slabs and do other damage. We are concerned that with a heavy season of rain, the damage will become very serious. Our homeowner association refuses to sue the developer for construction defects because our home is the only one significantly impacted by the flow of water. Are we without a remedy?

A. 
No. If the association refuses to protect your rights, an experienced construction defect attorney can file a suit to protect your rights. You should consult an attorney immediately because you can lose your rights if you wait too long.Top


WATER INTRUSION AND MOLD

Q. 
My twenty year old condominium in Los Angeles is located on a large slope which means that part of my living room is below grade. The wall has been leaking for five years because of poor water proofing. I have complained to the board but they refuse to spend the money for repairs since I am the only owner with this problem. What can I do? I am certain the wall is full of mold. I cannot sell my unit under the circumstances and I have been turned down for a lower interest rate loan because of the problem.

A. 
If your CC&Rs are written like most, the HOA is responsible for the repair. There is no reason for you to suffer any longer. Experienced HOA attorneys will represent you on a contingency basis and will advance any costs required.Top


WATER INTRUSION CLAIM

Q. 
What is the most common claim made by a condominium unit owner against the association and how is it typically resolved?

A. 
The most common claim made by the owners of condominium units against their homeowner associations is that their unit is experiencing water intrusion because the association has failed to maintain the common area. Generally, this involves leaking roofs, decks, planters, walls, and windows, and often improper slopes and drainage. When a condominium unit owner makes a claim against the association, it is generally because the statue of limitations has run and therefore a claim cannot be made against the developer of the condominium community.

When a condominium unit owner has exhausted his or her patience with the board and files a lawsuit against the association, (not the board), the association will almost always contact its insurance company. Assuming there is coverage, the insurance company will hire a law firm to represent the association and the law firm will hire any appropriate experts needed to investigate the situation and provide advice on how to remedy the problem.

As part of the process, the plaintiff's attorney will hire one or more experts to provide advice and repair cost estimates.

After all experts have completed their investigations, have developed a scope of repairs, and cost estimates, a mediation session will be arranged so that the parties can avoid further litigation and settle the matter short of going to court. In 99% of these matters, the dispute is settled in mediation.

Settlements usually, but not always, consist of the following:

The association agrees to repair the common area in a manner that is acceptable to the expert working for the plaintiff's attorney;
   
The association agrees to pay the plaintiff a dollar amount sufficient to make interior repairs and pay for loss of use; and
   
The association agrees to pay all of the plaintiff's attorney fees and costs.
   
Most importantly, depending upon the insurance coverage, the cost of settling the case will be paid in part or completely by the insurance company.
  Top


CONSTRUCTION DEFECT ATTORNEYS

Q. 
Our condominium association board has determined that we have no choice other than filing a construction defect lawsuit against the developer of our community. We have interviewed four attorneys. Three have quoted prices and terms that are nearly identical. One attorney quoted a substantially lower contingency percentage. Is it possible for an attorney to charge 20% less than other construction defect attorneys and get the same results?

A. 
It is possible but the odds are against you. Consider the following:

Construction defect trial dates are sometimes set by courts two years from the date of filing the lawsuit. Ask yourself whether the attorney has the financial resources, stamina, self-discipline, and patience to fight your battle for two years, without payment, while advancing thousands of dollars of litigation costs and overhead. If the answer is not a “definite yes,” you should be concerned.
   
Construction defect litigation requires many hours of intense legal work over a long period of time. Cases usually require at least two highly qualified construction defect attorneys working with a legal assistant to obtain a recovery. Does the attorney you are considering have the staff needed to perform over the long term, or will the defense attorneys bury him or her?
   
As the hours of work accumulate, will the financial pressure and volume of work cause the attorney to push for a quick but low settlement?
   

Paying a higher percentage to an attorney does not mean you will receive a smaller net settlement. If the fee you pay is small, but the settlement is also small, you may end up paying more than you originally anticipated.

The key is to hire a law firm with all of the resources needed to obtain the highest net result. Construction defect litigation is not a business for inexperienced attorneys working with an inadequate budget.Top






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