Protection of Association Claims in Construction Defect Legislation
Homeowners and associations should recognize that construction is a complex process and will not result in a product that is perfect, but they should expect that their homes and common elements are fit for their intended purpose, conform to the legally binding representations made by the builder, complies with building code and plans, and are constructed in a manner that is consistent with good workmanship. In recent years, builder and developer advocacy groups have proposed “right-to-cure” legislation to provide homebuilders with certain tactical privileges in connection with construction defect claims that are not available to other litigants. Often, these legislative proposals have unreasonably constrained the ability of community associations to timely represent the interests of both the association and individual owners and effectively seek resolution of construction defect claims.
IDENTIFICATION OF DEFECTS
Construction defect legislation must provide a community association with a meaningful and adequate opportunity to inspect the construction of common property and facilities, and to present any claims it may have to its builder.
THE OPPORTUNITY TO CURE
Builders must be given an opportunity to present a reasonable plan to repair defective construction, and an association should have the opportunity to accept or reject the plan. Nothing should preclude an association from taking emergency measures to correct any defect that poses an immediate health or safety risk or that would cause additional damage to the common elements or homes if not remediated. Associations must have a meaningful right to accept or reject any proposed plan to cure presented by a builder.
HOMEOWNER INVOLVEMENT
Like any other aspect of community association operations, an open communication process that assures the flow of information among the board, committees, and individual homeowners should be established in every community. If the community association brings a claim for construction defects, it has the responsibility to communicate to homeowners the nature of the defects, the remedies sought, the timing of the claims process, and the anticipated fees and expenses to be incurred. When the association has the right to make claims (except during the period of builder control), the governing board, as the elected representative body of all homeowners, must be allowed to make claims without owners’ approval. The prudent governing board will utilize experienced, qualified legal counsel and other experts to verify the validity of a defect claim to help meet both fiduciary and business judgment obligations. Legislation should invalidate as unconscionable any governing document provision proposed by or on behalf of the developer that requires owners’ approval before legal action may be taken for construction defects. Governing boards must have the same discretion as any other corporate board to act on behalf of the corporation. Provisions in governing documents restricting the governing board from taking action do not represent the best interests of owners and are incorporated by developers solely to benefit their interests. Builders should not be able to avoid their obligation to remedy defects by maintaining control of the association beyond the time permitted by law.
PROTECTION OF ATTORNEY CLIENT RELATIONSHIP
A community association’s relationship with its chosen legal counsel should be protected. The association’s legal counsel must be able to consult confidentially with board members, owners, and agents of the community association without the risk that such communications could be required to be produced in discovery proceedings. Such confidential communication must be protected to the same extent that the law provides for any other corporate counsel who communicates with the governing board, employees, constituents, members, and agents of their corporate clients.
Legislation should not limit the choice and ability of a community association to be represented by the legal counsel of its choosing. Legislation should not interfere with the attorney-client relationship by limiting an association’s ability to work with the attorney of its choice in any aspect of a construction defect dispute, including, providing disclosure to homeowners and builders. Furthermore, legislation should not require community associations or their legal counsel to provide disclosures to homeowners or builders irrespective of whether the community association and its legal counsel believe the required disclosure to be true.
ALTERNATIVE DISPUTE RESOLUTION
Community Associations Institute (CAI) supports legislation that encourages alternative dispute resolution (ADR) as an acceptable alternative to construction defect litigation when consent to ADR is truly voluntary and occurs after the dispute arises. Either party should be allowed to request use of ADR mechanisms as long as it is performed in a reasonable timeframe and under terms that are agreeable to all parties. CAI recognizes the need for and supports the use of fair ADR mechanisms, consistent with its adopted Alternative Dispute Resolution Policy. Any legislatively directed ADR process must also provide for the tolling of any statutes of limitation or repose that could jeopardize the association’s claims if the ADR process is unsuccessful.
RIGHT TO BE MADE WHOLE
To enable the association and its homeowners to be in the position they would enjoy if no defects had existed, the association must have the right to make claims for defects affecting common elements or other components for which the association has repair or maintenance responsibilities. Should an association take emergency measures to correct a defect that poses an immediate health or safety risk or remediate defects that would cause additional damage to the common elements or homes if not remediated, such action must not impair or preclude an association’s right to recovery, provided evidence of the defect is preserved. When legal action is taken, the prevailing party should be allowed to recover costs, attorney’s fees, and prejudgment interest.
STATUTES OF LIMITATIONS AND REPOSE
Legislation should provide for reasonable time periods for community associations to bring construction defect claims. Repose periods must account for the fact that latent defects often take years to discover. Limitations periods must give community associations reasonable time after the discovery of defects to investigate defects, work with the builder to informally resolve the dispute, and if necessary to retain legal counsel. Repose periods of less than 10 years after the substantial completion of the community, do not provide a sufficient period for community associations to discover latent defects. Limitations periods less than two years after the discovery of the nature of the defect do not provide community associations with sufficient time to investigate defects, work with the builder to informally resolve the dispute, and to retain legal counsel. The time period in which the board of directors of a community association is under the control of the declarant or other builder entity should not be counted towards any period of limitations or repose. Finally, the general contractor or construction affiliate’s statute of limitation should be coextensive with the statute of limitations during which the association can bring a claim against the developer.
SELF-GOVERNANCE
Legislation should not interfere with community association’s right to self-governance. It has become a common practice for builders to insert provisions in community association governing documents that are designed to shield builders from legal liability. Provisions in governing documents that are designed to shield builders from legal liability or make it more difficult, time-consuming, or expensive to bring a construction defect claim should be statutorily determined to be unconscionable and unenforceable. CAI advocates for legislation consistent with its Government Regulation of Community Associations Policy.
STATE CONCERN
Community associations are usually creatures of state statutes. As such, CAI believes that the regulation of construction defect disputes is a matter of state concern and opposes any efforts to regulate construction defect disputes at the municipal level, as this would create differing and likely conflicting standards in local communities. In turn, this would make it difficult for community associations to comply with differing standards without knowledgeable legal counsel, which could subject community associations to legal claims as a result of their failure to comply with obscure and conflicting municipal ordinances.
RECOMMENDATION
Recognizing that CAI’s diverse membership is affected in different ways by construction defect issues, this policy balances the interests and needs of our members with those of the development community to provide an equitable approach to construction defect legislation and regulations. CAI advocates from every perspective to balance their approaches to issues related to construction defects and embrace the best interests of community associations as a whole.
Approved by the Government & Public Affairs Committee, October 29, 2003
Adopted by the Board of Trustees, October 31, 2003
Approved by the Government & Public Affairs Committee, December 13, 2012
Adopted by the Board of Trustees, January 22, 2013
Approved by the Government & Public Affairs Committee, April 12, 2016
Adopted by the Board of Trustees, May 4, 2016