877-879-8776
Washington D.C.

Washington D.C.

Protect valuable property rights in the event of construction defects and the resulting damage to your condominium or townhome project.

Survivor’s Guide to Construction Defect Resolution in the District of Columbia

The lawyers at Levin Law Group LLP have helped a wide range of condominium and townhome associations to resolve construction defect claims with the developers of their projects.

In the course of our work we have come to appreciate the following:

  1. Seriously defective construction is unfortunately common;
  2. It is often exceedingly expensive to correct;
  3. If the repair of the defective construction is unreasonably delayed, the physical damage caused by the defective construction significantly increases and so does the cost of the corrective work; and
  4. It is common for defects to remain hidden until long after serious damage has already taken place inside the building envelope and valuable association rights already have been lost or otherwise compromised.

Over the years, we have found that associations are not always aware of their rights when their projects are impacted by defective construction. Associations may not know how to remedy the defective conditions, and in particular, how to compel the project’s developer to address them.

The purpose of this guide is to help association managers and boards understand the construction defect resolution process and how to take full advantage of the association’s legal rights. However, this book is not intended to constitute legal advice to the reader and should not be relied on as a substitute for consulting a lawyer licensed to practice law in the jurisdiction where the legal advice is sought.
Moreover, the legal advice should be relied on only if it has been given after all the relevant facts are disclosed to and considered by the lawyer from whom the legal advice is being sought.


Overview

EVALUATING CONSTRUCTION QUALITY

1. The Association’s Responsibilities

Typically, a condominium association has the obligation to maintain common areas. Even though damage occurs within a unit, if the cause is a common area defect, the association has a duty to deal with the problem.

Even where the building exterior is part of the unit itself and not considered part of the common area, as in many associations not governed by the Condominium Act, the association still may have a duty to maintain roofs, siding and other building envelope components. In such a situation, an association may have the duty to deal with building envelope problems even though the building envelope may not be part of any common area.

Association board delay in addressing defects in parts of a project that the association has a duty to maintain will result in increased physical damage, a more costly fix, and the potential loss of valuable rights.

2. Top 10 Construction Defects

Among the defects often found in residential projects are poor flashing, window defects, inadequate ventilation of crawl spaces and attics, improperly sloped roofs, decks and balconies, improperly installed plumbing systems, excessive sound transmission between units, poorly installed waterproofing, and inadequate soil preparation.

3. Why Construction Defects Are So Common

In many situations, the builder’s objective is to complete the project as quickly as possible and to “pass inspection” by the building department. If the defect isn’t caught by the building inspector, it often doesn’t get corrected. And building inspectors may miss or ignore a lot of defects. That is why the fact that construction may have been approved by a building inspector does not ensure that the construction is Code compliant or done in a good and workmanlike manner.

4. Working with the Developer

An Association will normally want to try to work with a developer to resolve claims. However, a developer may want to minimize the scope of repairs and may offer temporary “Band-Aid” fixes which merely disguise the problems rather than solve them. Counsel can advise an association during the negotiation process with the developer. Counsel will help the board to understand the association’s rights, the time limits on the association’s ability to exercise those rights, and the importance of obtaining a fix that adequately addresses the problems.

5. Why There is a Need for Professional Evaluation of a Project’s Construction

Frequently, defects remain hidden inside a building envelope for many years. Often, the result is that by the time they are discovered, substantial damage already has occurred and the rights of an association and its unit owners may already have expired.

To avoid this unfortunate situation, a board should hire a qualified professional to evaluate the construction quality of the project while the enforcement period for any statutory or other rights is still in effect.

The evaluation should be made by an engineer or architect or by a contractor with specialized training and experience in evaluating construction quality. This person should be selected by the Board and not by the developer. And the evaluation should include a look inside the building envelope to see how well the building envelope system is doing in keeping water out and in getting water that has entered into the building envelope to exit the building.

A Board should not make its decision on who to hire to perform the evaluation based solely on cost. Most qualified professionals charge about the same hourly rate. A lower bid may mean lower qualifications or a less thorough investigation and an insufficiently detailed report of findings.

ASSOCIATION AND HOMEOWNER RIGHTS

1. Express Warranties

Express warranties are warranties voluntarily and specifically provided by a developer in its sales agreements. They are of some value, but their value is often limited. The reason is that express warranties are typically for a short duration, and the unit owner or association is usually required to take formal action to enforce the warranty before the warranty runs out. Often the warranty period is only one year. But serious defects may remain hidden and not become obvious until several years after unit sales. Thus, by the time an association board or individual homeowners realize there is a problem, express warranty rights may already have run out.

2. Statutory Warranties

A. Bonding Company Liability Under the Condominium Act

Under the Condominium Act there is a statutory warranty against structural defects, and structural defects are broadly defined. The warranty period for the statutory warranty against structural defects is two years. For common area defects, that warranty period usually starts to run on sale of the first unit. For structural defects within the unit themselves, the warranty period starts to run separately on the sale of each unit.

Before sale of any units, the developer must post with the District a performance bond or other security in the amount of 10% of the estimated cost of constructing the condominium, to be available to satisfy the developer’s warranty liability under the Act.

To take advantage of this bond or other security, the association (for common area structural defects) or an owner (for structural defects within a unit) must provide the developer, the surety and the District with written notice of the structural defect within the applicable two year warranty period.

The notice must include an engineer’s report describing in detail the defects and their scope along with three detailed contractor estimates describing the work to be performed and the estimated cost of that work.

An agency within the District will determine if the notice of claim is timely and if the defects are structural defects and if so, the scope of those defects. If the developer refuses to do the work required, the agency will hire a contractor to perform the work the Agency determines needs to be done, and will call upon the surety to supply the funds to pay for that work up to the amount of the bond.

If the claimant or surety disputes the Agency’s determination, that party can file suit in the Superior Court to overturn the Agency’s determination.

The Act does not describe what happens if the bond amount is insufficient to correct the structural defects.

In many situations the bond provisions of the Act will not provide an adequate remedy if the cost of repair exceeds the bond amount, the defect is determined not to be a structural defect, or the defect is initially hidden and as a result the notice of claim is not filed within the two year warranty period.

B. Condo Act Warranty

As noted in the preceding section, under the Condominium Act, there is a two year warranty against structural defects. The warranty applies to newly constructed condo projects, and in conversion projects to the extent that a structural defect arises out of work done by the converter. An agency of the District will enforce the warranty, but only to the extent of the surety bond posted to support the warranty, and the bond amount is limited to 10% of the estimated cost of construction. However, to invoke the Agency’s authority to apply the bond to fund the cost to repair the structural defect, a detailed notice of claim must be filed with the Agency within the two year warranty period.

If this is not done, or the bond amount is insufficient to fund the needed repair cost, the claimant can file suit against the developer directly for the full amount of the repair cost. But the claimant must do so within five years from commencement of the warranty period.

3. Common Law Implied Warranties

If the association or its unit owners fail to take legal action within five years after commencement of the warranty term, they lose the right to enforce the Condominium Act warranty against structural defects.

However, while the DC courts have not yet clearly decided the issue, there may also be a “common law implied warranty of habitability”. If so, structural defects may result in a breach of that common law warranty. As noted above, it is unclear whether the District courts will apply the common law implied warranty of habitability to the sale of condominium units. So we don’t know whether such a warranty can be disclaimed by the developer, and if so, under what circumstances.

If the District Courts do apply a common law warranty of habitability to newly constructed condo projects and/or to conversion projects, the applicable statute of limitations is likely to be three years. But that three year period is likely to be measured from when the warranty breach was or should have been discovered rather than from when the warranty went into effect.

Given the fact that there is a Condo Act warranty, a claim based on a common law implied warranty would probably be worth making only if the defects were latent and therefore not discovered in time to bring an action within the limitations period under the Condo Act. That limitation period is five years from commencement of the warranty, irrespective of when the warranty breach is discovered.

4. Negligence Liability

The Condo Act warranty, and any common law warranty that might apply, would permit an association or its unit owners to take legal action against the developer but not against the contractors who actually performed the construction.

In order to impose liability on the contractors, the claimant would have to sue them on the basis that their negligence was what created the defects. However, the “economic loss rule”, if applied, limits and may totally eliminate negligence liability in connection with the construction of real estate.

The District appellate court ruled in 2014 that it was adopting the economic loss rule for negligence claims. However, we don’t yet know how the courts will interpret and apply the economic loss rule in the context of a claim for negligent construction. So we don’t yet know what impact the court’s adoption of the economic loss rule will have on the ability to sue a contractor or the developer for negligent construction. However, the economic loss rule should have no impact on a claimant’s right to proceed against a developer based on the Condo Act warranty or any applicable common law implied warranty.
To be noted is that any negligence liability claim would be subject to a three year statute of limitations. However, that three year period would not start to run until the claimant knew or should have known of the defect.

And if the economic loss rule does not bar the claim, a negligent construction claim may be possible against not only the contractors but also the developer. If so, even if a Condo Act warranty claim is lost because it was not filed within five years from the warranty inception date, if the defect was latent, a claimant may still be able to make a claim against the developer on a negligence theory, provided of course that legal action is taken within three years from the date the defect was or should have been discovered.

5. Liability Under the Consumer Protection Procedures Act

Under the CPPA, a developer may be liable to an association and/or its members for failing to disclose significant defects at the time units were sold, regardless of whether the developer actually knew of those defects.

There would be many advantages to a claimant in including a CPPA claim as part of any lawsuit against the developer.

A. There is a three year statute of limitations applicable to a CPPA claim, but the statute doesn’t start to run until “discovery” of the defects.
B. The CPPA opens the door to a possible recovery of treble damages.

C. Under the CPPA, a punitive damage award may also be possible.

D. Under the CPPA, a prevailing plaintiff may be entitled to an attorney fee award. Such an award normally is not possible under a Condo Act warranty claim, a common law implied warranty claim or a negligence claim.


 

THE CLAIMS RESOLUTION PROCESS

1. Pre-Suit Notice of Claim

There is no specific requirement that a claimant provide a developer with notice of a construction defect claim before filing an action based on that claim. However, there are reasons why doing so may be advisable, and in certain circumstances, such pre-suit notice may be necessary.

2. Is It Really Necessary to File a Lawsuit?

Without a lawsuit, often it is difficult to resolve a defect claim where the cost of repair is substantial. The developer and its contractors may not be willing or able to make the necessary repairs or to fund the cost of repairs to be made by the association or homeowner. Also, the developer and its contractors may be unable to agree on how the repair costs should be allocated between them.

Once a lawsuit is served, insurers for the developer and its contractors may have a duty to attempt to resolve the claim against their insureds. That duty, plus the prospect of a jury trial down the road if the claim is not resolved, usually result in a settlement of the claims at some point prior to the trial date. Thus, a lawsuit should simply be viewed as an often necessary part of the dispute resolution process.

3. Association Standing to Sue

Under the Condo Act, a condominium association automatically has standing to sue for defective construction unless the association’s governing documents provide otherwise.

4. Limitations on a Board’s Authority to Initiate Legal Action on Behalf of the Association

A provision in the Association’s governing documents limiting a board’s right to initiate legal action by the association against the developer would probably violate the Condominium Act and would therefore be unenforceable unless that limitation applied “across the board” to initiating legal action against anyone.

5. Arbitration Requirements

Developers often include in their sales agreements provisions requiring arbitration of claims by purchasers. Before taking legal action, a claimant should review all relevant documents to determine if there is a potentially applicable arbitration requirement, and if so, what it provides.

6. Mediation

Most lawsuits are resolved by mediation sometime after suit is filed. In a mediation, the mediator acts as a “facilitator”, but has no authority to decide anything. However, a skillful mediator is usually successful in persuading the parties to come to an agreement that resolves the case.

7. What If the Developer Goes Out of Business?

Developer entities frequently go out of business. However, their insurers rarely do so. If the developer had liability insurance, any insurance coverage for the developer’s liability would still apply even though the developer may no longer be in business.

8. Claims Against a Dissolved Developer

If a developer entity is dissolved, creditors who receive notice of the dissolution will have a limited time in which to make a claim, usually 120 days. And if the claim is rejected, they must file suit within 90 days after rejection.

If notice of dissolution is not given to the creditor, but the dissolved developer entity publishes a notice of dissolution in a newspaper, the creditor has three years from publication in which to sue, unless of course a suit is earlier barred by any applicable statutes of limitations.

9. What If the Developer Goes Bankrupt?

A developer’s bankruptcy will impact how a claim against that developer will be resolved. However, a developer’s bankruptcy usually does not affect an insurer’s liability arising out of a claim covered by that insurer’s policy naming the developer as an insured.

CONCLUSION

Associations and their unit owners usually have substantial statutory or other warranty rights protecting them against defective construction. Associations and their unit owners may also have the right to make a claim against the developer under the Consumer Protection Practices Act. They may also have the right to make a negligence claim against the developer and/or its contractors. However, there are time limits within which the association or its unit owners must take legal action to enforce those rights.

Association boards or homeowners should seek legal advice from an attorney with substantial experience in the resolution of construction defect claims. That attorney can explain those rights as they apply to that particular association or its homeowners, any applicable time limits, and how the board or homeowners may want to proceed. That attorney may also be willing to pursue a claim on a contingent fee basis. In that event, the attorney fee may be limited to a percentage of the recovery. Thus, if there was no recovery, there would be no attorney fee.

Richard H. Levin, Director of Client Relations
January, 2017