Despite the recent economic downturn, condominium development continues at levels substantially higher than those seen during the 1990s. Many areas have been revitalized through residential construction development, which flourishes because of the attractiveness of multi-ownership developments, particularly in areas where land is scarce and expensive. In addition, an increasing number of downtown areas and suburbs have turned to mixed-use facilities, combining retail and entertainment with integrated living space.
Although the condominium market may provide additional work for you, condominiums are unique in a number of ways that may pose additional risks. These risks, including increased prevalence and size of litigation and higher insurance premiums, have caused a number of contractors to abandon the condominium roofing business. However, the trend of states enacting construction defect litigation applicable to condominiums has helped alleviate some of that risk.
By better understanding the condominium market's risks and how to reduce or mitigate those risks, you can position yourself to take advantage of the opportunities offered by the condominium market.
Owners and associations
Disappointed expectations of unit owners or homeowners associations frequently are at the root of condominium litigation. Unit owners are not involved with condominium design or construction and frequently purchase units before a building is finished. Developers may make inflated claims about the qualities condominiums will have upon completion, leading to disappointed unit owners if the condominiums do not meet the developer's representations.
Because condominium developers frequently are single-purpose limited liability companies formed for the sole purpose of constructing one project, owners may try to pursue contractors directly if they are unsatisfied with the work.
A homeowners association is composed of people who decide to seek office, and those people may have little or no experience with building ownership or construction. The association has a duty to exercise care in maintaining common areas and may be sued by unit owners if it fails to maintain common areas in a manner that protects unit owners against foreseeable injury or property damage.
A unit owner's right to maintain a negligence action against a homeowners association first was recognized in the 1971 landmark case White v. Cox in which a California court allowed a unit owner to sue the association for negligence after he tripped over a sprinkler system maintained in the common area.
These rights extend not only to personal injuries but also to property damage. Unit owners seeking compensation for property damage caused by a homeowners association's failure to properly maintain common areas have brought numerous successful actions against homeowners associations.
Because of this exposure, most homeowners associations take their obligation to maintain common areas, including roof systems, seriously and are quick to request repairs, upgrades or replacements when they believe roof systems are not performing adequately. For these same reasons (and because board members are unit owners), homeowners associations tend to act aggressively when they are not satisfied with roof system performance or a roofing contractor's work.
Commercial roofing contractors, who are used to dealing with business owners, sometimes are caught off-guard by the emotional reaction of homeowners associations. Although a business owner is likely to treat a leaky roof as an annoyance and commercial expense, the business owner would react much differently if the leak occurred in his or her home.
Condominiums may have tens or even hundreds of homeowners. If multiple owners are affected by roof leaks, they begin to exchange stories; news of the leaks spreads; and demands are made that the homeowners association address the problem immediately. Board members may suffer leaks in their units and be highly motivated by their personal interests and the threat of potential litigation against the homeowners association to aggressively pursue the contractor, developer or design professional.
Finally, managing and settling claims can be difficult because of the numerous parties involved. Homeowners associations typically act on behalf of all unit owners when there is damage or foreseeable risk that extends to all members, such as risk of a roof blow-off, and may pursue recovery for damages to common areas.
However, if multiple units are damaged by water intrusion, the number of parties may expand quickly as unit owners contact insurance companies and begin undertaking repairs within their own units, requiring a contractor to negotiate with multiple owners and insurance companies in addition to the homeowners association to resolve the damages.
Insurance coverage
Because of the sizeable claims often associated with condominium litigation, many insurers broadly exclude residential coverage from standard commercial general liability policies. Depending on a policy's definitions, you may not have coverage for condominium work unless a special endorsement is obtained. Insurers may charge a hefty premium for this coverage because of the widely held belief that condominium work is more risky than standard commercial work. Such an evaluation is based on, among other things, the increased prevalence of claims on condominium projects and the likelihood that claims will be substantial.
According to insurers, condominium work is considered particularly risky in certain states, including Arizona, California, Colorado, Florida, Nevada, North Carolina, South Carolina, Texas and Washington. The reasons for this vary but may include a state's climate, prevalence of oceanfront condominiums, resort locations, and organization or presence of an experienced and aggressive bar of attorneys specializing in condominium litigation.
If you intend to perform roofing work on a condominium, have detailed conversations with your insurance broker or agent about the risk profile of the area in which the condominium is located and carefully review your insurance policies before signing a contract or otherwise committing to perform work to ensure satisfactory coverage is in place.
Warranties
Because condominiums fall within a class of residential construction, condominium construction may give rise to additional implied or statutory warranties beyond those applicable to commercial projects. Disclaiming these warranties may be ineffective as a matter of law or may require use of specific, statutorily mandated language.
As their name suggests, implied warranties arise by operation of state law without any specific contract language required.
In Florida, for example, roofing contractors undertake statutory warranties of fitness of work performed and materials furnished. Section 718.203 of the Florida statutes imposes an implied three-year warranty of fitness of roof systems running from the completion date.
Similarly, the Uniform Condominium Act creates warranties on condominium projects. Section 4-114 of the Uniform Condominium Act states a condominium's unit and common elements are suitable for the ordinary uses of real estate of its type and that any improvements made or contracted for will be free from defective materials; constructed according to sound engineering and construction standards; constructed in a workmanlike manner; and constructed in compliance with all laws.
The Uniform Condominium Act, drafted in 1977 and amended in 1980, is a sample law proposed by the National Conference of Commissioners on Uniform State Laws and intended to be used by states as a template when drafting legislation governing condominiums. Endorsed by the American Bar Association, 15 states (Alabama, Arizona, Louisiana, Maine, Minnesota, Missouri, Nebraska, New Hampshire, New Mexico, North Carolina, Pennsylvania, Rhode Island, Texas, Virginia and Washington) have adopted the Uniform Condominium Act or a substantial portion of it.
Section 4-113 of the act further provides that express warranties are made by any seller of a unit if relied on by the purchaser and are created by any of the following:
Under this section, words such as "warranty" or "guarantee" are not required to create an express warranty nor is a specific intention to make a warranty required. Therefore, marketing brochures, architectural plans and models could create a warranty of quality to unit purchasers. Similarly, value engineering could raise the possibility of a claim by disappointed purchasers who expected a more expensive system or additional components. Given the harshness of this statutory language, proceed carefully when performing any work that could raise one of the described warranties.
A unit owner also may have a cause of action for breach of the "implied warranty of habitability" if there is a deviation from fundamental aspects of the applicable building code. Although this warranty usually runs only from the builder or developer to the original purchaser, a developer sued by an owner may, in turn, assert a cause of action against a roofing contractor.
Typically, to succeed with such a claim, an original purchaser must show his or her condominium unit contained a latent defect; the defect manifested itself to the purchaser only after its purchase; the defect was caused by improper design, material or workmanship; and the defect created a substantial question of safety or made the condominium unit unfit for human habitation.
Right to cure legislation
Condominium defect claims often are multimillion dollar claims partly because of the number of units and potential for systemic defects. A history of high-dollar litigation and large settlements has attracted plaintiff-oriented law firms that specialize in representing condominium associations, often on a contingent-fee basis. Some firms not only offer free presentations to homeowners associations regarding their potential rights against contractors but also provide licensed contractors free of charge to examine condominiums and look for defects that could be the subject of litigation.
Condominium defect litigation has exploded in several states, clogging the court systems with complex construction disputes. In response, more than half the states have enacted "construction defect" or "right to cure" legislation, which creates an alternative method to resolve construction disputes.
According to this legislation, before filing suit, an owner submits written notice of a claim to the contractor and provides the contractor with the opportunity to resolve the claim without litigation. The goal is to reduce the need for litigation while adequately protecting homeowner rights. A majority of construction defect statutes specifically cover condominiums.
Many construction defect laws have been enacted in response to lobbying efforts by homebuilder, contractor and design professional associations. They are drafted in a manner not only requiring notice of the alleged construction defect in advance of litigation but also ensuring a contractor has a reasonable opportunity to investigate and test the disputed work before offering an owner money and/or a proposed scope of repair work.
In some states, certain notice provisions must be included in the contract for the construction defect legislation to apply. Accordingly, it is essential you become intimately familiar with the construction defect statutes in the states in which you intend to perform condominium work.
About half the states require a pre-construction "contract notice" provision whereby a contractor provides written notice to an owner of the construction defect statute's existence by referencing it in the contract. The notice usually is required to include specific wording and may be required to appear on a separate page or in capital letters and bold font to meet conspicuousness requirements.
Failure to include the required notice in the contract usually denies a contractor the right to invoke the construction defect statute if a dispute arises. Note that construction defect statutes—including the language required to invoke a statute—vary greatly among states.
All construction defect statutes require an owner to provide written notice of the claim to a contractor as a precondition to filing suit, describing the alleged defect with reasonable particularity. An owner also may be required to provide the contractor with any evidence that depicts the construction defect's nature and cause, including expert reports, photographs and videotapes.
Typically, upon receipt of such a notice, you will have the opportunity to offer to inspect the roof within a specific time, settle the claim without inspection, or dispute the claim and defend a lawsuit. If the owner rejects a reasonable settlement offer, whether made without inspection or following inspection, the owner may be prohibited from recovering an amount that exceeds the value of that offer defined as the fair market value of the proposed work or the amount of a proposed monetary settlement.
Even if a state in which condominium work is being performed does not have a construction defect statute, you can create a right to cure by incorporating notice and right to cure provisions into contracts. Given the risk factors involved and the likelihood condominium defect claims will be sizeable, you should make every effort to provide for similar pre-claim procedures of written notice and reasonable opportunity to inspect and cure an alleged defect.
Liening a condominium
The specialized nature of condominiums has significant implications for you if you seek to lien a property. As with commercial projects, an unpaid contractor has a statutory right to a mechanic's lien, but the contractor must strictly follow certain procedures to assert that lien.
In most states and under the Uniform Condominium Act, a single blanket lien against all condominium units is permitted if the work performed benefits all unit owners. Roofing work, even if it is to repair only one section of a roof system, improves the common property and is interpreted as benefiting all unit owners.
However, though only one lien needs to be filed, the lien is treated as numerous small liens applied to each unit. An individual unit owner typically is able to remove his or her portion of the lien by paying a prorated share.
So if you place a $100,000 lien on a 20-unit condominium, the owner of unit 17, for example, can pay $5,000 to have the lien on his or her unit removed—assuming each unit owner pays an equal share of the common expenses of the condominium—and the lien is reduced to $95,000. This pro-rata apportionment generally benefits unit owners and lien holders. The looming threat of foreclosure as a result of the homeowners association's failure to pay the balance due is likely to lead unit owners to demand the association pay the contractor or at least post a lien transfer bond to protect the unit owners.
Alternatively, some unit owners may choose to pay their share to free their unit from the lien, and the contractor receives at least some of its outstanding balance.
The notice procedures for liening a condominium vary among states but generally require notice be given to owners. However, it is not always clear whether "owner" means all unit owners or only the homeowners association.
In the case of work performed on common areas, you may choose to send a notice to the owner of every unit in the condominium even if you are not required to do so. Providing such notice is more likely to result in the owners pressuring the homeowners association to resolve the lien. Failure to provide notice to the required parties and in the required manner may be fatal to the lien.
In Southern Management Corp. v. Kevin Willes Construction Co., the lien claimant's notice of intent to establish a lien only was sent to the development's property management company. The notice was found insufficient because the contractor failed to comply with Maryland's requirement that all unit owners be given notice before a lien can be established against a condominium and, therefore, the lien was void.
States also differ regarding whether a lien claimant is required to apportion the lien at the time of filing though most states require apportionment on a pro-rata basis. In California, for example, a blanket lien against the common areas and individual units generally is permitted, but if a contractor performs work under a single contract, he or she is required to notify all unit owners of the fraction of the total amount claimed that is attributable to each unit.
In ECC Construction Inc. v. Ganson, a contractor contracted with a homeowners association to repair damage done to the units and common areas in a California condominium after an earthquake. None of the homeowners signed the contract individually. The contractor filed a lien of more than $2 million against the common areas and against the individual homeowners' units but did not specify the amount attributable to each owner. The court found the lien unenforceable because though a blanket lien against the entire complex was permitted, the contractor was required to apportion out the cost of improvements attributable to each unit owner.
In many states where apportionment is required, a lien claim will meet the apportionment requirement if it simply claims a lien "on all of the units in the building according to their respective percentage shares of the common expenses of the condominium." A lien claimant typically is not required to list in the lien all the units or unit owners and their respective shares in the lien. In some jurisdictions, such as Illinois, a lien claimant is not required to apportion a claim among the units.
In First Federal Savings & Loan Association of Chicago v. Connelly, a contractor delivered and installed carpeting in four buildings pursuant to a single contract. The contractor filed a lien that did not apportion the total contract price among the four buildings based on the materials and labor furnished to each. Upholding the lien, the court observed the language of Illinois' lien law explicitly authorizes the filing of liens against multiple parcels but does not specifically require an apportionment of the total claim among the specific parcels.
As is generally the case with lien laws, to ensure lien rights are not lost because of failure to comply with a particular requirement, you must be familiar with the lien statutes in the states in which you work. You also should seek to file liens as early as possible. If a unit is sold after work is complete but before a lien is filed, the new purchaser may be considered a "bona fide purchaser" whose unit cannot be subjected to the lien because of his or her lack of knowledge of the lien at the time the property was purchased.
In general, liening a condominium imposes a greater burden on you, who not only must track which of the tens or hundreds of unit owners have and have not paid their pro-rata shares but also must comply with more burdensome notice requirements. In addition, if a lien is not paid, you face the task of foreclosing upon multiple units. Nonetheless, liens remain important, effective tools for obtaining payment, and every effort should be made to ensure strict compliance with lien laws.
Proceed with caution
Although undertaking condominium roofing work may be riskier than other jobs of similar size, recent efforts by state legislatures have reduced the risk of this work in many states through enactment of right to cure legislation. You may further reduce that risk by better understanding your rights and remedies, especially as they relate to lien requirements and right to cure legislation, and by appreciating condominiums' unique nature instead of treating them as any other job.
When risk is managed properly, the condominium market continues to offer a substantial amount of new construction and repair work for roofing contractors.
David Gersh is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
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