2007-03-29

CONSTRUCTION DEFECTS OR ROUTINE REPAIRS?

A Protocol Primer for Community Association Property Managers

The construction boom of the 1990s and the early part of this decade has resulted in a number of issues affecting the role of the property manager.  First, and perhaps foremost, the "boom" resulted in the appearance of many new properties subject to the Minnesota Common Interest Ownership Act -- vesting property managers with more work to do and more clients to serve.  At the same time, a secondary result of the fast development and construction of these properties has been, in some cases, the appearance of construction defects.  It is commonly understood that the faster a property is designed and constructed, the higher the likelihood that issues will develop with regard to the structure of the buildings, function of the buildings (e.g. ventilation and mechanic systems), and the ever-lingering issue of water intrusion. 

This article provides guidance to property managers in understanding the legal issues which arise when defects in construction are first reported by the homeowner association or individual owners to the management company.  Very often the association will rely on the manager to preserve their legal rights, provide proper notices and, in some cases, make the decision of when the assistance of an attorney is warranted.

Several significant legal issues arise when the property manager first receives a request for a repair or a complaint from a homeowner regarding a physical issue of the property.  The first consideration which must be made in each case is whether the issue is (1) typical maintenance, (2) unrelated to the construction methods used in building the property (for example, storm damage, vandalism, etc.), or (3) an issue which is possibly the result of poor construction in the creation of the property.  The most difficult distinction to make is that distinction between maintenance and construction defects.  The property manager must ask him or herself whether issues such as leaky windows, warped or failing siding, or roof problems are simply a single-incidence item which needs to be addressed or which was overlooked in original construction, or a reflective of a trend throughout the association.  The reason this evaluation is important is because, in Minnesota, the discovery of a construction defect begins the statute of limitations clock.  For example, if two homeowners report windows which are allowing water into the interior envelope of the building, the property manager must understand that in the event the problem is later determined to be systemic and results in a lawsuit, the builder’s attorney will certainly argue that the first report of the issue begins the statute of limitations clock running.

Statute of Limitations Complexities

The topic of the statute of limitations for construction defects in Minnesota is one of the most difficult areas of law to understand.  It is made even more complex by side agreements between developers and builders and the purchasers of the property.  For example, under the Minnesota Common Interest Ownership Act ("MCIOA"), the association generally has a six-year statute of limitations for making a warranty claim under the Act.  However, very often, builders attempt to contract for a shorter statute of limitations by including in the purchase documents an agreement whereby the homeowner agrees to a two-year statute of limitations rather than the six-year statute of limitations offered in MCIOA.  The reason builders seek to have the statute of limitations reduced to two years (from the date of discovery of the defect) is because construction defect claims for property not subject to MCIOA are statutorily under a two-year statute of limitations (see Minn. Stat. § 541.051) already.  Because of this, when a report is first made by a homeowner to a property manager, there is often confusion as to whether a six-year statute of limitations will apply or a two-year statute of limitations will apply.  Conservative property managers always assume that a two-year time window applies. 

This means that a lawsuit must be commenced against the builder two years of the discovery of the defect.  The discovery of a defect need not include an understanding of the cause of the problem, but as argued by some builders, a mere discovery of the injury itself.  For example, very often attorneys for builders will argue a leaky window constitutes discovery of the defect, even though it can be several months later when the property manager or property owner learns that the leaky window is the result of window failure or improper window installation. 

It is important for property managers to understand that attorneys representing the builder in future litigation will argue that it is not the cause of the problem, rather mere indications of the problem begin the running of the statute of limitations clock.  Prompt contact with an attorney to evaluate any report of a defect can result in significant savings on future litigation costs and, in many cases, can be the difference between preserving a claim and losing a claim.

There are a variety of legal decisions which have held that it is not necessary for the property owner to understand the full extent of the damages to a property in order for the statute of limitations clock to begin to run.  (See, Continental Grain Company v. Fegles Construction Company, Inc., 480 F.2d 790 (1973); Thorpe v. Price Bros. Company, 441 N.W.2d 817 (Minn. Ct. App. 1989); Levee Drive Associates Ltd. v. Borson, 441 N.W.2d 560 (Minn. Ct. App. 1989); but see Wittmer v. Ruegemer, 402 N.W.2d 187 (Minn. Ct. App. 1987).)

Put it in Writing and Watch the Clock!

When reports of a consistent or potentially widespread problem come to the attention of the property manager, the first step is to report it immediately to the builder in writing.  It is a serious error to presume a phone call will satisfy the statutory requirements for notifying the builder.  Very often property managers believe that if they call the builder and the builder meets the manager or some representative of the homeowner association at the property to examine the issue that proper notice to the builder has occurred.  This is false.  In the event the homeowner association ever decides to go forward with a Minnesota New Home Statutory Warranty claim found under Minn. Stat. § 327A.01, et seq., the association will be required to show that written notice was provided to the builder within six months of the discovery date of the problem.  Written notification of the issue to the builder removes that issue and the cost of attorneys for arguing that issue in future litigation.

Many property managers are becoming aware of the written notice requirement for a new home warranty claim under Minn. Stat. § 326A.01, et seq.  Because of the increasing awareness of the written notice requirement, property managers have begun to consistently provide written notice of defects within the required time period.  This, however, has created a new problem for homeowner associations which, theoretically, could ultimately lead to accusations against the property manager of breach of the property manager’s duties. 

A typical scenario is as follows.  The property manager receives various reports throughout the first year of existence of the property and provides a written notice to the builder each time a defect is reported.  The builder responds in various ways, including repairing some items and denying the applicability of a warranty to other reports.  Several years pass and it is ultimately discovered that a systemic problem exists with the buildings at the association.  The written notice provided by the property manager in the first instance will be used against the association by the builder's attorneys in any subsequent litigation.  They will argue that these notices are per se evidence of "discovery" of the defect and, therefore, the written notices constitute, at a minimum, the date on which the statute of limitations clock begins to run. 

It is a common and serious error for property managers to provide written notice to builders of a defect and then fail to either resolve the issue with the builder or commence a lawsuit within two years of the discovery of the defect which was reported.  Any property manager who receives a report of a defect should use a calendaring system setting down the two-year anniversary of the date of discovery of the problem.  Several weeks prior to that anniversary, a reminder should be set up that a consultation with an attorney is necessary to make a determination as to (1) whether the statute of limitations clock is ticking, (2) whether a six-year statute of limitations or a two-year statute of limitations applies, and (3) whether the builder has responded sufficiently so as to make a legal claim unwarranted or unnecessary.  The only way that a property manager can be assured that the statute of limitations clock has stopped running, however, is the commencement of a lawsuit.  Obviously, the commencement of a lawsuit is not necessary if the builder has come forward and, without charge, fixed the claimed defects.

Another issue which confuses the question as to whether a six-year (from date of discovery) statute of limitations or two-year (from date of discovery) statute of limitations applies to a homeowner association occurs when some homeowners or even all homeowners have been provided with a contract decreasing the statute of limitations from six to two years but no such amendment has been executed by the association itself.  This question is also addressed as follows:

Does the fact that an individual homeowner reduced his or her statute of limitations from six to two years impact the homeowner association's rights (which under statute is six years) to commence an action for breach of warranty under MCIOA?

As of the date of this article, that question remains undecided.  Certainly, in the event of litigation, the association’s attorney should and will argue that a six-year statute of limitations applies in this context.  It is, however, dangerous for a property manager to rely on a successful outcome of this issue.  The argument can be made and should be made when needed, but a property manager who has received a report of a defect should consult with an attorney well in advance of the two-year anniversary of that report so as to avoid the argument altogether.

Warranties Available to Homeowner Associations

There are two separate warranties of which homeowner associations may take advantage in the event it becomes necessary to litigate a construction defect.[1]  The most attractive warranties for a homeowner association are found under Minn. Stat. § 515B.  The attractiveness of these warranties is due to the fact that a successful prosecution of a claim under some of the subsections of this statue can result in an award of attorneys’ fees for the association. 

The implied warranties under § 515B (MCIOA) are generally expressed as (1) a warranty that the property is suitable for ordinary uses of real estate of its type, (2) that the construction will be (i) free from defective materials and (ii) constructed within applicable law according to sound engineering and construction standards and in a workmanlike manner, and (3) that the property will be in as good condition at the time of delivery of possession as it was at the time of contracting (between the homeowner/buyer and the developer/declarant).

The Minnesota New Home Warranty found at Minn. Stat. § 327A.02 applies not only to MCIOA but non-MCIOA properties as well.  This warranty, often known as the ten-year warranty, provides reduced protection over specific periods of time.  Warranties offered to all new homeowners from the date of occupancy of the property are as follows: 

During the one-year period from and after the warranty date, the dwelling shall be free from defects caused by faulty workmanship and defective materials due to non-compliance with building standards.

During the two-year period from and after the warranty date, the dwelling shall be free from defects caused by faulty installation of plumbing, electrical heating, cooling systems; and

During the ten-year period from and after the warranty date, the dwelling shall be free from major construction defects.

Very often, when presented with a warranty claim, developers or builders of the property will respond that the property is “out of warranty.”  This response often comes despite the fact that the property is less than ten-years old.  If a property manager is met with this response from the builder, two pieces of information should be obtained:  (1) to which warranty the builder is referring (whether the MCIOA warranty, the § 327A.02 warranty, or an express warranty offered in the purchase documents), and (2) the property manager should seek a written statement from the builder/developer regarding their position on the applicable warranty. 

The idea that it is good practice to seek a written statement from the builder with regard to this issue does not have the black letter law effect of the written document requirement for providing notice to a builder, but it can be useful in determining the date of breach of warranty by the builder and should immediately alert the property manager that statute of limitations issues have arisen (i.e., the clock is likely running).

Investigation Protocol

The complexities with understanding the statute of limitations and the statute of repose in Minnesota, as well as the variety of potential applicable warranties, provide a significant burden for the property manager of a newer property faced with potential construction defect issues.  Each management company should develop a protocol for handling these claims so as not to inadvertently allow a homeowner association’s claim to run beyond the statute of limitations while simultaneously pursuing and properly investigating all of the issues.  Mistakes that can be made in the early stages of an investigation are many. 

For example, one common error is for the property manager, upon receipt of a rejection of a warranty claim from the builder, to go forward retaining a contractor to repair said issue.  Oftentimes, a very similar issue will come up a short while later, and that issue will also be addressed by a contractor.  After the issue has arisen three or four times and has been repaired each time at the expense of the homeowner association, enough dissatisfaction with the expense will arise whereby the possibility of a construction claim will be reviewed. 

It should be noted that without proper notice to the original builder regarding the repairs which are going forward (often called spoliation notice), it may be very difficult to hold the builder responsible for the costs related thereto in the future.  If there is any dispute as to which party is liable for the cost of the repair of damaged property at the homeowner association, the builder, even if they have rejected a demand for a repair, should be provided notice and an opportunity to inspect both prior and during construction and repair of the issue.  That way, in the event the issue arises again and it is determined that litigation might be prudent, the builder will be unable to argue that there has been destruction of evidence.

The property manager's protocol for investigating and documenting construction defects for the homeowner association should be developed with the assistance of an experienced construction defect attorney. The attorney can identify all of the potential litigation and investigation issues, and provide guidance on selecting the appropriate construction expert(s) to analyze issues as they arise.  The protocol must also contain a strict reporting system so that timeframes are managed and the statute of limitations does not pass.

From a general perspective, the property manager’s protocol for investigating, documenting and handling an initial construction defect claim should include:

1.      Written notice to the builder of the defect;

2.      An investigation throughout the association regarding whether or not the problem is widespread or limited in nature;

3.      Upon discovery of a problem which is widespread, or even limited but significant, consultation with an appropriate construction expert, which typically requires the services of a licensed professional structural engineer or an architect.

4.      Contacting a building contractor who can provide a bid regarding the cost of repairs;

5.      Consultation with a construction defect attorney regarding other claims related to the property which may exist in addition to the specific defects which are the subject of the engineer’s evaluation (i.e., if there is a roofing issue while simultaneously there is a window issue, they should be treated as one issue for purposes of evaluating time limits and the association’s ability to make a legal claim); and

6.      A conference with an attorney to provide an opinion as to the time allowance under the statute of limitations for the property manager/homeowner association client.

If each property management company consults with an attorney and creates a protocol for handling these investigations, very often additional legal expenses will be avoided.  For example, legal expenses regarding litigating whether or not the statute of limitations has passed will never be necessary if the first date of discovery is documented and all legal claims are preserved within two years from that date.  Sometimes, the builder’s insurers will push litigation longer solely due to a statute of limitations issue, even when the defects are obvious, such as variations and violations of building codes.

For any property manager who has been through the investigation and litigation process in a construction defect case related to a homeowner association, the fact that many pitfalls exist is well known.  Lack of understanding related to the timelines of applicable warranties and preservation of evidence issues will often be more costly than a simple consultation with a professional who has in-depth knowledge on the subject.  While these issues are difficult for property managers, development of the protocol suggested above and an acknowledgement of the deadlines which apply will serve homeowner associations much better than piecemeal attention to homeowner complaints.

Thus, property managers must ask themselves three simple questions when a report of a defect comes in:

1.      Is the statute of limitations clock ticking?

2.      Has the builder been properly notified?

3.      When is the appropriate time to contact professionals, such as engineers and attorneys?

Ultimately, knowledge of these subjects on the part of the property manager will result in greater and better service to homeowner associations and, in the long run, better management of costs and expenses on behalf of their clients.

[1] This is in addition to claims for negligence, breach of contract, or other statutory and common law claims.