Quail Hollow — Residential Builders Get Some Help

By Harlan E. Jones

The Oregon Court of Appeals recently changed the landscape of litigation involving defects in the construction of multi-unit residences. Previously, plaintiffs' lawyers took it for granted that they could bring claims for construction defects as to both individual owners' property and homeowner association ("HOA") property by having the HOA serve as the sole plaintiff. In effect, they had to convince only a few people on the board of an HOA in order to sue a developer, alleging defects in all the individual townhouses or detached single family residences of an entire subdivision. That has been changed by a case called Quail Hollow West Owners Association v. Brownstone Quail Hollow LLC, 2006 WL 1630303 (2006). The case also applies to condominium litigation, but somewhat differently and less clearly.

The Quail Hollow court decided that an HOA has no right to sue a developer for construction defects relating to the individual units or lots of HOA members. The HOA itself cannot bring such actions on behalf of or in the place of the individual owners. Quail Hollow implicates more than just lawsuits. It also affects other areas of concern for a developer, such as drafting a declaration of covenants, conditions, and restrictions (CCRs) for a project and responding to statutory notices of construction defects.

Litigation

Quail Hollow makes it clear that when a developer gets sued, every unit owner who alleges construction defects must be a party to the lawsuit. (HOA lawyers have suggested that they may be able to get around this requirement by having individual owners assign their claims to the HOA, or in some other way. Only time and future court decisions will reveal whether that is true.)

In some lawsuits, individual owners may have no construction problems in their units or may be unhappy that minor construction defects have been turned into a major lawsuit that threatens to diminish the value of their units. (It can happen that the owner of a townhouse with minor problems or no problems finds himself, through an HOA, involved in a lawsuit that alleges that the entire project has major defects. We know of at least one instance in which this kind of situation killed an individual owner's pending sale of a unit. That owner would obviously be more unhappy with the HOA than with the builder.) Because the Quail Hollow decision now requires that the individual owners be involved, builders have new tools for eliminating or diminishing individual claims that would otherwise be blended into a "we represent everybody" HOA claim. The HOA itself can still bring claims relating to property actually owned by the HOA rather than by individual owners.)

It is not clear yet whether Quail Hollow means that the owners must bring separate lawsuits or can join together in a single lawsuit raising all their claims. At the very least, it means that builders have a new tool to shrink the scope of the claims arising from a single development.

Drafting CCRs

Understanding the reasoning of Quail Hollow is important for a builder who is preparing the CCRs for a project. For example, plaintiffs' lawyers are currently scrambling to get around Quail Hollow (so that they can allege defects in 100 homes without getting 100 owners to agree) by pointing to language in the CCRs that supposedly gives the HOA the authority to bring claims on behalf of owners. A developer can draft CCRs so as to preclude HOAs from making this argument. Additionally, a developer should consider drafting the CCRs so that as little property as possible within the subdivision is owned by the HOA itself.

Notices of Defects

In Oregon, residential developers cannot be sued unless the homeowner has first provided a statutory notice of defects and allowed inspections. Quail Hollow raises questions about that procedure: What should a builder do if it receives from an HOA a statutory notice of defects relating to property owned by an individual? Does that notice qualify as the statutory prerequisite to litigation? Should the contractor respond to the notice as if it were valid — or ignore it? This and many similar questions remain unanswered.

Condominiums

Although the Quail Hollow decision involved townhouses, Quail Hollow probably also applies to some condominium-related claims. But Quail Hollow will operate somewhat differently as to condominiums because condominiums usually have more common property owned by the HOA than do townhouse or detached house subdivisions. This distinction is important because there is a statute that gives a condominium association authority to sue over common elements.

If a condominium association files a lawsuit in its own name alleging that water intrusion has damaged the interior of a unit owned not by the association but by an individual, that claim will be subject to dismissal because the interior of the unit is not common property. But if the association makes claims respecting common property, it may be able to proceed. Condominiums are frequently organized in such a way that the unit owners own only the interiors of the units from the plaster inward, leaving all exterior elements (such as roofs, siding, and concrete work) common property. Thus, developers may want to rethink how the CCRs and title conveyances of a condominium development are handled so as to benefit from the Quail Hollow opinion as much as possible.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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