By David H. Bowser, Attorney
This article originally appeared in the May 25, 2018 edition of the Daily Journal of Commerce Oregon.
I have noticed a recent uptick in questions from my clients about steps that can be taken to limit their potential liability associated with either designing or building condominium projects. These questions are spurred on by an increasing market for condos, the lucrative profits to be made by all parties involved, and the common knowledge that the likelihood of costly defect litigation is higher for condominium projects. The sad truth is, except for passing upon such projects in toto, there is no way to completely limit liability. However, there are certain steps that can be taken early in the process that can add protection and place reasonable limits upon any future litigation. One should also be wary of “stealth condos,” which are designed and built to be apartments with the intent to later convert them to condos.
Negotiate Contractual Protection. Between the parties, there are several matters that can be negotiated during contract negotiation to add additional contractual protection for yourself and the whole team. The AIA provides a good guide to start with for additional clauses, the AIA B509 Guide for Supplementary Conditions to AIA Document B109 for use of Condominium Projects. It suggests, in part, that clauses be added to require (a) mock-ups of critical systems and materials along with testing of those markups (especially those that most often lead to defect litigation); (b) a professional and detailed maintenance manual; (c) a full-time contract administration during the project by the design professionals; (d) the owner to hire specialized consultants (such as a Building Envelope Consultant) to provide their expertise on traditionally problematic areas; and (e) regularly scheduled post occupancy site visits to monitor the project and compliance with the maintenance obligations. Other suggested clauses include an increased emphasis on contractors experienced in the type of construction and preventing value engineering through selecting a lesser quality of materials.
In addition, the parties may want to consider taking steps to maximize indemnity requirements owed to them and ensure that all participants will have the necessary and adequate insurance available in the event of future issues, with the requirement to be named an additional insured if possible under the type of insurance. Beware that the owner “entity” may be a single asset, single purpose entity that will disappear into the ether after completion, so you may want to consider having an individual or entity with real assets guarantee the obligations. Attention also needs to be made to completed operations coverage and, for claims made policies, that tail coverage is required for the whole time period allowed by the jurisdictions statute of repose (the drop dead date to file litigation). Another possibility is to limit the insurance pool for potential plaintiffs to a single policy by requiring a wrap policy for the project, either owner controlled (OCIP) or contractor controlled (CCIP). These policies provide blanket coverage for the owner, contractor, and subcontractors, and while designers can sometimes be added, it is important to ensure that the coverage is broad enough to cover everything traditionally covered by the typical E&O policy. Having a single insurance policy available may lessen the complexity of any ensuing litigation. These are just some of the potential clauses that should be considered.
Negotiate Condominium Documents. After completion, the condos will be sold under sale documents and the owners will be subject to various condominium formation documents, such as the declaration or bylaws. Traditionally, the designer and contractor have no input in such documents. That should be changed. The designer and contractor can negotiate to require the owner to place certain clauses in such documents and to provide advanced coordination and approval prior to their use or recording. Terms should be considered that limit warranties to the extent possible and that strictly require the maintenance obligations be fully followed and funded. A pre-purchase inspection should be required of every purchaser. If an issue is found, the designer and contractor should be provided notice and an opportunity to investigate and address the issue.
Terms can also be added to the documents that may lessen the chance of litigation. Clauses can be placed in the documents requiring pre-litigation mediation or arbitration. The documents can also be made to require that a higher percentage of the condo owners vote in favor of litigation costing over a certain threshold before litigation is filed, along with a requirement that the condo owners pay their share of a special assessment that fully funds the expected and substantial fees (attorney and expert) and other costs prior to litigation being filed. And finally, you should require the documents to contain a time limitation (some reasonable time less than the statute of repose) for the condo owners to file litigation.
Beware of Stealth Condos. Like condominiums, apartments are also currently in high demand. Apartments are not built to the standards of condominiums. There are different building code requirements and the overall quality is usually of a lesser standard. What many designers and contractors do not consider is that the completed apartments can be converted to condos and sold. These new owners may expect more quality than is reasonable and may see standard and expected deviations in quality as a defect. This can lead to designers and contractor who contracted to design and build apartments being sued by condominium owners. If you are undertaking to design or build apartments, you may want to take some additional steps to protect yourself. Have the owner make representations in the contract documents that the owner will not convert the apartment to condos until after the statute of repose has passed. You may also want to require the owner to record in the real property records a covenant not to convert for a specified time period.
Conclusion. This is not an exhaustive list of ways to protect yourself. Condos and apartments will continue to be built because of demand and growth. Defect litigation on such buildings will continue to occur. There is real money to be made by developers, designers, and contractors in building them. While you cannot eliminate risk, you can take steps to lessen the risk and to provide enhanced protections for you and your company. It is wise to work early and closely with a construction attorney who you trust to maximize your protection. It’s simply too late after the defect suit has already been filed.