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Q&A: Can Condo Boards Sue Developers for Construction Defects in New York?

By Adam Leitman Bailey


By: Adam Leitman Bailey


QUESTION

Can Condo Boards Sue Developers for Construction Defects in New York?

ANSWER

New York law does allow a condominium board to sue a developer for construction defects. However, the right of the board to sue the developer is limited to construction defects that affect the common elements of the condominium building only. The law does allow the board to sue on behalf of construction defects that affect individual units, but only if the defect involved is common to two or more units in the building.

It is the builder-vendor’s obligation to construct the building “in a skillful manner and free from material defects,” but no building is ever constructed perfectly and entirely without even minor defects.

Ultimately, the board’s right to sue the developer, whether for common element defects or building-wide defects that affect two or more individual units, is ultimately derived from the promises made by the developer in its Offering Plan (and all amendments thereof), all of the terms of which are incorporated into the developer-drafted purchase agreements executed by all of the purchasers of the individual units.

The Offering Plan and the Purchase Agreement

The purchaser’s rights (and, therefore, the rights of the board) and the contractual obligations of the developer are fully circumscribed by these two documents, and any dispute that might arise between the parties, regarding the purchaser’s obligation to accept the apartment or the developer’s obligation to “make good” on its construction promises to the purchasers or to the board, will be determined by the specific terms and representations contained therein.

In New York, the developer’s Offering Plan is crafted and offered to the public in accordance with the requirements of the regulations issued by the Attorney General under the Martin Act. The Attorney General’s regulations require that the Offering Plan contain disclosure of specific items of information regarding the property from which a purchaser is likely to be able to make an informed decision on whether or not to purchase. Nevertheless, the developer is not obliged to disclose the kinds of problems normally encountered in the course of construction that are described in field reports, project meetings and change orders. Therefore, purchasers and their attorneys must read the Offering Plan carefully, because the purchaser’s rights and those of the board against the developer will ultimately depend upon what is stated in the Plan.

Moreover, the “No Representations” clause contained in every purchase agreement acknowledges that the purchaser has not relied upon any architect’s plans, sales plans, selling brochures, advertisements, representations, warranties, statements or estimates of any nature whatsoever, whether written or oral, and whether made by sponsor, the sponsor’s selling Agent or otherwise, and (b) that the purchase agreement, together with the terms of the Offering Plan, supersedes any and all understandings and agreements between the parties and constitutes the entire agreement between them with respect to the subject matter hereof. Accordingly, statements or renderings appearing in sponsor ads or in other marketing materials furnished by the developer or its sales agent are readily found by courts to be mere “puffery” and furnish no basis for any potential contract or fraud claim against the developer.

The Sponsor’s Construction Obligations

Although Offering Plans generally state that the Sponsor will construct the building in a manner “comparable to the currently prevailing local standards and substantially in accordance with the Plans and Specifications for the construction work filed with the Buildings Department and other appropriate governmental authorities,” Offering Plans also generally state that the “Sponsor has no obligation to make any repairs, improvements or decorations in or to the Property, the Units, the Building or the Common Elements except as otherwise expressly provided in the Plan.”

In addition, unless the building is five stories or less, the Sponsor also states that the statutory Housing Merchant Implied Warranty Law “does not apply to this offering,” and that “Sponsor makes no other warranties, express or implied, in connection with this offering of the Units and all such warranties are excluded, except as provided in the limited warranty (“Limited Warranty”) set forth in this Section.”

In accordance with these express disclaimers, Sponsors generally then represent that the Sponsor “will correct, repair, or replace any and all defects relating to construction of the building, common elements or the units or in the installation or operation of any appliances, fixtures, or equipment therein, or will cause the same to be corrected, repaired, or replaced,” but only if: (1) such defects are due to substantially improper workmanship or construction practices or the use of materials that are substantially and materially at variance with the plans and specifications for the same; and (2) sponsor is notified by the Condominium Board or the affected Unit Owner, as the case may be, of the same in accordance with time deadlines specified in the offering plan for (a) not visually ascertainable “latent” defects (usually within one year of the Closing of Title), or (b) “patent” defects that are ascertainable through inspection in the construction of a Unit (usually within six-months of the Closing of Title to the Unit).

Moreover, the sponsor generally reserves the right to select, “in its sole discretion,” the “method of correcting any defect” and that it will be conclusively considered to have discharged any obligation that it may have with respect to the repair of a defect or replacement of a defective item, whether patent or latent, if sponsor has corrected or caused the correction of, the defect in accordance with the practice in the industry, as determined by sponsor’s general contractor, architect, or engineer, in their sole judgment.

Nevertheless, despite the clear obligation of the developer-sponsor to “correct, repair, or replace any and all defects,” careful reading of the Plan discloses that many, if not all, of the imperfect cosmetic construction conditions, which a purchaser is likely to find in any first walk-through of the apartment, are expressly stated, in large font typeface, to be “Not Defects,” but rather conditions that “may be found in any newly constructed or substantially renovated building.”

The “Walk Through” Inspection

Despite the many offering plan disclaimers that sponsors include in their offering plans, responsible sponsors will often offer to correct or repair, as “punch list” items, many of the items otherwise deemed “not defects,” to eliminate purchaser excuses for delaying the Closing. Therefore, purchasers should engage an engineer to conduct the “walk through” inspection on the purchaser’s behalf, hoping that the engineer will identify, to whatever extent possible, evidence of any construction items that may be clear Building Code violations or that might otherwise pose a risk of substantial repair costs in the future.

In addition, on the ground that the condo purchaser is purchasing a percentage of an undivided interest in the common elements, the engineer may also attempt, whenever possible, to inspect the boiler, elevator, mechanicals, electrical panels, and the roof – the common elements that, if defective, are most likely to cause serious immediate and long-term problems for the building (and, therefore, the board) and its residents.

However, sponsor purchase agreements do not normally permit inspection beyond the apartment interior, and, therefore, complaints about defects in building-wide systems or other common elements are generally raised in the first instance only after the sponsor has relinquished its control of the board.

Litigation Options 

Despite the limitations contained in the specific warranties provided in the sponsor’s offering plan, and despite the various disclaimers of contractual liability stated in both the offering plan and in the purchase agreement, sponsors are nevertheless obliged to perform such work and supply such materials as is necessary to complete the Building with a quality of construction (a) comparable to the currently prevailing local standards, and (b) substantially in accordance with the Plans and Specifications for the construction work filed with the Buildings Department and other appropriate governmental authorities.

Accordingly, where a board’s engineer can document (a) that a sponsor has failed to comply with Code requirements, or (b) that sponsor’s construction has substantially deviated from the plans and specifications filed with the Buildings Department, the board will have sound ground upon which to sue the sponsor for breach of contract.

In such cases, the board’s objectives may be either (a) to compel the sponsor to correct and repair the identifiable construction defects at the sponsor’s cost and expense, or (b) to obtain a monetary judgment for the costs the board has incurred to do the required remedial work with the board’s own contractors.

In some cases, especially where the defects in the sponsor’s construction work has proven to be particularly negligent and unskilled, the board may actually need to employ its own contractors to perform the requisite remedial work, either before or simultaneously upon commencement of a lawsuit.

However, no matter how bad the construction, the sponsor should first be given an opportunity to fix the defects. If the sponsor attempts to do so, but uses a “band aid” approach that only temporarily cures the problem, the sponsor’s warranty then may be said to fail of its purpose, and the board may use its own contractors to remediate the defects. Nevertheless, in those instances, where the board proceeds to do the necessary remedial work itself, either after the sponsor has tried but failed to correct the problem, or where the board has done so without first giving the sponsor an opportunity to do the necessary repairs, the board needs to have the urgency of the work well documented if it proceeds. Without such documentation, the sponsor can claim that the board has waived whatever warranty rights the board may have had and that, by so doing, the sponsor has no remaining liability to the board.

Boards often attempt to sue sponsors for fraud claiming that the promises made in their offering plans were false and deceptive when made and that purchasers were thereby fraudulently induced to sign their purchase agreements. However, such fraud claims are generally dismissed on the grounds that they are duplicative of the purchasers’ or the board’s underlying breach of contract claim against the sponsor.

However, in cases where the board can plausibly allege that the sponsor knew of and affirmatively took action to conceal evidence of a material construction defect, but nevertheless affirmatively represented, in its offering plan, that the particular construction item involved complied with Code and with the plans and specifications filed with the Buildings Department, courts will permit the board to sue the sponsor for fraud in addition to the board’s underlying contract claims.

Settlement of Board Claims

Lawsuits against sponsors are expensive, and litigating board claims against a sponsor can extend over several years before a final judgment is entered in a given case. Although it is not cost prohibitive for a board to commence a lawsuit against a sponsor, continuing the litigation through the discovery process to trial can prove financially devastating to small buildings. The average lawsuit takes at least two years before a trial date is even selected, and it can take even longer before a trial is completed and before a decision is obtained from a higher court in any appeal that might be brought by whoever loses at the trial level.

Moreover, during the time that the lawsuit is pending, if the board and the building unit owners are unable to fund the cost of the needed repairs, the complained of construction defects remain uncorrected and unrepaired.

Even if a board achieves a court victory, by the time a final judgment is entered, the sponsor’s company may not have sufficient assets to cover the cost of repair and replacement of the construction defects, and court decisions have made it extremely difficult for a board to obtain a judgment personally against the principals of any corporate sponsor.

Therefore, boards and sponsors often seek to settle the construction defect issues through an early settlement of the lawsuit, or even before a lawsuit is commenced. They do so to avoid the anticipated litigation costs that both sides will otherwise incur and to not waste years of time and effort in litigating to a resolution of the dispute that could otherwise be obtained in short order. Negotiation between responsible developers and reasonable boards can often lead to successful settlements, where the sponsor agrees to do some work and/or to make a monetary payment that covers construction items that the board deems most important. In such cases, it is important for both sides to negotiate in good faith in search of a compromise solution that satisfies the respective needs of the parties.

Conclusion

As noted, sponsors have an armory of contractual weapons at their disposal to defend themselves against potential board claims of faulty construction. Purchasers, who ultimately will be dependent upon board action to represent them in any action against a sponsor, must therefore be extremely diligent before entering into purchase agreements with a sponsor. They should do so only with full knowledge of all the risks involved. It is therefore incumbent upon attorneys for prospective purchasers of newly constructed condominium units to fully explain the risks and obligations to which their clients are subject in these important transactions. Attorneys should always advise prospective purchasers to employ an engineer to inspect the unit they wish to purchase and, to whatever extent possible, to also inspect the common elements of the building in which the unit is located.

Disclaimer: The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.

Original Article

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS