By Gregory L. Shelton, Horack, Talley, Pharr & Lowndes, P.A.
Overview of “ "Condo Defects"'
Owner associations govern different types of planned communities, including condominiums, townhomes, and subdivisions. The term "condo defect case" has become attorney short-hand for defect claims in any type of planned community. Condo defects are often associated with mold and structural damage caused by water intrusion, but the term also includes defects in sidewalks, pools, retaining walls, private roads, irrigation systems, and other items falling within the association's maintenance and repair responsibility.
We have seen a rise in condo defect cases in recent years. In the mid-2000s (before the market crash), developers could not build communities fast enough. Skilled subcontractors were in short supply, new construction products were introduced into the market, and installation methods for the new products varied from manufacturer to manufacturer. These factors, among others, contributed to the increase in condo defect cases.
In construction, the workers who install sheathing, building wrap, windows, flashing, and masonry must be properly trained and supervised, and must perform the work according to the product manufacturer's instructions. If the materials are not installed properly, water may become trapped inside the building envelope with nowhere to go.
Repairing structural and mold damage is expensive. If the association cannot recover repair costs from the developer, the contractors, or their insurers, the individual unit owners will ultimately bear the cost through association assessments.
Modern condominium buildings proved particularly susceptible to water intrusion. Condominiums have become more complicated to satisfy the aesthetic demands of the market. More corners, terminations, railings, and roof lines mean more potential entry points for water.
The commoditization of housing also played a role in the increase of condo defect litigation. If the developer is singularly focused on sales, and views the construction as an opportunity to reduce costs, quality will suffer.
Standing to Sue
Traditionally, courts were reluctant to find association standing, even when common elements were involved. Today, courts and legislatures are much more likely to allow the association to bring claims involving common elements. For example, the North Carolina General Assembly enacted legislation granting standing to associations on "matters affecting the condominium." N.C. Gen. Stat. § 47C-3-102(4).
In addition to the law of the jurisdiction, the association's governing documents may determine whether the association is responsible for the maintenance or repair of the defect or damage at issue. Governing documents include articles of incorporation, by-laws, the declaration, or the covenants, conditions, and restrictions ("CCRs"). If the damaged property falls within the definition of "common elements" or "common areas," most courts will find that the association is the real party in interest because the association is responsible for the repair.
Roofs, exterior walls, sheathing, wall studs, and other exterior building envelope components are generally included in the definition of a condominium's common elements. In most planned communities, amenities such as pools, club houses, golf courses, and parks are common elements.
Authority to Sue
While an association may have standing to sue, it may lack authority. The governing documents may require written approval by a certain percentage of owners before a lawsuit may be filed. For example, the by-laws of an HOA may require written consent of 80% of the owners before the association may file a lawsuit against the developer. Although less common, some declarations require the association (or an owner) to navigate a procedural labyrinth, involving notice requirements, mediation, and arbitration, to resolve disputes.
To the developer, voting thresholds and dispute resolution provisions are a matter of risk mitigation and avoidance. To the homebuyer, these requirements represent legal escape hatches designed to enable unscrupulous developers to avoid liability for shoddy workmanship. Perspectives aside, defendants will argue for enforcement of these requirements, and associations must either satisfy the requirements, challenge the defendant's standing to raise them, or be prepared to challenge the requirements.
Statutes of Limitation and Repose
Statutes of limitation and repose frequently come into play in condo defect cases, particularly where water intrusion is involved. If the building envelope has not been designed or constructed properly, water will find its way into the building and attack the structure itself. The resulting decay, hidden between the exterior and interior walls, may go undetected for years. I represented a homeowners' association in a case where a resident fell off a treadmill and broke through the drywall. When warm moldy air poured into the room, the association quickly learned that it had a water intrusion problem.
In most jurisdictions, the limitations clock starts running when the plaintiff discovered or reasonably should have discovered the defect. In North Carolina, for example, the limitations period is three years, but the clock cannot start to run until the developer turns over control of the association to the unit owners.
Defendants will want the limitations clock to start as soon as possible. Maintenance records may provide ammunition for the defendant's arguments. The window subcontractor may point to leak repairs and owner complaints to argue that the association knew of water intrusion issues years ago. The association might argue that occasional, isolated repairs do not trigger the limitations clock.
Unlike the statute of limitations, the statute of repose usually starts to run at project completion. The statute of repose may begin without regard to when the defect was or should have been discovered. In some states, the repose period cannot start until the declarant turns over control of the association to the owners.
If the statute of repose is an issue, plaintiff's counsel should determine whether statutory or common law exceptions exist. In North Carolina, if the plaintiff proves that the damage results from willful or wanton conduct, or from fraud, the statute of repose will not apply to bar the claim. N.C. Gen. Stat. § 1-50(a)(5)(e).
Causes of Action
Claims vary depending upon the damages involved, the relationship of the parties to each other, and potential insurance coverages. Most condo defect cases involve multiple parties, and therefore multiple theories of liability. Commonly plead claims include breach of contract, breach of express warranty, breach of implied warranty, negligence, malpractice by the design professional, products liability, breach of fiduciary duty, unfair and deceptive trade practice claim, and fraud. Unintentional tort claims such as negligence are preferred because commercial general liability policies are not intended to cover intentional torts and contract liability.
When drafting the complaint for an association, a stitch in time saves nine. Almost without fail, defendants file dispositive pre-trial motions for dismissal or summary judgment. Drafting a strong complaint requires an understanding of the economic loss rule, insurance coverage, contributory or comparative negligence, attorneys' fees, and other jurisdiction-specific laws and procedures.
Expert Witnesses
Retaining properly licensed, experienced, and knowledgeable expert witnesses is critically important. In some jurisdictions, professional negligence (malpractice) claims against engineers or architects must be supported by testimony from a licensed professional in the field. An expert witness should be knowledgeable, credible and likeable.
Mediation
Most condo defect cases settle before trial. Given the number of insurers involved, the evaluation of claims and defenses during discovery, and the irreducible risks and costs inherent in a trial, settlement usually makes the most sense to everyone.
Going into mediation, plaintiff's counsel must ensure that the association will have authority under the governing documents to fully resolve the case. If a quorum of the board cannot attend mediation, the parties and the mediator usually arrive at resolution. On the defense side, insurance adjusters frequently seek permission to attend the mediation by telephone rather than in person. Allowing the decision makers to attend remotely is usually a bad idea.
Plaintiff's counsel frequently presents dramatic photographs during the opening session so that the defendants, their attorneys, and the insurance adjusters understand what the jury will see if the case goes to trial. Defendants, on the other hand, attack the association's liability theories, blame other defendants for the problem, or propose much less expensive repairs.
Practical Challenges
The attorneys who litigate condo defect cases must possess a very particular set of skills. The plaintiff's attorney must be an advocate, diplomat, technician, strategist, and negotiator. Defense counsel must possess a thorough understanding of the available substantive and procedural defenses in the jurisdiction and must understand how commercial general liability policies work.
The association's attorney is often called upon to update anxious owners on repairs, legal costs, and the status of the lawsuit. Experienced attorneys explain at the outset that the attorney represents the association, not the individual owners. Conversations about strategy, settlement, and other sensitive issues must stay between the attorney and board members.
In condominium cases, the plaintiff's lawyer may receive inquiries from realtors or lenders seeking written confirmation that the defects do not affect the structural integrity of the building. This is a recipe for a fraud lawsuit against the attorney and the association; for instance, when water damage is hidden behind sheathing and drywall. Counsel and their clients should resist external pressure from lenders, owners, or buyers to make uninformed or blanket representations about the extent of the defects or the cost for repairs. In real estate sales, no good deed goes unpunished.
Conclusion
In the world of construction law, condo defect cases are among the most complex cases to litigate. A water intrusion case may involve twenty or more defendants, all with their own factual, procedural, and legal defenses. Defendants may include architects, engineers, developers, contractors, subcontractors, suppliers, and product manufacturers. It is not unusual for the association to seek damages in the millions where widespread water intrusion is involved. 

Additional Resources
North Carolina Construction Law Deskbook, Sixth Edition (2013) North Carolina Bar Association
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