Condominium Challenges

By Joseph Dirik, Esq.

Dirik outlines the risks and challenges contractors should be aware of when taking on condo projects.

Contractors and developers have been extremely busy during the past several years building condominium projects in such places California, Florida, Las Vegas. Texas as well has its share of high-profile projects. According to Michael Carliner, an economist with the National Association of Home Builders, the flow of condominium supply has about tripled or quadrupled nationwide.

These project opportunities can involve unusual risks and challenges for contractors resulting in construction-defect litigation and cost overruns. Condominium owners are unique. They typically demand higher quality workmanship. And next-door neighbor owners with similar problems or complaints can easily band together in search of "guilty parties." In Texas, condominium associations and individual unit owners can assert claims against developers and contractors for construction defects and deceptive or fraudulent transactions. Several problem areas drive increased litigation.

Problem One: Quality Part of the reason for increased condominium litigation involves a lack of fixed standards for workmanship. There is no Texas legislation directly governing condominium quality, even though the Legislature recently passed a law establishing the Texas Residential Construction Commission. Without explanation, the statutory warranty regulations developed by the Commission covers single- and duplex-family residential units only. Workmanship can of course be established by the parties' contract. Most attorneys would agree that a condominium owner has an implied warranty of good and workmanlike construction, unless the implied warranty was properly replaced with a suitable express warranty. And depending on the circumstances surrounding the sale, a builder or developer might be able to sell a residential property on an "as-is" basis.

Implied warranties are simply legal fictions designed to protect buyers. An implied warranty does not include a defined list of specifications and measurable standards.
Instead, a party seeking to enforce an implied warranty must establish the warranty's terms with expert testimony to identify the standard for a generally proficient builder engaged in similar work and performing under similar conditions. If I asked ten contractors to bid a job without specifications based on the standard of a hypothetical "generally proficient builder," I am confident that the bid results would vary tremendously. The contractors I work with prefer to have a clear idea of the required standards before bidding on a job.

According to the Texas Supreme Court, the implied warranty passes from buyer to buyer by operation of law. If this is true, who initially provides an implied warranty for condominiums - the general contractor or the developer? Based on a 2002 Texas Supreme Court case, "builders" impliedly warranty workmanship for residential construction. In the traditional arrangement, a general contractor usually constructs a high-rise project for a developer, who creates the condominium development and sells the units to individual owners. There is no clear answer to the question of who is the builder in a traditional developer - general contractor relationship.

Contractors working for developers on Texas condominium projects should avoid providing an implied warranty of workmanship that may pass to subsequent owners.
The best practice involves crafting a contract that provides for the manner, performance or quality of the project and effectively disclaims any implied warranties. Unless the legislature requires statutory warranties for multifamily projects, this is the best was to address quality risks. Contact your attorney for help on this important issue.

Problem Two: Escalating Costs Condominium construction costs are rising and a big component is insurance. Rates have increased dramatically over the past several years due in large part to excessive litigation, which in turn has reduced availability of coverage. According to Karen Reutter, senior vice president of Willis Inc.'s National Construction Practice Group, condominium builders face challenges in securing general-liability insurance for condominium projects, namely, the lack of program options and higher premiums for liability coverage. The number one reason for such challenges involves underwriters' concerns with the increased litigation by condominium associations and owners. The industry has responded by offering general liability, project specific, wrap-up policies or rolling wrap-up programs. Many policies exclude coverage for subsidence, mold, EIFS, and other typical coverage exclusions. And Texas has a ten-year statute of repose so coverage may be necessary for several years beyond that term. Contractors wishing to enter the condominium market should carefully evaluate the insurance requirements for these projects.

Problem Three: Misrepresentation Claims In addition to pursuing claims for construction defects, condominium owners and associations can allege fraud, negligent misrepresentation and Deceptive Trade Practices Act (DTPA) violations in connection with condominium sales. Contractors are particularly susceptible to DTPA claims because a simple breach of warranty claim can support a DTPA action, providing the association or unit owners with an opportunity to recover attorneys' fees, as well as mental anguish and treble damages under certain circumstances. A contractor's best defense to DTPA claims based on warranty actions is to comply with the detailed specifications, plans and express warranties on the project.

Top Five List To succeed, condominium contractors should sharpen their risk-management skills. Your attorney can help with several of the following issues, in no particular order of importance:

Contractors should take necessary steps to disclaim any implied warranty of good and workmanlike construction by offering a suitable express warranty providing for the manner, performance or quality of the project.

Avoid making any representations to potential buyers.

Establish a serious quality-assurance program to verify that the finished product meets the contract's specifications and plans.

Require that the developer, unit owners and the association waive consequential damages against the contractor.

Use qualified subcontractors with experience in high-quality construction.