The Common Element Conundrum – When Common Elements Damage Unit Interiors

John S. Prisco | Stark & Stark

One of the most frequent hot button issues in condominium communities, particularly those with multi-residential buildings, is whether or not the association will pay to repair damage to a unit’s interior stemming from a defect or issue, such as a water leak, in the common elements. A condominium association has specific duties and obligations in maintaining the general common elements of the community for which it is responsible for operating and managing. These duties and obligations are not only spelled out in the association’s governing documents, but also are required by law. For instance, the New Jersey Condominium Act requires that the association “shall be responsible for” such things, including but not limited to, “[t]he maintenance, repair, replacement, cleaning and sanitation of the common elements.”

However, while the controlling regulations and typical governing documents of a condominium association assign responsibility for the repair and maintenance of the common elements to the association and the interior of units to the unit owner, that distinction—in practice—does not always work to resolve conflicts between associations and unit owners arising from a leaky common element.

In the most typical of circumstances, a defect or issue with a common element, such as a roof or even a section of improperly installed shingles, allows water to infiltrate the building’s common element exterior and cause damage to the interior finishings of a unit. While it may bring some solace to the unit owner that the roof has been repaired or the path of infiltration remediated, that in and of itself will not make the unit owner whole. After all, the unit owner’s property was damaged because of the common element. In these circumstances, condominium association Boards, absent guidance or controlling provisions in the governing documents, must make the determination, many times a very politically-volatile decision, as to whether the association will compensate unit owners when common elements cause damage to unit interiors.

Condominium Board of Directors could rely on the typical language in governing documents requiring unit owners to “repair and replace” damaged unit property to support their decision not to compensate a unit owner for damage stemming from common elements. However, such a stance may only exacerbate a difficult situation and may ultimately cost both parties a pretty penny. In fact, taking such an approach could result in a lawsuit not only against the association, but against the board and even board members individually for breaching their duties to properly maintain and repair the common elements. Such lawsuits are not uncommon, and New Jersey courts routinely allow unit owners to bring claims against associations for damage to unit interiors caused by common element issues.

Of course, not all damage to unit property will be the association’s fault and careful consideration must be taken when assessing these situations. It must be noted that an association will generally only be liable for damages to a unit’s interior if it is determined that the association negligently maintained or failed to repair the at-issue common elements. Additional considerations include whether the damage is covered under the unit owner’s insurance policy, the association’s policy, or can be recovered against a third-party such as the original builder or recent contractor.

Balancing these considerations can often be a daunting task, but association boards do not have to make these difficult decisions alone. Having experienced counsel on your board’s side will ensure the right decisions are made for your community.

Developer Pre-Conditions in CC&Rs Limiting Ability of HOA to Make Construction Defect Claims, Found Unenforceable

Garret Murai | California Construction Law Blog

The Davis-Stirling Common Interest Development Act (Civ. Code §4000, et seq.), also known simply as “Davis-Stirling,” is a statute that applies to condominium, cooperative and planned unit development communities in California. The statute, which governs the formation and management of homeowners associations or HOAs, also governs lawsuits filed by HOAs for construction defects.

In the next case, Smart Corners Owner Association v. CJUF Smart Corner LLC, Case No. D076775 (May 20, 2021), the 4th District Court of Appeal addressed the pre-litigation voting requirements of Davis-Stirling and the impact of recent amendments to the Act.

The Smart Corners Case

In 2004, CJUF Smart Corner LLC contracted with Hensel Phelps Construction Company for the construction of the Smart Corner condominium project, a 19-story mixed-use development with 301 residential units and common areas, in San Diego, California. As part of the development an HOA was formed, the Smart Corner Owner Association.

On July 6, 2017, the Smart Corner HOA filed a notice of construction defects with CJUF Smart Corner and Hensel Phelps under the Right to Repair Act (Civ. Code §895 et seq.) and under Davis-Stirling. The notice identified defects in the project’s exterior barrier coating, windows, door casings and doors, private decks, waterproofing, concrete, bathtubs and showers, roof membrane and roof flashing, roof laps and seals, tower floors, plumbing, venting, garage, and parking structure.

On September 27, CJUF Smart Corner and Hensel Phelps notified the HOA of their election to opt out of the Right to Repair Act and Davis-Stirling pre-litigation procedures.

On October 6, 2017, the HOA filed suit against CJUF Smart Corner and Hensel Phelps alleging causes of action for negligence, strict liability, breach of warranties, and violation of the construction standards of the Right to Repair Act. In its answer, CJUF Smart Corner asserted as a defense that the HOA had not complied with the CC&R requirements for maintaining a claim, specifically, that a majority of the members of the HOA did not vote in favor of filing suit.

On May 14, 2018, the HOA filed a declaration by its attorney who, while stating that he did not believe the majority-vote requirement of the CC&Rs were enforceable, that by February 15, 2018, a majority of the members of the HOA had voted in favor of filing the lawsuit and ratified the past actions of the HOA’s Board in filing the lawsuit.

While the case was pending, the 4th District Court of Appeal, in another case entitled Branches Neighborhood Corp. v. CalAtlantic Group, Inc. (2018) 26 Cal.App.5th 743, upheld an arbitration decision which found against an HOA which had failed to obtain a 51% vote prior to filing suit against a developer, even though 92 of 93 members of the HOA later voted ratify the HOA’s Board’s earlier decision to file suit against the developer.

In December 2018, based on the decision in Branches, CJUC Smart Corner filed a motion for summary judgment arguing that Smart Corner HOA’s lawsuit was barred because it had failed to follow the pre-litigation voting requirements of its CC&RS and, pursuant to Branches, the members of the HOA could not later ratify the actions of the HOA’s Board in filing the lawsuit.

On July 29, 2019, the trial court, rejecting the HOA’s argument that the Branches decision only applied to arbitration decisions, found in favor of CJUC Smart Corner, stating that “Branches analyzes the substantive, legal issue of enforcement of a CC&R member consent requirement and, as such applies irrespective of the forum” and that under Branches “Plaintiff’s failure to obtain the requisite consent of the membership prior to bringing this action against the [Developers] renders [the Association’s] original complaint invalid.”

CJUC Smart Corner appealed.

The Appeal

In a case marked by twists and turns in case law while the case was pending before the trial court another twist occurred during pendency of the appeal. On August 30, 2019, the California State Legislature enacted Senate Bill 326 which was signed by the Governor, and became effective January 1, 2020. The new legislation nullified pre-litigation vote requirements like those involved in the Branches decision.

One of the legislative analyses of the bill described it as follows:

As part of the creation of a new HOA, the developer typically begins laying the groundwork for the HOA’s future self-governance. This includes establishing the initial governing documents for the HOA, including the HOA’s “declaration” [of] covenants, conditions, and restrictions (CCRs). While the HOA developer is still selling off the separate properties within the HOA to homeowners, it is also common for the developer to serve, or appoint people to serve, on the HOA board of directors. In these ways, HOA developers exercise a great deal of control over how the HOA will operate going forward, even though, over time, the developer’s direct involvement with the HOA typically fades away.

The involvement of HOA developers in the creation of the HOA’s initial government documents and the appointment of early HOA board members can sometimes create conflicts of interest because the HOA and the developer’s interests are not necessarily aligned.

[T]his bill addresses one such circumstance. In drafting the governing documents for the HOAs they are creating, developers sometimes add provisions that make it quite difficult for the HOA to sue the developer in the event that construction defects are discovered at the HOA. [¶] While it could be argued that requiring a vote of the HOA members prevents the board of directors from spending the HOA’s money on legal disputes without the support of the members, the fact that these provisions are limited to construction defect claims against the developer suggests that more is afoot. Moreover, Civil Code Section 6150 already provides some protections against an overly litigious board bent on suing the developer: it requires an HOA board to hold a meeting of the members 30 days prior to filing a lawsuit, stating its reasoning and laying out the options available to the HOA. [¶] This bill ensures that developers cannot reap the benefit of having taken advantage of their participation in the creation of the HOA in this way.” (Sen. Rules Com., Off. of Sen. Floor Analyses, 3d reading analysis of Sen. Bill 326, as amended May 1, 2019, pp. 6-7)

The bill added Civil Code section 5986 which provides in pertinent part:

The governing documents shall not impose any preconditions or limitations on the board’s authority to commence and pursue any claim, civil action, arbitration, prelitigation process pursuant to Section 6000 or Title 7 (commencing with Section 895) of Part 2 of Division 2, or other legal proceeding against a declarant, developer, or builder of a common interest development. Any limitation or precondition, including, but not limited to, requiring a membership vote as a prerequisite to, or otherwise providing the declarant, developer, or builder with veto authority over, the board’s commencement and pursuit of a claim, civil action, arbitration, prelitigation process, or legal proceeding against the declarant, developer, or builder, or any incidental decision of the board, including, but not limited to, retaining legal counsel or incurring costs or expenses, is unenforceable, null, and void. . . . 

This section applies to all governing documents, whether recorded before or after the effective date of this section, and applies retroactively to claims initiated before the effective date of this section, except if those claims have been resolved through an executed settlement, a final arbitration decision, or a final judicial decision on the merits.

God, or rather the State Legislature, had spoken. In response, CJUC Smart Corner argued that the HOA could not benefit from the recent enactment of Section 5986 because the trial court’s decision on CJUC Smart Corner’s motion for summary judgment was a “final decision on the merits” which had been entered before effective date of the statute.

Noting that “no court of review of this state has yet interpreted the phrase ‘final decision on the merits,’ the Court of Appeals explained that what the phrase means, depends on statutory interpretation. And, here, explained the Court, the general rule is that “civil statutes are presumed to operate prospectively ‘in the absence of a clear indication of a contrary legislative intent.’” 

In interpreting a statute, explained the Court of Appeals, three-step process is followed: “We first look to the plain meaning of the statutory language, then to its legislative history and finally to the reasonableness of a proposed construction.” Following each of these steps, the Court found that:

  1. Plain Meaning: Analyzing the use of the phrase “final judicial decision” in Section 5986, the Court of Appeal explained that the term “judicial” is a general term that refers equally to a trial court, appellate court, or a high court of review” and that “[h]ad the Legislature meant to exclude from the retroactive reach of section 5986 claims that had already been resolved by the trial court, it could have easily have done this by inserting the words ‘trial court’ in place of ‘judicial.’”
  2. Legislative History: As to the legislative history of Section 5986, the Court of Appeal found it compelling that the State Legislature was attempting to address a “trend of developers taking advantage of their ability” to dictate CC&R provisions and that the State Legislature clearly intended the statute to apply retroactively but placed limits on its retroactive effect to cases in which a final judicial decision  had been reached. As such, the court found that the “Legislature intended ‘final judicial decision’ to refer to a judgment for which the time to appeal had passed, or, if an appeal was then, had reached finality after completion of the process of appellate review.”
  3. Reasonableness of Construction: The Court of Appeal also noted that its interpretation was consistent with reason and common sense because if “final judicial decision” meant a “final judicial decision” by a trial court it would “create the possibility of judicial enforcement [by reviewing courts] of a provision that our Legislature has already declared in the strongest possible terms – through explicit statutory directive – should be treated as null and void.”

As a further, independent ground the Court of Appeal also found that the majority vote requirement as a pre-condition prior to filing suit was void as to public policy when a majority of the members voted in favor of filing suit after the lawsuit was filed.

Conclusion

For developers, the most important take-away from the Smart Corner case is that under Civil Code section 5986 CC&R provisions establishing pre-conditions or limitations on a HOA Board’s authority to commence and pursue construction defect claim will be found void and enforceable.

Who Is The Declarant? And Why Does It Matter?

Samuel B. Franck | Ward and Smith

The concept and designation of the “Declarant” arise from the formation of a planned community or a condominium. 

When the developer declares land to restrictions described in a “Declaration” for a planned community or a condominium, that developer has the opportunity to reserve certain rights to itself as the “Declarant.”  Although there is no requirement that the developer reserve such declarant rights, it is common practice to do so and very unusual for a developer to form a planned community or condominium without reserving declarant rights.  Subsequently, any party who holds any of the reserved declarant rights is a Declarant.

Although people often associate the concept of “developer” with a specific natural person, the Declarant is often an entity, such as a corporation or a limited liability company.  While a natural person may very well be authorized to act on behalf of a corporate Declarant, that authority does not vest the declarant rights in the natural person.  Similarly, other entities owned by the same person or by the Declarant itself, for that matter, are not a Declarant unless they have received an assignment or other transfer of declarant rights.

Declarant Rights

Declarant rights are reserved in the recorded Declaration for a planned community or condominium and are part of the contract among the lot or unit owners, the owners association, and the Declarant.  The developer of real property is generally free to restrict that real property however it sees fit.  Therefore, subject to only a very few statutory limitations, a Declarant is free to establish and reserve whatever declarant rights it wants at the time that a planned community or condominium is formed.  Although the North Carolina Planned Community Act and the North Carolina Condominium Act clearly contemplate declarant rights, define them, and, in some limited circumstances restrict the extent of those rights, there are no declarant rights created by statute.  If a declarant right is not expressly reserved in the Declaration, it does not exist.

There Are No Secret Declarants

Declarant rights can be transferred, in whole or in part, to other entities or persons.  Successors often include home builders, successor developers, and lenders.  Therefore, the Declarant identified in the original Declaration for a planned community or condominium may no longer be the Declarant or may share the declarant rights with other parties.  The current identity of the Declarant or Declarants can almost always be determined because the law requires that transfers of declarant rights be evident on the public records.  Transfers are not effective until the date that document is recorded or filed.

Transfer of Declarant Rights

The standard way to transfer declarant rights is pursuant to an Assignment of Declarant Rights, executed by both the Declarant-transferor and the new Declarant-transferee and recorded in the office of the Register of Deeds in the county where the planned community or condominium is located.  Technically, any recorded instrument that:  (i) adequately describes the declarant rights transferred, (ii) is executed by both the transferor and the transferee, and (iii) is recorded in the office of the Register of Deeds may be sufficient to transfer the rights.

In North Carolina, declarant rights can also be transferred without the consent of the Declarant through foreclosure, bankruptcy sale, tax sale, judicial sale, or receivership proceedings pursuant to an explicit statutory mechanism.  Although these non-consensual transfers are not all recorded in the Register of Deeds’ office, the others will be filed in other public record locations – either the office of the county Clerk of Court or the office of the Clerk of the Bankruptcy Court in the applicable federal judicial district.

The common element of all of these mechanisms is that, with sufficient research, one can determine the holder or holders of the declarant rights by researching and analyzing the public records.  Therefore, provided that you are willing to do the research, or retain legal counsel to do that research for you, you can identify the Declarant or Declarants of a North Carolina planned community or condominium.

There May Be More Than One Declarant

Because declarant rights can be transferred in whole or in part, there may be more than one Declarant of a planned community or condominium at any given time.  The division of declarant rights works cleanly when the rights transferred relate to specific parcels of real property, either property already included in the planned community or condominium, or development property subject to a Declarant’s right to incorporate the property into the planned community or condominium at a later time.  It is more difficult to divide control-oriented declarant rights.  For example, it creates a practical problem to have more than one Declarant authorized to appoint members to the board of directors of the owners association.

Another area where there may be multiple Declarants is in master communities that include condominiums or other sub-communities.  In such projects, which may include residential, commercial, or mixed use arrangements, there are often different Declarants from the beginning, one for the master community and others for each of the sub-communities.  It is important to evaluate the status of the Declarant for each community and condominium regime that impacts the property in which you are interested.

Owners, buyers, owners associations, and lenders should carefully consider any scenarios that include, or may include, multiple Declarants, not only to identify the Declarants for a particular project and the extent of each of their rights, but also with an eye toward identifying any problems that may arise out of competing interests in similar declarant rights.

The Termination of Declarant Rights

A Declarant’s authority ends when all of the declarant rights for that particular Declarant expire or terminate.  There are some limited statutory provisions that require the expiration of certain specific declarant rights, but otherwise, the declarant rights will endure until they either expire by their own terms or are voluntarily terminated by the Declarant.  In a North Carolina condominium, the Declaration must describe a time period after which the declarant rights must terminate, but for most rights, there is no limit on the allowable length of that time period.  No such requirement is imposed on planned communities in North Carolina, and we often find declarant rights for planned communities that have no specific expiration date.

The survival of declarant rights after the time period that a Declarant is actually exercising those rights is a problem for all concerned.  Those rights carry potential liability for the Declarant, which makes them an undesirable asset after the Declarant no longer has a use for them.  It is also awkward for owners and owners associations to function and flourish when stale declarant rights remain.  Although a Declaration may provide that some or all of the declarant rights expire upon the Declarant’s sale of the last lot, they often do not.  Furthermore, the development activity for a planned community or condominium may well be completed long before the last Declarant sells its last unit or lot.

Conclusion

Determination of the identity of the Declarant or Declarants is an important aspect of any party’s evaluation of a planned community or condominium.  Whether evaluating the asset as a successor developer, a lender, an owners association or a homeowner in a planned community or condominium regime, it is important to know which party or parties hold the declarant rights.  The longer the developer period for a project, the more complex the inquiry, but the holders of declarant rights may always be determined with careful and thorough review of the public records.

Class Action Certification by Association for “Matters of Common Interest”

David Adelstein | Florida Construction Legal Updates

Associations have authority to pursue as a class, on behalf of all of their respective members, lawsuits “concerning members of common interest to the members.”  Fla. R. Civ. P. 1.221.   This includes, but is not limited to, the common property or the areas in which the association is responsible.   But, what about matters or elements for which the association is not responsible or does not own?  For example, issues or damages relative to a specific unit or owner that are prevalent throughout?

The Third District Court of Appeal addressed this question in Allied Tube and Conduit Corp. v. Latitude on the River Condominium Association, Inc., 45 Fla. L. Weekly D1518a (Fla. 3d DCA 2020) when in affirmed a class certification by a condominium association relating to the removal and replacement of the condominium building’s defective fire sprinkler system.    In affirming the class certification by the condominium association, the Third District maintained:

Rule 1.221 expressly authorizes condominium associations to “institute, maintain, settle, or appeal actions or hearings in its name on behalf of all association members concerning matters of common interest to the members.” “[A]s to controversies affecting the matters of common interest . . ., the condominium association, without more, should be construed to represent the class composed of its members as a matter of law.”  “[T]he common interest provision of the rule has been interpreted to permit a class action by the association for a construction defect located physically within a unit, rather than in the common elements, if the defect is prevalent throughout the building.”  We, therefore, cannot say the trial court abused its discretion in finding that damages resulting from the replacement of the fire-sprinkler system throughout the building were a matter of common interest for purposes of certification at this stage of the litigation.

Allied Tube and Conduit Corp, supra (internal citations omitted).

Without knowing more, the association was presumably seeking damages that were prevalent throughout the building but may not have been damages owned exclusively by the association.  This is the reason the association was seeking class certification.  It could be damages associated with the removal and replacement of fire sprinkler in individual units.  And, perhaps it is tied to the displacement of unit owners during this work.  Regardless, the association at the class certification hearing established that the defect and damages were prevalent throughout the building and, therefore, a matter of common interest to the association. There is great value in having the association pursue the class on behalf of all of its members opposed to individual unit owners separately suing, where certain owners may not have the economics to pursue such individual lawsuit.

Commercial Owners Associations/Residential Owners Associations The Same — But Different

Justin M. Lewis | Ward and Smith

What are commercial owners associations, and are they really that different from residential owners associations? 

Commercial owners associations are nonprofit corporations that govern planned communities, condominiums, or a combination of the two, in which the lots and/or units are used for non-residential purposes.

Commercial owners associations are governed by the same statutes as residential owners associations: Chapter 55A of the North Carolina General Statutes (the Nonprofit Corporation Act), Chapter 47C of the North Carolina General Statutes (the Condominium Act), Chapter 47A of the North Carolina General Statutes (the Unit Ownership Act) and Chapter 47F of the North Carolina General Statutes (the Planned Community Act). 

While some of the obligations and responsibilities of commercial associations are the same as residential associations (the collecting assessments from the members, maintaining the common elements, and enforcing the rules and regulations), there are some issues that are more important, or are unique, to commercial associations.

Parking

Typically, parking is not an issue in residential communities.  Owners of lots park on their lots and owners of condominium units park in what are often limited common elements parking spaces dedicated to particular units. 

But for a commercial community, parking is very important to the owners.  Adequate and convenient parking for the employees, and most importantly, the customers, is vital to the success of the business.  Some commercial communities have ample parking in the common elements, but business owners may want some designated parking close to their lot or unit; and, in a community with limited parking, it may be necessary for each lot or unit to be allocated some limited common elements parking to ensure easy access for customers. 

This issue should be addressed in the declaration when the commercial community is formed.  If it is not, an amendment to the declaration may be necessary, which often will require the consent of a certain percentage of the owners.

Signage

Signs are usually prohibited in residential communities or subject to rules that establish duration, size, and location on political signs and “for sale” and “for rent” signs. 

In a commercial community, signs are necessary to identify and advertise the owners’ businesses.  While some regulations as to the size, number, and type of signs are desirable, signs should be allowed in commercial communities.  In addition to signs on a lot or unit of the business, commercial communities often maintain monument signs or electronic signs in the common elements that identify the various businesses.  The governing documents should address how these signs are managed by the owners association so that each business is given a fair opportunity to advertise its business. 

Use Restrictions

While governing declarations establish and restrict the uses of lots and units within particular communities, those uses will differ between residential and commercial development.

As implied by the designation, declarations creating residential communities promote typical neighborhood/non-commercial activities and restrict or prohibit the uses and actions that may be a nuisance to the other owners within the community. 

Use restrictions in commercial communities are also intended to prevent one business owner from becoming a nuisance to the other owners within the community.  Such restrictions also frequently establish specific uses permitted within that community.  For example, some commercial communities are restricted to only medical offices, business offices, or, perhaps, a combination of restaurant and retail uses.

It is important that any such use restrictions on the lots or units be established in the declaration and additional governing documents.  As North Carolina law favors the unrestricted and free use of property, subsequent rules or regulations intended to restrict or prohibit certain uses not specified in the declaration and governing documents will most likely be unenforceable.

Ordinances and Regulations

In addition to the governing North Carolina statutes (mentioned above), local, state, and federal ordinances and regulations (think about local zoning ordinances) must be observed.  In residential communities, all of the lots or units are being used for the same general purposes, so the same ordinances and regulations would apply to all of the owners and their properties.

However, in a commercial community, you may have restaurants, business offices, medical offices, retail stores, and other uses all of which may be subject to different ordinances and regulations.  Most of the burden for complying with those ordinances and regulations will fall on the individual business owners, but the owners association should be aware of the ordinances and regulations applicable to the community to make certain that owners do not commit violations that could harm, or result in a violation enforced against the entire community and association.

Mixed-Use Communities

Some planned communities and condominiums contain both commercial and residential lots and units.  The owners association for a mixed-use community will need to deal with all of the issues important to a commercial community, some of which are described above, and the issues important to a residential community.  One way to ensure that all of the owners’ needs and concerns are considered is to establish in the governing documents that the association board will be comprised of owners of both residential lots or units and commercial lots or units.  The concept of selecting board members from different types of lots or units may also be applied in a solely commercial community to make sure the board is truly representative of the entire community.

All owners associations must perform many of the same tasks, enforce the same rules, fulfill the same obligations, and comply with the same statutes, but the needs and issues in commercial owners associations are unique.  It is important for the board of directors of these associations to understand the complexities of a commercial community so that they can adequately meet the needs of their members.