Mary Jane Augustine, Sarah B. Biser, Benjamin F. Elliott, Francis A. Kirk, John P. Martin and Joseph E. Ruccio, III – July 11, 2013
The rights and obligations of both developers and community associations have been expanded by the reported decision of the Appellate Division of the Superior Court of New Jersey in Belmont Condominium Association, Inc. v. Geibel, et al., which was decided on July 9, 2013.
Developers are liable for misrepresentations even to subsequent purchasers
In the Belmont case a community association sued a developer and various subcontractors and design professionals for defects to common areas of an apartment-style condominium complex more than seven years after sale of the last unit.
The Court rejected a key defense that the condominium association lacked standing to represent owners who acquired their units not from the developer but from an intervening seller. The developer asserted that subsequent owners could not have relied upon any alleged misrepresentations in the public offering statement or the attached marketing materials. The Court found that if misrepresentations that violated the New Jersey Consumer Fraud Act (“CFA”) could be proven, together with ascertainable damages, then a developer was not absolved from liability with respect to subsequent purchasers. The Court concluded that to hold otherwise would create a windfall for developers at the expense of innocent purchasers.
Community Associations have exclusive right to pursue claims for community defects
The Court also rejected the defense that the association lacked standing to aggregate the damage claims of all unit owners. In doing so the Court found that under the New Jersey Condominium Act an association has the exclusive right to pursue causes of action for construction defects in the common elements of a community. The Court noted, however, that individual unit owners remained free to sue developers for damages to their individual units.
Truthful statements provide no defense to misrepresentation claims
The developer asserted that it was immune from liability under the CFA because its statement that it knew of no defects in construction of the community was true at the time that it was made. In rejecting this defense, the Court noted that the statement was made before construction began. It also observed that the test for misrepresentation was whether the statement had the capacity to mislead the average reader. The Court found that the statements at issue were misleading, even if literally true at the time they were made, and that evil intent or other aggravating factors are not required to impose liability under the CFA.
Claims for misrepresentation ripened when damage occurred
The jury in the Belmont case found that the developer had substantively misrepresented the nature and extent of its prior building experience in the public offering statement and the marketing materials. The Court rejected the defense of the developer that those facts were discovered by the association prior to the filing of the action, which occurred seven years after the closing on the last unit. The developer argued that the claims were precluded by the six-year statute of limitations for contract actions. The Court disagreed, finding that the cause of action for misrepresentations accrued when damage as a result of the defects was discovered, which occurred well within the six-year statute of limitations.
Claims for damages outside of common elements were rejected
In a partial victory for the developer, the Court found that the association could not maintain a claim to replace all the windows in the community. The case involved damages due to water infiltration, part of which was alleged to have occurred through windows. The association obtained an award for the cost to replace the windows in the community. The Appellate Division reversed, finding that because the windows were not clearly included in the definitions of common elements, they were excluded from the common elements. The Court also noted that all windows served individual units and not the building as a whole.
Pre-judgment interest is limited to compensatory damages
In a final partial victory for the developer, the Court found that the CFA provision that requires a court to award treble damages should not apply to interest. Therefore the Court reversed and remanded that portion of the decision, directing that an award of pre-judgment interest be calculated based on the amount of compensatory damages, not damages after trebling.
The overall lesson of the Belmont decision is clear. Developers need to take great care to ensure that their marketing materials cannot be considered misleading in any way. They will also be urged to take great care to define what items in the community are considered common elements as opposed to parts of individual units.