Bob Burton | Winstead
A recent article in the Wall Street Journal (“Home Builders Are Getting Buried in Claims of Shoddy Construction”) highlighted the growing wave of construction defect litigation facing homebuilders and developers across the country. Rising insurance costs, increasingly aggressive litigation strategies, larger jury verdicts and the continued aggregation of claims are placing significant pressure on residential development—particularly at a time when affordability and housing supply remain major concerns.
Much of the discussion surrounding construction defect exposure tends to focus on condominium projects. That focus is understandable. Condominiums involve shared structural systems, centralized governance and concentrated ownership structures that naturally lend themselves to collective claims. But many of the same liability dynamics exist in traditional non-condominium planned communities, particularly master-planned communities with extensive common area.
Developers and builders should view governance documents as providing an opportunity to implement risk-management for construction defect claims. For several years, we have worked with developers and builders to design and implement governance frameworks that also address construction defect claims. These provisions include dispute resolution procedures, standing limitations, anti-assignment provisions, reserved access rights and expanded disclosure provisions.
I. Enhanced Common Area Enhances Claim Risk
Traditional subdivision documents were often designed for relatively simple communities with limited common area, modest operational responsibilities. That is no longer the case in many planned communities. Today’s planned communities may involve extensive stormwater systems, grading and drainage facilities, retaining walls, private streets, trail systems, irrigation infrastructure, major recreational facilities, landscape systems, and utility-related improvements. Disputes involving these systems often arise years after initial development and frequently after turnover of the association to residential leadership. The association, then controlled by a residential board, becomes responsible for coordinating investigation, repair and dispute resolution relating to common-area systems. As a result, there should be an expectation that disputes may arise long after development of the community and turnover of the association to resident leadership.
II. Associations Retain Authority to Address Legitimate Common-Area Defects
Associations play an important role in protecting and maintaining common areas and, in many communities, they are the only organization capable of coordinating investigation, repair and maintenance of common area. The question is not whether such claims should exist. In many cases, they are entirely appropriate. The more important issue is how those claims are managed and resolved.
In virtually all planned communities with common area, there is the possibility that disputes over the construction and operation of common areas may arise over time. As a result, for the developer or builder who will direct preparation of the governance documents, failing to give some thought to implementing a process for the resolution of disputes is a missed opportunity. Examples of a few of these procedures are mandatory notice procedures, engineering review requirements, cure opportunities, negotiation periods, mediation requirements, and arbitration provisions intended to facilitate early investigation and a repair-oriented resolution of disputes.
One note. There is a difference of opinion regarding whether binding arbitration or traditional litigation provides the preferable forum for construction disputes. However, many of our developers and builders favor arbitration since arbitration can provide a more technically focused process and can reduce certain risks associated with jury trials.
III. Individualized Home Construction Claims
Individualized home-construction claims present fundamentally different issues than claims involving common area. Unlike common-area claims, home-construction claims often involve highly individualized facts, differing subcontractors, owner modifications, varied maintenance histories, and differing causation and damages issues.
Despite these individualized issues, there may be an attempt to aggregate these claims through the association. However, an association is intended to govern and maintain common area rather than function as a centralized litigation vehicle involving differing facts, causation issues, and damages. We incorporate provisions limiting association standing with respect to individualized home-construction claims and restricting assignment of those claims to the association for collective prosecution. These provisions help preserve the distinction between legitimate association claims involving common area and individualized disputes involving separate homes.
IV. Reserved Access Rights and Easements Remain Critical
Post-closing access rights are sometimes overlooked or not addressed in community governance documents. However, many disputes escalate unnecessarily because developers, builders or contractors lack clear rights to inspect, evaluate or repair conditions affecting the common area. For that reason, we incorporate access rights allowing appropriate access for inspection, warranty work, drainage correction, utility repair, retaining wall stabilization, infrastructure maintenance, and correction of conditions affecting common areas.
These rights are important in communities with interconnected drainage systems, shared grading patterns and extensive common area improvements. Properly integrated access-right provisions can materially improve the ability to investigate and resolve issues before relatively minor conditions become significantly more difficult, and expensive, to address.
V. Robust Disclosures Matter
Well-drafted disclosure provisions are also an important risk-management tool.
We incorporate expanded disclosure regimes intended to establish realistic expectations regarding ongoing development, community operations and future changes to the project. Depending on the nature of the community, these disclosures may address conceptual site plans, future development rights, ongoing construction activity, drainage conditions, easements, utility infrastructure, adjacent land uses, governmental approvals, shared facilities, maintenance responsibilities, and modifications to future amenities or development plans.
Master-planned communities are dynamic and not static. Clear disclosures establish realistic owner expectations and reduce the likelihood that future changes or operational issues are later characterized as concealment or misrepresentation.
VI. Governance Documents as Risk Management Tools
Planned community governance documents are often treated primarily as operational documents focused on assessments, architectural controls and use restrictions rather than as part of a broader risk-management strategy. Many planned community governance documents, both older forms and newly prepared documents, do not address the litigation dynamics associated with construction defect claims. While no governance structure can eliminate construction disputes, well-designed governance provisions can materially improve how those disputes are managed, evaluated and resolved.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 801.641.8304, or email experts@adviseandconsult.net.