Florida Condo & HOA Legal Blog : Florida Condo Lawyer & Attorney : Becker & Poliakoff Law Firm : Condominium & HOA Law Blog

Board Certified Construction Law Attorney Aaron Pruss reminds us that manufacturing and workmanship defects are prevalent in the building industry. Such defects not only represent a large cost to Community Associations and homeowners in terms of repairs, but they can also present serious health and safety issues and reduce the value of the property.

He's identified some building products alleged to be defective, and about which lawsuits and warranty claims have been filed.  Remember - If you are unsure whether any of these products were utilized in the construction of your home or condominium, it may be necessary to consult any warranty you may have, speak with your property manager or hire an independent contractor to examine the materials.

MI WINDOWS:

A design and manufacturing defect has been alleged against MI Windows in several lawsuits. Several experts working on behalf of the property owners have concluded that the windows are poorly designed and manufactured, the result of which is water entering through the window assemblies during normal rain events. Many property owners have been forced to make costly repairs to their homes and/or replace the defective windows at great expense. As we all know, water intrusion into a home will ultimately lead to several problems including rotting, mold growth and significant damage to the underlying structure of a home.

GENTEK SIDING:

Consumers claim that Gentek steel and aluminum siding was produced with a defect that makes it inclined to chip, crack, break, peel and/or fade prematurely. Such defects can be very costly to repair and reduce the value of a property significantly.

We will include more information about claimed defective products that potentially impact community associations in the Firm's Community Update publication.

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Last November I posted a blog ( Homeowners' Associations: New Ruling Supports Compensation for Construction Defects)  alerting readers to an important appellate decision holding that buyers and homeowners' associations are entitled to a common law implied warranty of fitness and merchantability with respect to the roadways, drainage systems, retention ponds and underground pipes in a residential subdivision.  Florida Condominium Law provides condominium purchasers with implied warranties of fitness and merchantability with respect to the roof and structural components of buildings as well as mechanical, electrical and plumbing systems serving the common elements, but homeowners' associations do not have the same protection.

The Lakeview Reserve Homeowners v. Marondo Homes, Inc., case is now pending before the Supreme Court of Florida.  Oral arguments took place on December 6.

This case is truly important - so important that advocacy groups filed amicus briefs in support of the appellate ruling.   So important that the Florida Home Builders Association (FHBA) and National Association of Home Builders (NAHB) also filed briefs in opposition to implied warranties.

FHBA and NAHB contend that since roads and drainage areas are owned by an association, not individual homeowners, defects in these structures generally have no direct effect on home habitability.  In my opinion that doesn't really make sense.  How can you live in a home without access to the home over a safe roadway?  The roadways, underground plumbing, retention ponds and drainage facilities are essential.  In fact, the residential dwellings probably couldn't qualify for a Certificate of Occupancy without these improvements.  

CALL submitted a brief on behalf of its 4,000 +/- member communities in the State of Florida since the issue of whether a developer of a residential subdivision provides common law implied warranties for the roadways, retention ponds, underground pipes, and drainage systems throughout that subdivision is one of great importance to hundreds of thousands, if not millions, of Florida residents living in homeowners’ associations. CAI likewise submitted a brief contending that developers owe a duty to the homeowners and their homeowners’ association to turn over common area structures that are fit for use and do not impair the habitability or merchantability of the homes. 

We will report on the outcome of this appeal when the Supreme Court publishes its decision.

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Big prestige brings big money - at least that what developers hoped for when marketing some fabulous projects (or projects that were supposed to be fabulous) in South Florida, Las Vegas, New York and other high profile places.  Buyers rushed to put down deposits on condominiums in the Canyon Ranch building, the Jorge Perez/George Clooney building, the new Trump project or whatever 'brand' name was hot at the time.

What happens when the prestige, the panache, the whole milieu of the project changes (or fails to materialize) because the brand backs out?  The people that bought condos and apartments in the Trump International Hotel and Tower planned for Fort Lauderdale don't want Trump to simply walk away from the failed project with impunity.  The Miami federal judge presiding over the lawsuit recently sided with those buyers and refused to allow Trump out, in spite of his claim he was not a developer but merely licensed his name to to the project developers. 

Marketing materials and the media flooded Miami with news about "Trump's latest development".  When construction costs soared and the real estate market went south, Trump withdrew his support and removed his name from the project (as reportedly permitted by a licensing agreement).  Buyers say they lost hundreds of thousands of dollars in deposits and should be able to pursue reimbursement from Trump, among others.

While the Judge refused to grant Trump's motion to dismiss, Courthouse News Service reports the buyers were not as persuasive with their other arguments.  The Court will not allow the plaintiffs' claim for punitive damages to go forward because, he ruled, Florida law does not allow punitive damages in cases of breach of contract (unless there is merit to an independent tort claim).  He also rejected claims of  breach of the covenant of good faith and fair dealing.

There is an important lesson here for condominium buyers (and all property buyers in general), you MUST read the fine print.  While this lawsuit survived a motion to dismiss, this is merely the beginning.  There is a long road ahead and thousands of dollars have already been lost.

Developers are required to create and supply prospective buyers with a prospectus or offering circular in communities with over 20 residential units.  Buyers are entitled to a Frequently Asked Questions & Answers sheet and deposits in excess of 10% of the purchase price must be held in escrow if the condominium project isn't substantially completed.  This prospectus contains very important disclosures - it describes the condominium property and the recreational amenities, the number of units that are contemplated to use the facilities, use rights associated with the property (and limitations on use) as well as a whole host of other issues that impact the value of the property.  

I can't tell you the number of times Association Attorneys have had to give clients disappointing news that was already disclosed in the governing documents.  People pay a premium for a golf course view, sometimes only to learn that the owner of the golf course plans to change the use, allow the public or start offering golf clinics.  Community leaders often cannot understand why they have to pay another association to maintain mitigation or wildlife areas that have nothing to do with their community - but its in the governing documents.  That 'brand' associated with a project during the sales & marketing push may not be around in the long run.  You need to consider those issues and if in doubt, don't hesitate to seek counsel.  Better to be safe than sorry - especially in these uncertain times.

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Court Holds that Homeowners' Associations Can Recover Damages for Breach of Common Law Implied Warranties from the Builder or Developer.

Florida's Fifth District Court of Appeal recently issued a significant ruling finding home buyers and homeowners' associations are entitled to a common law implied warranty of fitness and merchantability with respect to the roadways, drainage systems, retention ponds and underground pipes in a residential subdivision. The Court considered the marketing materials indicating that homes were available for immediate occupancy, essentially "move-in" condition.

The decision, Lakeview Reserve Homeowners v. Marondo Homes, Inc., No. 5D09-1146 (Fla. 5th DCA), was filed on October 29, 2010.  Since it conflicts with case law from another Florida district, the question whether to extend the home buyer's warranty to improvements that are necessary to live in the home, even if those improvements do not physically support the structure of the home itself, was certified for consideration by the Supreme Court of Florida.  

There is a tremendous amount of work that takes place in a subdivision before construction of the homes or recreational facilities and placement of landscaping.  The infrastructure in large communities can cost millions of dollars.  The Developer usually funds that work*, hoping for an even big return by selling the individual houses.  

Correcting defects in the infrastructure can likewise cost millions of dollars.  How many of us are familiar with portions of neighborhoods that flood every time it rains?  How many people that you know had sewage back up into their homes repeatedly, only to discover later that the underground drainage pipe wasn't connected properly?  If the municipality owns and services the underground infrastructure, it will correct problems, but that is not the case for many homeowners' associations. 

The Court found that certain types of improvements were necessary to live in a home - drainage systems, underground pipes, etc.  It further said since a home buyer:

• cannot really inspect this portion of the property before purchase,
• does not have the ability to correct the work during the construction phase, and
• would not typically recognize problems with these portions of the property even if they were allowed on to the site during this early construction phase

they "must rely on the expertise of the builder/developer for proper construction of these complex structures".   Consequently, according to this case, If the builder/developer represents that everything is ready for immediate occupancy, it must warrant that the improvements necessary for occupancy are fit for their particular purpose.  Clearly a significant ruling.

The Court declined to extend this notion of implied warranty to subdivision features it did not consider essential, such as a clubhouse or recreational facilities.  That doesn't mean, however, that homeowners' associations cannot seek to recover damages from builders or developers for defects in these areas.   Defect litigation and alternative dispute resolution pursuant to Chapter 558 (the Construction Defects statute) are viable courses of action to resolve complaints about the inadequacy of construction, violation of building codes and the like.  For more information about construction defects generally, please visit our companion blog, Florida Construction Law Authority.

* I say 'usually' because there are various different methods of financing infrastructure.  If your community is located within a Community Development District (CDD) or Special Taxing District (STD), these costs may be passed on to the home owners.   

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Condominium conversions became tremendously popular (because they were profitable) during the housing boom.  Many old tired apartment buildings were converted to condominium ownership, remodeled and then the units sold.  In some cases the developer substantially remodeled the building and improvements by updating plumbing and electrical systems, replacing the roof, replacing or modernizing elevators and "gutting" the interiors.  In other cases the developer merely installed tile where there was carpet, upgraded the kitchen with fancy cabinets, stainless steel appliances and granite counter tops then painted before selling the units. If the developer of the conversion project funded converter reserves, unit purchasers are left without statutory warranties.

When an apartment building is being converted to a condominium, Section 718.616, Florida Statutes requires the developer to provide each prospective buyer, as part of the Prospectus or Offering Circular, with certain inspection reports from professionals. These reports focus on the physical condition of various portions of the building and improvements. With respect to certain aspects of the building (such as the roof, structure, heating, plumbing and electrical systems), the owner must disclose the age of the component, the estimated remaining useful life of the component, the estimated current replacement cost, and the structural and functional soundness of the component. The specific purpose of the disclosure requirement is to protect the prospective purchaser by allowing them to make an informed decision whether to purchase a "new" unit in what may be an old building.

We are all guilty of not reading the "fine print" from time to time.  That was especially true when purchasers found what seemed to be an affordable price for a condominium unit in the hot real estate market.  Unfortunately for many of those buyers, some of those buildings needed substantial work.  Levying assessments to repair elevators, perform concrete work, repair damages from roof leaks and other expenses in a "new" condominium is stressful for the members of the board of directors and causes friction between the owners and the board. 

If the developer is out of the picture, bankrupt, no longer in business, etc. is there any recourse for the association and its members? 

There is, especially if the building disclosures weren't accurate. Florida Courts have found that the engineers and other professionals preparing these disclosures supplied expert information which was intended to and did guide and inform prospective purchasers on the condition of the building. Accordingly, if engineers or other professionals provide false information which reaches and is relied upon by people who are expected to receive and rely on the information, they may be held liable for expenses incurred by the association to repair or remedy the undisclosed defects.  There was an effort by the legislature this year to vitiate remedies against design professionals.  That bill was vetoed by Governor Crist.

This is not to say every statement of false information in an inspection report in a condominium conversion will lead to a potential claim. It will, however, open the door for those associations where purchasers were truly harmed by the misrepresentations of professionals who are supposed to be providing honest, objective evaluations of the condominium property.
 

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Developers Often Use Community Development Districts (CDD) to Fund Community Infrastructure and Amenities.

Newspapers are filled with advertisements for homes in neighborhoods that have wonderful community amenities.  The streets are lined with sidewalks, beautiful trees tower above medians, there are neighborhood parks and tot-lots, lakes, maybe even a clubhouse with an exercise facility and meeting rooms.  At the sales office you learn that these facilities are solely for the use of the owners within the community.  It is not unreasonable to think that all of these features were built by the developer, at its expense, in order to justify the price of the homes and to encourage sales. 

Well, the latter may be true, but if the property is located within a Community Development District purchasing a home is likely to include a long-term obligation to fund the initial construction of those amenities.

Community Development Districts (CDD) are not new in Florida but use of this mechanism to fund infrastructure and recreational amenities has increased exponentially in recent times.  A CDD is a special-purpose unit created primarily for the purpose of financing and then operating and maintaining community-wide improvements in new communities.  A landowner (usually a developer) petitions the local government to create a CDD with broad powers that enables the CDD to generate revenue.  Bonds are typically issued and payable by the land-owners (purchasers of homes and other properties) in the district over a period of time - up to thirty (30) years.  Additional revenue is generated through special assessments and other fees paid by the property owners in the district.

It is not unusual for a developer, through the use of a CDD, to fund development and construction of the roads, the surface water management systems, parks, clubhouses and other community facilities such as entry features and the like with the initial lump-sum of revenue obtained from the issuance of bonds.  The CDD maintains, operates and administers the property and improvements subject to its control and establishes the fees or other financial obligations of the land owners.

Chapter 190, Florida Statutes became effective in 1980, but CDD's were not very popular in the early years.  Approximately 100 CDDs were created in Florida during the 1990s and then over 200 new CDDs came into existence between 2000 and 2005.  There are currently close to 600 CDDs active in Florida at the present time according to the website maintained by the Department of Community Affairs.

While the Board of Supervisors for each CDD is elected by the landowners, the exercise of the powers and duties of the district, as well as the use of revenue produced by the special assessments and fees, has often come into question.  The developer of the Cory Lake Isles community in Hillsborough County reportedly controlled CDD operations for 18 years.  Residents complained that the developer mismanaged the district's finances and spent CDD money on the developer's personal projects.  When CDD meetings became tumultuous, it hired off-duty police officers to keep the peace, as a CDD expense.   Residents in Cory Lakes have had to pay higher fees, but now have control of the District.

Defaults associated with CDDs have increased, presumably as a result of the downturn in the housing market.  An Orlando based Firm indicated that more than 10% of the CDDs in Florida did not fulfill their obligations.   Defaults may mean even more of the costs will be passed on to homeowners.

Home buyers need to read the 'fine print' before purchasing a home in a Community Development District.

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Amendment to SB 880  approved by Community Affairs Committee intends to encourage purchase of remaining inventory by limiting liability.

Last week the Community Affairs Committee advanced SB 880 with a significant amendment entitled the “Distressed Condominium Relief Act”.

If the bill becomes law, new Section 718.702, Florida Statutes sets forth the legislative intent for the protections afforded to “bulk assignees” and “bulk buyers” of condominium units.

“Bulk assignees” are defined as purchasers of more than 7 units who receive an assignment of some or all of the rights of the developer of the project. “Bulk buyers” are also defined as purchasers of more than 7 units, but have not obtained an assignment (other than rights to conduct sales, leasing and marketing activities within the condominium).

Bulk assignees are not responsible for implied warranties, the obligation to fund converter reserves for units owned by others or honor conversion warranties. Bulk assignees will not have to provide the Association with a full transition audit and will not have to fund developer guarantees or assessment obligations, unless they receive an assignment of the right to guarantee assessment levels and therefore take on the obligation to fund budget deficits.

This section of the proposed bill provides for three distinct methods of assignment of development rights, to wit:

• By the Developer;
• By a previous Bulk Assignee; or
• By a Court.

While bulk assignees are required to deliver any of the documents identified in Section 718.301(4), Florida Statutes in their possession or control to the association upon transition, they are not liable for production or delivery of documents and other materials normally required as part of the transition process, if they cannot obtain them after a “good faith” effort.

Both bulk buyers and bulk assignees need to update the prospectus, the Frequently Asked Questions and Answers Sheet, the required form of escrow agreement (if applicable) and financial information pertaining to the Association.  Disclosure statements, identifying the rights assigned and warranty limitations, are also required.

The legislative history suggests these provisions are necessary to encourage the purchase of remaining inventory in failed projects. 

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Developer's Challenge to Notice of Meeting not Proper Defense to Construction Defect Claim

Lake Forest Master Community Association, Inc. v. Orlando Lake Forest Joint Venture, et al., Case No. 5D08-2096

Lake Forest Master Community Association, Inc. ("Lake Forest") filed a lawsuit for construction defects against the Developer, after the membership voted in favor of doing so as required by Section 720.303(1), Florida Statutes. 

The Developer claimed that Lake Forest shouldn't be permitted to continue its lawsuit since it failed to properly notice the meeting.  The trial court agreed and entered Summary Judgment against Lake Forest.

Section 720.303(1), Florida Statutes, provides, in relevant part:

After control of the association is obtained by members other than the developer, the association may institute, maintain, settle, or appeal actions or hearings in its name on behalf of all members concerning matters of common interest to the members, including, but not limited to, the common areas; roof or structural components of a building, or other improvements for which the association is responsible; mechanical, electrical, or plumbing elements serving an improvement or building for which the association is responsible; representations of the developer pertaining to any existing or proposed commonly used facility; and protesting ad valorem taxes on commonly used facilities. The association may defend actions in eminent domain or bring inverse condemnation actions. Before commencing litigation against any party in the name of the association involving amounts in controversy in excess of $100,000, the association must obtain the affirmative approval of a majority of the voting interests at a meeting of the membership at which a quorum has been attained.

Lake Forest appealed the ruling.  While it could have re-filed, re-filing would have impacted its case tremendously due to a change in Section 95.11(c)(3), Florida Statutes, which is the statute of repose.  The statute of respose changed from 15 to 10 years.  Re-filing the lawsuit would have eliminated any claims associated with latent construction defects that existed in excess of ten (10) years.

The appellate court evaluated the procedures utilized by Lake Forest to call the annual meeting, as well as the procedures utilized to recess and reconvene the meeting. The court noted:

• Notice of the annual meeting was furnished by mail to all owners and posted as required by law.  The mailing included a general proxy;
• Minutes of the annual meeting indicated that the members agreed to recess the meeting and reconvene it for specific date. There was testimony indicating that the President likewise announced the time and place for reconvening the meeting;
• At the reconvened meeting, the President announced the annual meeting would be reconvened again at a specific date, place and time.  That information is reflected in the minutes;
• A Motion was made, seconded and the majority of members participating voted in favor of filing legal action against the developer when Lake Forest reconvened the meeting the second time.

The Court relied on both Section 720.306(7), Florida Statutes and the Association's bylaws when concluding it was not necesary for Lake Forest to send written notice of reconvening the meeting to the entire membership, since the date, time and place were announced before it went into recess.  

Moreover, the Court also concluded that dismissal of the case by Summary Judgment was not appropriate even if the Association failed to comply with technical procedural rules.  Rather, it said the case should have been abated for a period of time to enable the Association to correct procedural deficiencies.

This case clarifies several important points of law for community associations.

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Is the economy influencing the Courts? 

It seems that the trend has shifted from rulings in favor of condominium developers to rulings in favor of  purchasers and more lawsuits on the behalf of buyers are being filed in Courts throughout Florida.  Attorneys have come up with creative arguments against developers in an attempt to cancel contracts and obtain return of initial deposits, or at least portions of those deposits. 

As reported in the Wall Street Journal and other news sources, just over six  (6) months ago the U.S. District Court in Miami dismissed several lawsuits brought against the developer of the Opera Tower Condominium, ruling that the buyers could not rely upon the marketing materials associated with the project.  However in the last two (2) months rulings have agreed with claims made by purchasers.  Just recently the Eleventh Circuit Court of Appeals upheld a ruling against the developer of the Lake Buena Vista Resort as a result of completing the project a mere five (5) days after the deadline promised in contracts with purchasers.  The buyers  were entitled to receive their deposits back, in spite of the developer's claim the delay was beyond its control.  Attorneys for buyers predict similar rulings in the future. 

In December,  2008, the Fourth District Court of Appeal upheld a ruling requiring the developer to return deposits on contracts concerning the 200 East Palmetto Park  building.  The Court found that the project did not qualify for exemptions to the Interstate Land Sales Full Disclosure Act (often referred to as "ILSA"), regardless of an advisory opinion from the Department of Housing and Urban Development (HUD) that was relied upon by the developer.

Unoccupied and unfinished condominium projects are likely to remain prevalent in Florida for the time being, creating opportunities for new investors and home buyers.  However, filing claims against the entire property and including lenders in these types of lawsuits complicates financing for potential purchasers and may impact continued operation and maintenance of the properties.  Please return to this site for periodic updates regarding these issues.

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