CONSTRUCTION PROBLEMS AND COMMUNITY ASSOCIATION FINANCIAL STABILITY

Nothing lowers property values faster in a community association than poor maintenance and repair. Doing this properly requires money--and planning. Community associations that adequately plan for long-term maintenance and repair needs can keep their association financially stable and preserve the equity of the owners.

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Location: Walnut Creek, California, United States

I received my Ph.D. in Government from Claremont Graduate School and my law degree from the University of California, Davis. Berding|Weil has represented community associations for over 35 years. For more information, please call 925-838-2090, or email: tberding@berding-weil.com

Monday, May 01, 2006

We have written many times about the need for community associations to plan their financial future with care. This requires a thorough analysis of what is known about the physical condition of a community association’s property and from that drawing conclusions about reserve requirements. All of this sounds good, and it works as long as there are no significant surprises.

But with many associations surprises have become the rule, and there are no bigger surprises than those that arise from various construction problems. There are, of course the problems found early in an association’s life--those that emanate from defects in original construction. But there are others, also related to the construction of the buildings that can affect financial stability much later.

These problems include latent construction problems not discovered in the first decade of an association’s life; poorly executed repairs; and building components which require extraordinary and unanticipated maintenance. Any of these issues can do as much, and perhaps more, financial damage to a community association than original construction defects. That’s because most construction defects, if found before the lapse of ten years, are covered by the developer’s “warranty”—its obligation to its customers to correct, or to pay for correcting, construction defects.

Minor construction problems are often addressed by the builder’s customer service department. More expensive problems might be settled through negotiation after nothing more than a written request to the builder. But more typically, an independent expert and the assistance of legal counsel are needed to resolve such claims. Nevertheless, among the resources of the builder, its subcontractors and everyone’s insurance carriers, the resources to address most original construction issues are ultimately there, albeit after a little persuasion.

This is certainly not true with construction issues that develop later in an association’s life. There are many new, and a few old, statutes of limitation that severely limit an association’s ability to tap the developer of the project for the cost of repairing construction defects. Not only is there a ten-year, almost absolute outside limit to a developer’s liability, triggered by completion or occupancy of the project , there are many, much shorter limitations imposed by the new SB800 , which imposes limitations on legal actions as short as one year from completion. Anything discovered after the relevant statute has lapsed can not be asserted against the builder, so even hidden defects, if discovered later than 10 years from completion, cannot be the basis for a claim.

If the association hires a contractor to perform repairs, only that contractor can be held responsible if the repairs are mishandled. There is usually no recourse to the original developer at that point, and the remedial contractor is entitled to rely on the narrow terms of his contract to define his responsibilities. If the roof is repaired and later leaks, the roofing contractor is not liable if the leaks turn out to be from say, chimney flashings that were not part of the contractor’s scope of work. A remedial contract typically does not expose the contractor to the same breadth of liability that would normally apply to the original developer.

The original developer has liability for everything that is either built or designed into the project. Professionals designing or performing later repairs usually have a much narrower responsibility, and if the association’s claims are outside of this range of limited culpability, the members will have to bear the loss. This is especially true if the board of directors chooses an untried or novel method of repair that fails badly and the vendor cannot be found or cannot respond in damages. The association will then have to ask the members to contribute new capital sufficient to re-do the work, or exhaust the association’s reserves, or both.

So, if the association invests hundreds of thousands of dollars in roof repairs and those repairs turn out to be faulty, recovering from the repairing contractor may be difficult. Also, if the fault lies with a poor design or specification, then the association would have to look to the architect or roof technician for its losses, yet such professionals usually carry a limited amount of insurance, and/or have limitations on liability in their contract, sometimes limited to the amount of their fee.

Finally, even components which are constructed properly can require extraordinary sums for repair and maintenance which may not be included in an association’s budget. A good example is hardboard siding. Most association reserve budgets do not provide for siding replacement as an item of maintenance or even long term repairs. Most siding is expected to last the life of the building and require only periodic painting. With hardboard siding, painting is not usually enough, and within the first twenty years of an association’s life most, if not all of it will require replacement. Whether that replacement is considered “maintenance” or a “repair” makes no difference when there is no money to pay for it. The need for wholesale siding replacement has financially crippled many associations because no one anticipated that substantial expense. The cost to replace wooden balconies and entry structures which rot and weaken are other examples of enormous unexpected repair expenses that can severely undermine an association’s financial stability.

Any of these circumstances, occurring later in an association’s life, can have deleterious effects on its financial condition. Early and comprehensive inspections, whether intended to document construction defects, or to head off later developing problems, are obviously important to any association. The investigations necessary to formulate a reserve funding plan is a good place to start, but expanding those investigations to include components that are not typically included in a reserve budget is also a prudent move. Getting by original construction defects with help from a claim against the developer is not the end of the story. Using those funds wisely, and staying alert for future, unanticipated construction issues, is equally important.

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