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Protect Valuable Property Rights in the event of construction defects and the resulting damage to your condominium or townhome project.


A Survivor’s Guide to Construction Defect Resolution in Maryland

The lawyers at Levin Law Group LLP have helped a wide range of condominium and townhome associations to resolve construction defect claims with the developers of their projects.

In the course of our work we have come to appreciate the following:

  • Seriously defective construction is unfortunately common;
  • It is often exceedingly expensive to correct;
  • If the repair of the defective construction is unreasonably delayed, the physical damage caused by the defective construction significantly increases and so does the cost of the corrective work; and
  • It is common for defects to remain hidden until long after serious damage has already taken place inside the building envelope and valuable association rights already have been lost or otherwise compromised.

Over the years, we have found that associations are not always aware of their rights when their projects are impacted by defective construction.  Associations may not know how to remedy the defective conditions, and in particular, how to compel the project’s developer to address them.

The purpose of this guide is to help association managers and boards understand the construction defect resolution process and how to take full advantage of the association’s legal rights. However, this book is not intended to constitute legal advice to the reader and should not be relied on as a substitute for consulting a lawyer licensed to practice law in the jurisdiction where the legal advice is sought.

Moreover, the legal advice should be relied on only if it has been given after all the relevant facts are disclosed to and considered by the lawyer from whom the legal advice is being sought.


Overview

EVALUATING CONSTRUCTION QUALITY

1. The Association’s Responsibilities
Typically, a condominium association has the obligation to maintain common areas. Even though damage occurs within a unit, if the cause is a common area defect, the association has a duty to deal with the problem.

Even where the building exterior is part of the unit itself and not considered part of the common area, as in many associations not governed by the Condominium Act, the association still may have a duty to maintain roofs, siding and other building envelope components.  In such a situation, an association may have the duty to deal with building envelope problems even though the building envelope may not be part of any common area.
Association board delay in addressing defects in parts of a project that the association has a duty to maintain will result in increased physical damage, a more costly fix, and the potential loss of valuable rights.

2. Top 10 Construction Defects
Among the defects often found in residential projects are poor flashing, window defects, inadequate ventilation of crawl spaces and attics, improperly sloped roofs, decks and balconies, improperly installed plumbing systems, excessive sound transmission between units, poorly installed waterproofing, and inadequate soil preparation.

3. Why Construction Defects Are So Common
In many situations, the builder’s objective is to complete the project as quickly as possible and to “pass inspection” by the building department. If the defect isn’t caught by the building inspector, it often doesn’t get corrected. And building inspectors may miss or ignore a lot of defects.  That is why the fact that construction may have been approved by the City or County does not ensure that the construction is Code compliant or done in a good and workmanlike manner.

4. Working with the Developer
An Association will normally want to try to work with a developer to resolve claims. However, a developer may want to minimize the scope of repairs and may offer temporary “Band-Aid” fixes which merely disguise the problems rather than solve them.  Counsel can advise an association during the negotiation process with the developer.  Counsel will help the board to understand the association’s rights, the time limits on the association’s ability to exercise those rights, and the importance of obtaining a fix that adequately addresses the problems.

5. Why There is a Need for Professional Evaluation of a Project’s Construction
Frequently, defects remain hidden inside a building envelope for many years.  Often, the result is that by the time they are discovered, substantial damage already has occurred and the rights of an association and its unit owners may already have expired.

To avoid this unfortunate situation, a board should hire a qualified professional to evaluate the construction quality of the project while the enforcement period for any statutory or other rights is still in effect.

The evaluation should be made by an engineer or architect or by a contractor with specialized training and experience in evaluating construction quality.  This person should be selected by the Board and not by the developer.  And the evaluation should include a look inside the building envelope to see how well the building envelope system is doing in keeping water out and in getting water that has entered into the building envelope to exit the building.

A Board should not make its decision on who to hire to perform the evaluation based solely on cost.  Most qualified professionals charge about the same hourly rate.  A lower bid may mean lower qualifications or a less thorough investigation and an insufficiently detailed report of findings.

ASSOCIATION AND HOMEOWNER RIGHTS

1. Express Warranties
Express warranties are warranties voluntarily and specifically provided by a developer in its sales agreements. They are of some value, but their value is often limited. The reason is that express warranties are typically for a short duration, and the unit owner or association is usually required to take formal action to enforce the warranty before the warranty runs out.  Often the warranty period is only one year.  But serious defects may remain hidden and not become obvious until several years after unit sales.  Thus, by the time an association board or individual homeowners realize there is a problem, express warranty rights may already have run out.

2. Statutory Warranties

A. Condo Act Warranties
The developer is responsible for correcting structural, mechanical and other significant defects in both the units themselves and the common areas under the statutory implied warranty of construction quality provided in the Maryland Condominium Act.

As to common area defects, the warranty extends for a period of three years, generally measured from completion of the improvement or sale of the first unit, but in any event for a period ending no less than two years after the unit owners obtain majority control of the association’s board of directors.

However, notice of the defect must be given to the developer during the warranty period. And an action to enforce the warranty must be commenced within one year from the expiration of the warranty period.

The Condo Act implied warranty cannot be eliminated by the developer. However, the period for giving notice of a claim and for taking legal action to enforce the warranty is not dependent on when the defect is discovered.

B. Warranties Under the Homeowners Association Act
Under the Homeowners Association Act there is a statutory, implied warranty of construction quality similar to the warranty provided by the Condominium Act.  However, unlike the Condominium Act statutory implied warranty, the Homeowners Association Act statutory implied warranty applies only to common areas. Additionally, the duration of the warranty is two years, measured from commencement of the warranty or transition of board control from the developer to the unit owners, whichever is later.

Like under the Condo Act, notice of the claim must be given to the developer before the warranty expires, and an action to enforce the warranty must be commenced within one year after its expiration.

C. Cooperatives
The warranties under the Cooperative Housing Corporation Act are similar to those under the Condominium Act. They have a three year duration.  Like under the Condo Act, notice of a claim under the warranty must be given to the developer during the warranty term, and an action to enforce the warranty must be commenced within a year after expiration.

D. §10-203 Statutory Implied Warranty Applied to All Residential Developments
Under Maryland statutes, §10-203, there is a broad statutory implied warranty of construction quality that applies except with regard to defects that should have been apparent on reasonable inspection by the buyer at the time of purchase.  However, the warranty is for only one year, or two years for structural defects.

While the statute doesn’t require that a claim be made against the developer during the term of the warranty, it does require that legal action to enforce the warranty be commenced within two years after the defect was or should have been discovered, or within two years after expiration of the warranty, whichever occurs first.

E. §10-601 to 10-610

New Home Warranties Act
This Act permits builders to adopt a new home warranties plan that contains provisions described in the Act.  However, a builder is not required to offer such a plan.  In any event, the plan would be of limited value to a purchaser because the period of the warranty under the plan would be only two years for mechanical and electrical issues, and only one year for water intrusion issues. Since many if not most water intrusion issues would not be discovered during a one year warranty period, it would appear that many water intrusion problems would not be covered by a warranty plan adopted by the builder pursuant to the provisions of this Act.


COUNTY WARRANTY PROGRAMS

Montgomery County by specific ordinance and regulations requires a builder of a new dwelling to provide buyers with a one year, two year and five year warranty against defects in the dwelling.  The county requires a one year warranty of all components, a two year warranty of electrical and mechanical systems, and a five year warranty against major structural defects.

However, any claim against the builder under the Montgomery County program requires notice to the builder within 30 days after expiration of the warranty.  Serious water intrusion problems often do not become apparent until long after the expiration of the one year warranty period. So such problems would be covered by the Montgomery County warranty program only if the water intrusion resulted in a violation of the warranty against major structural defects, and did so within the 5 year period of that specific warranty.

The problem is that to breach the warranty required by Montgomery County against major structural defects, the dwelling or portions of the dwelling probably have to be in danger of collapsing or in danger of otherwise becoming uninhabitable.  And it is doubtful in most cases that the deterioration resulting from water intrusion would reach that point within the five year warranty period for major structural defects.

Also, the Montgomery County warranty program does not apply to condo projects over four stories in height or to the common area or limited use common area of any condo project.

Other counties may have similar warranty programs, but their programs may have similar limited application.

1. Common Law Implied Warranties

Common law implied warranties are created by courts rather than by statutes.  In Maryland, there are no common law implied warranties applicable to the purchase of a completed dwelling.

2. Negligence Liability

In many situations a party can be liable to an injured plaintiff if that party’s negligence resulted in damage to the plaintiff or to the plaintiff’s property.  However, when the negligence results in only an economic loss, and not in physical damage, courts will often rule that negligence liability doesn’t apply.

In some states, courts have ruled that where the negligence in the manufacture of a product or in the construction of a building results only in damage to the product that was manufactured or to the building that was constructed, the damage is a mere “economic” loss.  Having reached that conclusion, these courts will rule that to obtain a remedy, the plaintiff must rely on any contract or warranty rights the plaintiff may have, and cannot rely on a negligence theory of liability.

Maryland’s courts have taken a “compromise” position, holding that negligent construction cannot serve as the basis for liability, where the only property damage is to the negligently constructed building itself, unless the resulting damage to the building poses a substantial risk of severe bodily injury.

Arguably, a structurally deficient balcony could pose such a risk, as might mold resulting from unwanted water intrusion, because mold could have an impact on the health of persons with allergies or compromised immune systems.

There is relatively little case law in Maryland regarding the degree of risk of personal injury and regarding the type of potential personal injury that will be required to overcome the “economic loss” defense to a negligent construction claim.

Given the uncertainty associated with a negligent construction claim created by the economic loss rule, most claimants will focus on claims which offer more promising prospects for success, such as statutory warranty and Consumer Protection Act claims.

3. Consumer Protection Act Claims
In many situations, an association or a homeowner’s most promising claim is that the developer violated the Maryland Consumer Protection Act by failing to disclose defects in the project even if the developer wasn’t aware of the defects, if the developer should have been aware of them.

The statute of limitations on a “CPA” claim is three years.  And it doesn’t begin to run until the defects were or should have been discovered. So a CPA claim may survive a statute of limitations defense in circumstances under which a warranty claim might not survive that defense.

Also, absent a CPA claim, it is usually impossible for a plaintiff to obtain an attorney fee award.  There is usually no attorney fee liability under a negligence claim, and none of the implied warranty statutes provide for an attorney fee award to a prevailing party.  However, under Maryland’s Consumer Protection Act, the court may make an attorney fee award to a prevailing plaintiff, and courts usually do.

The threat of an attorney fee award against a developer defendant under a CPA claim greatly strengthens a plaintiff’s leverage in negotiations over settlement of the claim.

And it may be arguable under the Act that a developer is liable for failure to disclose defects without regard to whether the developer knew or should have known of that defect.


THE CLAIMS RESOLUTION PROCESS

1. Pre-Suit Notice of Claim

Under the Condominium Act and under the Montgomery County Warranty Program, a claimant must provide the developer with timely notice of a warranty breach, and must give the developer an opportunity to cure.  And under the Condominium Act, an action cannot be filed without the claimant having done so.  However, there is no express requirement under Maryland’s statutory warranty applicable to all dwellings (§10-203, etc.) that such notice be given prior to taking legal action.  Nor does the Consumer Protection Act expressly require such notice before taking legal action under that statute.  Nonetheless, a claimant should as a matter of course give the developer notice of the defect and an opportunity to do the necessary corrective and repair work or to settle the claim, before taking legal action.

2. Is It Really Necessary to File a Lawsuit?

Without a lawsuit, often it is difficult to resolve a defect claim where the cost of repair is substantial.  The developer and its contractors may not be willing or able to make the necessary repairs or to fund the cost of repairs to be made by the association or homeowner.  Also, the developer and its contractors may be unable to agree on how the repair costs should be allocated between them.

Once a lawsuit is served, insurers for the developer and its contractors may have a duty to attempt to resolve the claim against their insureds.  That duty, plus the prospect of a jury trial down the road if the claim is not resolved, usually result in a settlement of the claims at some point prior to the trial date.  Thus, a lawsuit should simply be viewed as an often necessary part of the dispute resolution process.

3. Association Standing to Sue

Under the Condo Act, a condominium association automatically has standing to sue for defective construction unless the association’s governing documents provide otherwise.

For an association not governed by the Condo Act, unless the defect is in a common area, there is no specific statutory authority for an association to sue for defective construction.  However, there is case law that such authority may exist in some circumstances.  Also, an association not governed by the Condo Act may be able to acquire such authority by taking an assignment of claims from unit owners.

Under the Homeowners Association Act, an association not governed by the Condo Act has standing to sue for common area defects.  But such an association may lack standing to sue for defects in the units themselves, absent claim assignments by unit owners to the association.

4. Limitations on a Board’s Authority to Initiate Legal Action on Behalf of the Association

Sometimes an association’s governing documents purport to require a “super majority” of “all” unit owners to approve a lawsuit against the Declarant before a board can initiate legal action.  In some states, such a limitation on board authority may be unenforceable.  In Maryland, there is no case law that such a limitation is unenforceable. However, there may be ways to get around that requirement if a super majority vote of approval by unit owners proves impractical to obtain.

5. Arbitration Requirements

Developers often include in their sales agreements provisions requiring arbitration of claims by purchasers.  Before taking legal action, a claimant should review all relevant documents to determine if there is a potentially applicable arbitration requirement, and if so, what it provides.

6. Mediation

Most lawsuits are resolved by mediation sometime after suit is filed. In a mediation, the mediator acts as a “facilitator”, but has no authority to decide anything.  However, a skillful mediator is usually successful in persuading the parties to come to an agreement that resolves the case.

7. What If the Developer Goes Out of Business?

Developer entities frequently go out of business. However, their insurers rarely do so. If the developer had liability insurance, any insurance coverage for the developer’s liability would still apply even though the developer may no longer be in business.

8. Claims Against a Dissolved Developer

The dissolution of the developer entity may prevent a claimant from obtaining a judgment setting aside a transfer of developer assets to its investors.  However, it will not prevent a claimant from obtaining a judgment against that dissolved developer entity.  Armed with that judgment, an association (or other claimant) can seek to satisfy that judgment by exercising any indemnity rights the developer entity has against its insurers or its subcontractors, regardless of the fact that the developer may have been dissolved.

9. What If the Developer Goes Bankrupt?

A developer’s bankruptcy will impact how a claim against that developer will be resolved.  However, a developer’s bankruptcy usually does not affect an insurer’s liability arising out of a claim covered by that insurer’s policy naming the developer as an insured.

CONCLUSION

Associations and their unit owners usually have substantial statutory or other warranty rights protecting them against defective construction.   Associations and their unit owners may also have the right to make a claim against the developer under the Consumer Protection Act.  However, there are time limits within which the association or its unit owners must take legal action to enforce those rights.

Association boards or homeowners should seek legal advice from an attorney with substantial experience in the resolution of construction defect claims.  That attorney can explain those rights as they apply to that particular association or its homeowners, any applicable time limits, and how the board or homeowners may want to proceed. That attorney may also be willing to pursue a claim on a contingent fee basis. In that event, the attorney fee may be limited to a percentage of the recovery. Thus, if there was no recovery, there would be no attorney fee.

Richard H. Levin, Director of Client Relations

January, 2017