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

Frequently Asked Questions

About Defect Claims Resolution

  1. Does an Association need an attorney to help it make a construction defect claim against a developer and/or its contractors? If so, why?
  2. What fee structure works best for a client with a construction defect claim? Hourly rates or contingent fees?
  3. Under a contingent fee agreement, who advances costs? The attorney or the Association?
  4. In a construction defect case, who pays a successful claimant’s attorney fees?
  5. Are lawsuits really necessary to resolve a construction defect claim?
  6. If an Association sues, does this mean we will probably take the claim to trial?
  7. Is it true that arbitration is cheaper and faster than a lawsuit?
  8. How does mediation work?
  9. What is a tolling agreement, and why would we want to use one?
  10. Why are hidden defects potentially a serious problem?
  11. Statutes of limitation: What are they and what do they mean for an Association Board?
  12. What types of damages are recoverable in a construction defect suit?
  13. Statutory warranty rights – What are they and how are they different from developer warranties in sales contracts?
  14. What rights does an Association have if a developer is bankrupt?

1) Does an Association need an attorney to help it make a construction defect claim against a developer and/or its contractors? If so, why?

An attorney can help an Association with construction defect issues in many ways. Here are some of them:

An attorney with substantial experience in resolving construction defect issues can help an Association Board make the right choice in selecting a consultant to evaluate the construction quality of the condominium.

The attorney can assist in determining the scope of an investigation. Too little may reduce the value of the investigation. Too much may result in unnecessary expense.

Valuable rights can lapse and be barred while an Association conducts its investigation or attempts to negotiate a resolution of its claims. An attorney can help ensure that this does not happen.

The involvement of an attorney in the dispute resolution process may discourage the developer or its contractors from unduly delaying resolution.

If a developer is asked to do substantial repair or corrective work, or to pay the Association a substantial sum of money in lieu of doing the work, the developer will probably want a release as part of a settlement. An attorney can make sure that the release is limited to specified issues and is not overly broad.

2) What fee structure works best for a client with a construction defect claim? Hourly rates or contingent fees?

Most work by lawyers is done on an hourly basis. This usually involves a monthly invoice, with the lawyer expecting payment within 30 days. With a contingent fee, payment is deferred until the claim is resolved, and the fee is limited to a specified percentage of the recovery, regardless of the amount of time put into the case by the lawyer.

An hourly rather than a contingent fee works best for the client where the recovery is substantial and the attorney time spent to obtain the recovery is not substantial in relation to the amount recovered. In that situation, the attorney fees will be less if computed on an hourly basis than if computed on a contingent fee basis.

The contingent fee, on the other hand, offers a client several advantages:

First, it enables the client to avoid paying any attorney fee if there is no recovery.

Second, the fee cannot exceed the specified percentage of the recovery, regardless of the amount of the recovery or the amount of time spent by the attorney in obtaining it. If an attorney is hired on an hourly basis, however, and the total recovery is relatively small compared to the amount of time spent by the lawyer, the hourly fees may eat up most or all of the recovery.

Third, payment of the fee is deferred until there is a recovery. This avoids the necessity of monthly attorney fee payments and may eliminate the need to impose a unit owner assessment to finance prosecution of the claim.

It often makes sense for the Association to initially hire the attorney on an hourly basis to see if the claim can be settled without a lawsuit. Then, if it appears that a lawsuit is necessary, the Association can transition from an hourly to a contingent fee.

3) Under a contingent fee agreement, who advances costs? The attorney or the Association?

A large percentage of Associations elect to hire a lawyer to prosecute a construction defect claim on a contingent fee rather than an hourly basis in order to defer payment of attorney fees until the matter is resolved. However, attorney fees aren’t the only expenses incurred by a client in the investigation and prosecution of a construction defect claim.

First, the claim has to be evaluated. What exactly are the defects? How serious are they? Do they really need to be corrected? Are they isolated or present throughout much of the project? What needs to be done to correct the problems? How much will it cost to correct them?

Lawyers and their clients rely on consultants to provide answers to these questions. Usually an engineer or architect will determine what the problems are, where they are, and how to fix them. A contractor will then estimate the cost of the necessary corrective work.

These consultants almost always work on an hourly basis, bill monthly, and expect to be paid promptly. The time they put in is usually related to the scope of their investigation. The more issues that are investigated, and the larger the project, the greater the amount of time that the consultants will need to put into the investigation. The more time they spend, the more they charge.

If a client wants to defer payment of these consultant costs until the claim is resolved, the attorney hired on a contingent fee basis may be willing to advance some or all of these costs. However, if the lawyer agrees to advance costs, the lawyer will want to be paid a higher percentage fee.

A good compromise is for the lawyer to work on a contingent fee basis and for the client to advance costs. That way the client can defer paying attorney fees until the matter is resolved, and can hire the attorney for a lower percentage contingent fee than would be the case if the lawyer is required to advance the costs.

4) In a construction defect case, who pays a successful claimant’s attorney fees?

Sometimes underlying contracts between purchasers and the developer will have an attorney fee provision that will apply to a construction defect claim. Typically, however, such contracts contain no such provision.

Sometimes an Association’s declaration will contain a provision allowing an Association to recover its attorney fees from the developer in an action involving a construction defect claim. However, most attorney fee provisions in Association declarations do not apply to construction defect lawsuits.

In some states, statutes which impose construction warranty liability on a developer or contractor include a provision which may allow the claimant on a breach of warranty claim to recover attorney fees. The Virginia Condominium Act’s warranty statute includes such a provision.

Using the probability of an attorney fee award at trial in settlement negotiations before trial, an Association is in a strong position to insist on attorney fees as a legitimate component of any settlement.

5) Are lawsuits really necessary to resolve a construction defect claim?

Whether a lawsuit becomes necessary is totally in the hands of the developer and its contractors. The problem is that most developers and their contractors won’t be willing to address defects that are costly to correct unless they are first sued. There are several reasons for this:

First, the developer hired contractors to construct the project. So if something has gone wrong, they will want the contractors to fix it. However, the contractors will probably be unwilling to do so. Each contractor at whom the finger is pointed is likely to blame the developer, the architect’s plans, some other contractor or all of the above parties. Typically, no one will be willing to take responsibility.

The extra time and effort in doing the work correctly rather than incorrectly is usually minimal. However, removing an incorrectly installed component and re-installing or replacing it may cost more than the original installation. If a contractor made a 10% profit on his original work, and if correcting that work will cost 50% more than the original work, in order to fix the problem, the contractor will have to spend about 15 times as much as his original profit. Most contractors simply won’t undertake repair unless legally compelled.

Secondly, as a practical matter, the developer and its contractors often have liability insurance that may pay for some or possibly all of the cost of repair, and their insurers normally won’t become involved in the dispute resolution process until their insureds get sued.

As a result, often a lawsuit turns out to be the only way to get a construction defect claim resolved.

6) If an Association sues, does this mean we will probably take the claim to trial?

Probably not. Over 90% of civil litigation is settled without a trial. Construction defect claims are no exception. Trials of Association construction defect claims are rare, so most defect suits can be resolved without a trial.

A lawsuit, however, is often necessary, because it accomplishes three things without actually having to take the suit to trial.

(1) It gets the attention of the developer, its contractors, and their insurers in a way that letter writing usually doesn’t.

(2) It forces insurers for the developer and its contractors to get involved in the dispute resolution process. Insurers can ignore liability claims against their insureds, but they can’t ignore lawsuits against their insureds.

(3) You get a trial date. Trial dates are what get cases settled. As much as they dislike having to pay money, developers, contractors and their insurers dislike jury trials even more. If the claim is legitimate, they would rather pay on the claim than risk a jury trial.

Thus, most construction defect suits get resolved without trial.

7) Is it true that arbitration is cheaper and faster than a lawsuit?

Not necessarily. The advantages of arbitration have been greatly exaggerated by defendants and their insurers. Arbitration works best when the claim is small. The bigger the claim, the less likely that arbitration will retain its advantage over a lawsuit.

Arbitration is marketed to the public as a dispute resolution mechanism that is less complicated than a lawsuit. However, this isn’t really so. What slows down the dispute resolution process in a lawsuit is the pre-trial discovery that is allowed in litigation. However, in an arbitration proceeding, if a large amount of money is at stake, the arbitrators will also allow pre-trial discovery. When this happens, an arbitration starts to look more and more like a lawsuit.

Also, an arbitration isn’t necessarily quicker than a lawsuit. Most arbitration involving a significant amount of money will require three arbitrators. Most arbitrators have busy schedules. Try to get three arbitrators to all agree on hearing dates. Chances are that in any given week there will be only one day when all three are available. This means that some arbitrations can drag on for months, even after the arbitration hearing has started, because of scheduling conflicts of the arbitrators.

Finally, instead of being cheaper, an arbitration proceeding can be more expensive than a lawsuit. In a lawsuit, the taxpayers rather than the parties pay for the Judge. And the jurors’ pay is nominal. In an arbitration, the parties pay the arbitrators. And in a large claim, where arbitration rules may require three arbitrators, the arbitrators’ fees can exceed $1,000 an hour. On top of that, the arbitration service will charge a fee for administering the arbitration process. This fee can run into many thousands of dollars.

Most Associations with significant defect clams will be better off filing a lawsuit than initiating an arbitration proceeding.

8) How does mediation work?

It is often very difficult for two opposing parties to resolve their differences without the intervention of a neutral third party. In any negotiation, both sides tend to be emotional. They will want to “dig in”. They will be reluctant to compromise and will have a hard time seeing the case from the other side’s perspective.

A skilled neutral third party will try to defuse the emotions of the two sides and to ensure that hard facts rather than emotion drive the negotiation.

Also, a client will be more open to a compromise suggested by a mediator than by the client’s own lawyer. The client wants the lawyer to advocate the client’s position, and is more receptive to compromise proposals when they come from a neutral third party.

Moreover, there are usually two sides to an issue, and since lawyers are hired to be advocates for their clients, it is often difficult for a lawyer to both advocate a position and to point out to the client the weaknesses in that position. That is where the mediator comes in. The mediator’s job is to point out the weaknesses in a client’s position which the client’s lawyer may be reluctant to acknowledge.

In most negotiations, both sides tend to start out with extreme positions. The mediator’s role is to realistically assess both the strengths and weaknesses of each side’s position. The mediator will do this in private discussions with each side separately. The objective will be to narrow areas of disagreement to the point where compromise by both sides can result in resolution.

While a mediator can’t legally order anything, his or her role is to persuade opposing parties to moderate their positions in a way that will ultimately enable them to reach agreement.

9) What is a tolling agreement, and why would we want to use one?

An action must be brought to enforce a claim within the time provided by law. That time period is called the statute of limitations. Failure to bring an action within the period of the statute of limitations makes the claim “time barred”. A claim that is “time barred” will be dismissed by the Court.

A “tolling agreement” is an agreement between a claimant and a potential defendant that for the period specified in the tolling agreement, the statute of limitations will stop running.

A tolling agreement is used when it appears that the statute of limitations may soon run out, and the claimant wants to have the opportunity to try to resolve the matter without filing a lawsuit. The danger is that the effort to resolve the matter without a lawsuit will prove unsuccessful, and that by the time the claimant realizes a lawsuit is necessary, it is too late to file one.

A tolling agreement prevents that from happening by “freezing” the running of the statute of limitations while the parties try to resolve the matter without a lawsuit.

However, there is a downside to a tolling agreement: If there is potential insurance coverage for the developer, and the developer agrees to a tolling agreement without the consent of its insurers, the developer may have lost its insurance coverage.

A second problem with a tolling agreement is that it binds only the parties to the agreement. If the contractors don’t become parties to the tolling agreement, any statute of limitations on a claim against them may continue to run.

Lastly, if a lawsuit is inevitable because of the nature and amount of the claim, a tolling agreement only delays the inevitable. And delay rarely works in a claimant’s favor.

10) Why are hidden defects potentially a serious problem?

Hidden defects are a potentially serious problem for a number of reasons. As an initial matter, hidden defects are common. Take for example the case of water intrusion: moisture can remain hidden inside the building envelope for years. When this happens, the defect does not become apparent until the mold and dryrot resulting from the water intrusion have worked through the exterior siding or interior drywall. Because moisture damage starts from inside the building envelope, it may take many years before the damage caused by the hidden defect affects exterior or interior wall surfaces and thus becomes obvious.

By the time anyone notices the defect, two things may have occurred: (1) damage which is expensive to repair may have occurred; and (2) by the time an Association Board realizes they have a serious problem, it may be too late to act. By then, the responsible parties may be out of business, their liability insurance may have been exhausted by the payment of prior claims or any applicable statute of limitations on making a claim may have run.

The only way to avoid the consequences of hidden defects is to retain a qualified consultant, usually an engineer or architect with construction related experience, to determine whether hidden defects are an issue. All an engineer has to do is open up portions of the envelope and take a look inside. If that inspection discloses hidden defects, the consultant can determine how to correct the defects before serious damage occurs, and the Association can take legal action, if appropriate, before valuable rights are lost.

11) Statutes of limitation: What are they and what do they mean for an Association Board?

In most states, including, public policy requires that claims be made without undue delay. Thus, the pursuit of “stale claims” is discouraged, and the way to discourage the making of “state claims” is to punish claimants who “sit on their rights.”

This is accomplished by statutes of limitation that bar suits if they are not filed in a timely manner. These statutes bar untimely suits regardless of the merits of the claim.

Moreover, except in unusual circumstances, complaining to the developer or contractor doesn’t stop the statute from running. To stop the statute, legal action must be taken within the period provided by the statute.

In Virginia, under the Condominium Act, an action can be brought to enforce the statutory warranty within five years after the date the warranty goes into effect. For common element defects, this means five years from the later of completion of the common element or sale of the first unit. As to defects within an individual unit, the warranty period begins to run from the date that unit is first sold.

For a statutory implied warranty claim, applicable to non-condominium projects, an Association is required to take action within two years of the breach of the warranty. For construction defects that occur in the original construction and precede the sale of the unit, the date of breach is considered the date of sale.

Once a Board becomes aware of any potential defects, it should consult counsel regarding the potential application of a statute of limitations.

12) What types of damages are recoverable in a construction defect suit?

Unless the cost of repair is grossly disproportionate to the loss in value resulting from the damage, the cost of repair is ordinarily recoverable. Moreover, the cost of repair can be recovered without having to first make the repair.

The cost of repair will usually include not only the contractor’s charges for making the repairs, but also the cost of determining what repairs have to be made, and the cost of overseeing the work of the contractor doing the repairs.

Temporary relocation costs may be recoverable if unit owners are required to move out of their units during some portion of the repair process.

Other forms of damages may also be recoverable, including an award of attorney fees.

13) Statutory warranty rights – What are they and how are they different from developer warranties in sales contracts?

Typically, a developer provides a one year warranty against construction defects in its sales contracts. However, warranties provided by developers in their sales contracts and by contractors in their construction contracts should not be confused with statutory warrantees.

Statutory warranties are warranties provided by state statute and are separate and apart from whatever warranties a developer or contractor voluntarily agrees to provide. Statutory warranties, therefore, are warranties in addition to warranties provided by developers in sales contracts or by contractors in their construction contracts. These statutory warranties are very broad, and it is very difficult for a developer or contractor to avoid or disclaim them.

The Virginia Condominium Act includes statutory warranties for the quality of new construction. Va. Stat. § 55-70.1 also provides a statutory implied warranty of construction quality for non-condominium new construction.

These statutory protections are broad and can give Associations substantial protection against defective construction. However, in order to take advantage of these protections, an Association must act in a timely manner.

14) What rights does an Association have if a developer is bankrupt?

Developers frequently go out of business, and in recent years many more have gone into bankruptcy. However, neither situation necessarily impacts an Association’s ability to recover for defective construction.

The settlement of construction defect claims is often funded by developer and contractor liability insurance. The insurers remain responsible under their policies up to their policy limits, even if their insureds are in bankruptcy.

Therefore, even if a developer goes bankrupt or out of business, a claimant can still pursue the developer’s insurers, the contractors and the contractors’ insurers. Further, even if the developer and its contractors have no insurance when the claim is first made, if they had liability insurance when the damage first occurred, those policies may cover the claim.

Also, the fact that a developer goes into bankruptcy doesn’t always mean that the developer has no assets other than its liability insurance with which to satisfy claims. Many times a developer will file a Chapter 11 bankruptcy rather than a Chapter 7 bankruptcy.

A Chapter 7 bankruptcy normally involves liquidation of the debtor’s assets for fire sale prices. However, a Chapter 11 bankruptcy contemplates a reorganization rather than a liquidation. In a Chapter 11 bankruptcy, the debtor’s goal is to reorganize, stay in business and pay unsecured creditors a specified percentage of what they are owed. Sometimes this percentage is quite substantial.