What is CAI’s Public Policy on HOA Construction Defect claims?

By Deborah Goonan, Independent American Communities

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Community Associations Institute (CAI) often claims that, by way of representing homeowners, condominium, or cooperative associations, it also represents all homeowners living in Association Governed Housing.

But CAI is a trade group made up primarily of community association managers and attorneys. Most of the “homeowner” members are from a select group of HOA board members, rather than HOA members at large. As I have said before, and I’ll say it again: Trade groups do not serve the interests of their consumers.

One way to drive that point home is to examine official Public Policies of CAI, and analyze if or how those policies benefit consumers – homeowners and residents of Association Governed Housing.

Today, let’s take a look at CAI’s stance on how HOAs deal with construction defects that affect common property.

You can read the entire policy here:

PROTECTION OF ASSOCIATION CLAIMS IN CONSTRUCTION DEFECT LEGISLATION

Below I have highlighted portions of the policy. Read it for yourself. I’ve added emphasis in Bold.

Summary of CAI’s Policy

Starting with the concluding paragraph, you’ll see that CAI’s approach is to attempt to balance competing interests: their own members vs. the development community. Notice there is no mention of homeowners!

On one hand, CAI does not want to offend developers that create HOAs. After all, if or when developers stop building common interest communities, the party is essentially over for Community Association Managers, Attorneys, and countless affiliated vendors that serve the industry.

But millions of homeowners know that developers as well as affiliated design and construction professionals that build CICs are not always dedicated to building a high quality product or offering top notch service. Too often, the homebuilding industry is primarily concerned about keeping costs low and completing projects as quickly as possible.

Shoddy construction and hidden defects are far too common. And, of course, HOAs that must deal with safety and health issues, or property damage due to construction defects, are a true burden on Managers, as well as the homeowners and residents. If HOA members cannot afford to pay for necessary repairs and reconstruction, how will they be able to afford to employ a professional CAI manager?

But the fact that CAI is attempting to serve as referee between HOA attorneys and the developers is simply unworkable. How can this stance fully protect consumer – homeowners?

RECOMMENDATION

Recognizing that CAI’s diverse membership is affected in different ways by construction defect issues, this policy balances the interests and needs of our members with those of the development community to provide an equitable approach to construction defect legislation and regulations. CAI advocates from every perspective to balance their approaches to issues related to construction defects, and embrace the best interests of community associations as a whole.

Approved by the Government & Public Affairs Committee, April 12, 2016
Adopted by the Board of Trustees, May 4, 2016

 

Trade groups do not serve the interests of their consumers.

 

Disclosure of matters related to construction defects in Association Governed Housing

Two more problematic sections of CAI’s Public Policy: homeowner involvement and disclosure of known defects to homeowners and, for that matter, buyers.

On matters of disclosure, CAI advocates for limited transparency and maximum control of HOA Boards and Attorneys.

Note that CAI expects HOA Boards to operate as all other corporate boards: with full decision-making power vested in a handful of association members, even though all association members must bear the costs of litigation and/or live with any out-of-court settlement made between the HOA and developers.

But what if your HOA, condo, or co-op board is stacked with affiliates of the developer? Or what if you have board members that are too quick to sue, and not willing to settle, even if that’s the best business decision?

Shouldn’t affected unit owners  — the consumers that ultimately have to pay for defect repairs and litigation against the developer — have a say in the matter?

Not according to CAI.

Yes, it’s true that requiring a unit owner vote before taking legal action can work in the developer’s favor. But that’s only because voting interests attach to the property, not the person, and the developer or affiliates might own many units and control those votes.

That problem could be solved by enacting legislation that excludes developer and affiliate (investor) owned units from votes on matters involving construction defects, where there would be an obvious conflict of interest.

But CAI doesn’t go there. Why not?

 

Homeowner Involvement

Like any other aspect of community association operations, an open communication process that assures the flow of information among the board, committees and individual homeowners, should be established in every community. If the community association brings a claim for construction defects, it has the responsibility to communicate to homeowners the nature of the defects, the remedies sought, the timing of the claims process and the anticipated fees and expenses to be incurred. When the association has the right to make claims (except during the period of builder control), the governing board, as the elected representative body of all homeowners, must be allowed to make claims without owners’ approval. The prudent governing board will utilize experienced, qualified legal counsel and other experts to verify the validity of a defect claim to help meet both fiduciary and business judgment obligations. Legislation should invalidate as unconscionable any governing document provision proposed by or on behalf of the developer that requires owners’ approval before legal action may be taken for construction defects. Governing boards must have the same discretion as any other corporate board to act on behalf of the corporation. Provisions in governing documents restricting the governing board from taking action do not represent the best interests of owners, and are incorporated by developers solely to benefit their interests. Builders should not be able to avoid their obligation to remedy defects by maintaining control of the association beyond the time permitted by law.

 

In fact, CAI is not even in favor of fully disclosing to property owners (affected plaintiffs with defect complaints) details of legal discovery or legal strategy, let alone the results of any invasive testing. This keeps property owners completely in the dark, as well as any buyers that close sale while litigation is ongoing.

As a housing consumer, are you OK with that?

 

Protection of Attorney Client Relationship

A community association’s relationship with its chosen legal counsel should be protected. The association’s legal counsel must be able to consult confidentially with board members, owners, and agents of the community association without the risk that such communications could be required to be produced in discovery proceedings. Such confidential communication must be protected to the same extent that the law provides for any other corporate counsel who communicates with the governing board, employees, constituents, members and agents of their corporate clients.

Legislation should not limit the choice and ability of a community association to be represented by the legal counsel of its choosing. Legislation should not interfere with the attorney-client relationship by limiting an association’s ability to work with the attorney of its choice in any aspect of a construction defect dispute, including, providing disclosure to homeowners and builders. Furthermore, legislation should not require community associations or their legal counsel to provide disclosures to homeowners or builders irrespective of whether the community association and its legal counsel believe the required disclosure to be true.

Once again, legislation must make a distinction between the group of property owners that have claims against the developer as opposed to property owners that either are the developer or have a direct conflict of interest. Homeowners that are paying for defect repairs and litigation should have the right to know the status of the case and the nature of the defects!

But CAI avoids making the distinction between different types of property owners, and, by doing so, advocates non-transparency.

 

On matters of disclosure, CAI advocates for limited transparency and maximum control of HOA Boards and Attorneys.

The consumer-friendly portions of CAI’s policy

To be fair, some portions of the Public Policy are aligned with consumer interests. But that doesn’t mean CAI fully represents the interests of all homeowners! In some cases, alignment of homeowner interests is only coincidental with CAI’s interests.

All of the following policies are meant to protect the financial solvency of HOAs. But think about it: insolvent HOAs cannot afford to employ professional CAI managers and attorneys.

 

Right to Be Made Whole

To enable the association and its homeowners to be in the position they would enjoy if no defects had existed, the association must have the right to make claims for defects affecting common elements or other components for which the association has repair or maintenance responsibilities. Should an association take emergency measures to correct a defect that poses an immediate health or safety risk, or remediate defects that would cause additional damage to the common elements or homes if not remediated, such action must not impair or preclude an association’s right to recovery, provided evidence of the defect is preserved. When legal action is taken, the prevailing party should be allowed to recover costs, attorney’s fees and prejudgment interest.

 

Statutes of Limitations and Repose

Legislation should provide for reasonable time periods for community associations to bring construction defect claims. Repose periods must account for the fact that latent defects often take years to discover. Limitations periods must give community associations reasonable time after the discovery of defects to investigate defects, work with the builder to informally resolve the dispute, and if necessary to retain legal counsel. Repose periods of less than ten years after the substantial completion of the community, do not provide a sufficient period for community associations to discover latent defects. Limitations periods less than two years after the discovery of the nature of the defect, do not provide community associations with sufficient time to investigate defects, work with the builder to informally resolve the dispute, and to retain legal counsel. The time period in which the board of directors of a community association is under the control of the declarant or other builder entity should not be counted towards any period of limitations or repose. Finally, the general contractor or Construction Affiliate’s statute of limitation should be co-extensive with the statute of limitations during which the association can bring a claim against the developer.

 

Self-Governance

Legislation should not interfere with community association’s right to self-governance. It has become a common practice for builders to insert provisions in community association governing documents that are designed to shield builders from legal liability. Provisions in governing documents that are designed to shield builders from legal liability or make it more difficult, time-consuming, or expensive to bring a construction defect claim, should be statutorily determined to be unconscionable and unenforceable. CAI advocates for legislation consistent with its Self-Governance policy.

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