Recent amendment to Michigan HOA bill prevents suing developer for construction defects

By Deborah Goonan, Independent American Communities

Who should have the power to decide whether or not to pursue litigation against a condominium developer for defective construction of common property: the condominium association’s board of directors or the entire membership, based upon a two-thirds vote of approval?

That is the crucial question currently under consideration by the Michigan Legislature.  House Bill 4919, introduced in 2015 by Klint Kesto, was intended to ensure that a condominium board would be authorized to make litigation decisions on behalf all members of the association.

According to proponents of the bill, in recent years, condominium developers have begun to insert provisions in the declarations (governing documents) requiring a two-thirds vote of all unit-owner members of the association, before the board can proceed with filing a lawsuit against the developer.

Such language is known as an “anti-litigation” provision. Obtaining a two-thirds vote of unit owners on any issue is exceedingly difficult for any condo association. Developers are keenly aware of this fact, therefore inserting such language into condominium declarations significantly reduces the likelihood of a lawsuit. That often makes it difficult, if not impossible, to hold a developer accountable for poor or defective construction, requiring the condo association to cover the cost of repairs due to premature failure of infrastructure and related damages.

The original language of HB4919 would have invalidated provisions in condo documents requiring a two-thirds vote of owners to approve litigation action against a developer, allowing the board of directors to make litigation decisions without consulting all unit owners first. It is standard practice to give a corporation’s board of directors the power to make litigation decisions without first consulting all members or shareholders.

However, in December of 2016, attorneys for condominium developers convinced Legislators to amend HB 4919, allowing developer-inserted anti-litigation provisions in governing documents to stand. Essentially, the amendment neutralizes the original intent of the bill.

This is standard operating procedure for industry lobbyists. As soon as they become aware of any proposed litigation that would offer greater consumer protection – and hold the industry accountable for creating financial damages – lobbyists quickly move to either kill or amend the bill, thereby obliterating any potential benefit for the consumer.

One attorney, Robert Meisner, Esq., of the Meiser Law Group, testified against the amended version of HB 4919, and in favor of the bill as originally drafted.

Community Associations Institute testified in favor of the amended version of HB 4919.

 

But…

isn’t that somewhat surprising, given CAI’s recently released study on Construction Defects in community associations?

In its recently released report, entitled Protecting Homebuyers and Homeowners from Construction Deficiencies in Condominiums and Preserving Property Values Survey Report, CAI highlights the following statistics:

  • 81% of defects are due to poor workmanship
  • 35% of owners report a reduction in property value due to construction defects
  • 26% of owners report difficulty reselling their home because of construction defects
  • 47% of deficiencies were not apparent until after the builder’s warranty had expired

The study draws the following conclusions:

States or municipalities looking to amend their laws or ordinances should take the following into consideration:  Lengthen the statutory period of limitation and repose.  Strengthen overall warranty protections for homeowners.  Permit associations to make alternative methods for funding repairs.  Permit – not mandate – associations to resolve claims prior to litigation with alternative dispute resolution, specifically mediation. As this study’s finds, stripping the warranty protections for homeowners only increases the cost of homeownership following the sale and will not reduce purchase prices.

 

CAI makes the case for extending warranty periods and for removing mandates for alternative dispute resolution.

For once, I see some common ground with CAI on these two points. Both of these policies would, in fact, serve homeowners well.

But, here’s where CAI walks the thin line between supposedly advocating for homeowners and advocating for its trade group members, many of whom work directly for developers of common interest, association-governed communities: CAI insists upon balancing the rights of its consumers (homeowners) with the rights of the home building industry.

Note how CAI summarizes its public policy on the issue of construction defects as follows (emphasis added):

CAI recognizes the importance that homeowners have reasonable expectations of the quality of construction of their homes. CAI supports legislation and regulations concerning construction defects that adequately balance the rights and responsibilities of community associations, their governing boards, homeowners, builders and construction affiliates

So now it makes sense that CAI is supporting HB 4919 as amended, allowing for anti-litigation provisions as a matter of state law.

Remember this: quite a few of CAI’s members are prominent attorney firms and management companies that represent developers of planned communities and condominiums. CAI cannot bite the hand that feeds it. Without continued construction of new common interest communities, many of its members would be looking for a new career path.

And, not coincidentally, the largest CAI accredited management companies, representing associations both before and after transition of developer control, just so happen to be affiliated with a cadre of contractors looking for work.

Perhaps they are more than happy to take on costly vendor contracts, so they can make necessary repairs caused by defective construction?

After all, it doesn’t matter to the service provider who pays their bill – whether it be the developer or the homeowners.

When it comes to balancing rights of competing interests, the US court system is supposed to weigh the rights of each party. By preventing disputes involving the developer of a community from ever reaching the court room, homeowners are deprived of their full range of due process rights, while home builders and affiliated contractors hold an unfair economic advantage that enables them to avoid accountability for poor workmanship or use of defective materials.

When it comes to protection of consumer (homeowner) rights, it is unreasonable to put the anti-litigation rights of community developers and home builders above the property rights of individuals who invest the bulk of their personal wealth on their homes.

 

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