HOA homes sidewalk

Construction defects in HOA Common property – Homeowner challenges

By Deborah Goonan, Independent American Communities debgoonan@icloud.com

It’s bad enough dealing with defective construction in one’s home. But what can homeowners do when property damage — and high HOA fees — result from shoddy construction of commonly owned or maintained property?

A few weeks ago, Nate Carlisle of Fox13 Utah contacted me at IAC as part of his investigative research. Nate was looking into homeowner options, when they discover construction defects in their homes. I was interviewed for the report, which aired last week.

In my recorded interview, I pointed out that residential community developers often add conditions to Covenants and Deed Restrictions that shield them from liability for poor quality construction or safety defects.

I also noted that, once construction defect litigation is underway, property owners may find it hard to sell their homes or refinance their mortgages. That’s because sellers are required by law to dislose defects to prospective buyers. Also, lenders tend to shy away from writing new mortgages for homes in communities with construction defects, knowing that the HOA can be embroiled in complex litigation for years, with an uncertain outcome.

Nate’s report focused mainly on defects in individual housing units, so it didn’t cover the unique challenges faced by owners when construction defects and poor workmanship are discovered in common areas of HOA-governed communities.

This post addresses those important considerations.

Defects in common property

Owners of homes and commercial properties in HOA-governed communties, including condominiums and townhomes, need to be aware that poor workmanship and defects can and do occur in the commonly owned or maintained property, as well as individual homes or dwelling units.

Over the past five years, many examples have been presented here on IAC.

The most common adverse effects to homeowners are “leaky” homes that allow water penetration, flooding and erosion of privately-owned property, mold, serious health and safety hazards with wooden balconies and playground equipment, as well as other quality of life issues.

In townhouse, condominium or co-op housing, owners share financial responsibility for maintenance, repair, and replacements of big ticket items: roofs, foundation systems, exterior siding, windows, doors, elevators, fire suppression systems, and suspended balconies. When building components are of poor quality, they will show defects within several years of completion of construction.

In single family home planned communities, developers have saddled homeowners with unfinised or badly-constructed roads, poor stormwater drainage, defective retention ponds, erosion of hillsides, and failing retaining walls.

In master planned communties, recreational amenities such as swimming pools, clubhouses, or playground equiment can also be defective, possibly even unsafe to use.

In addition to high HOA fees and inconveniences, homeowners in communities plagued by such defects experience unavoidable declines in property values.

Separate warranties for HOA/condo/co-op common property

The biggest home building corporations can churn out thousands of new homes and condos each year. Some of those homes will have serious defects. But it’s a numbers game for the big corporations — the enormous profits they generate from home sales far outweigh insurance payouts and legal settlements they make for cutting corners on materials or construction.

In the Fox13 investigative report, attorney John Morris laments that homeowner warranties offer almost ‘zero’ protection. Morris has spent many years working with HOAs on construction defect claims. He aptly refers to the home warranty as the ‘enemy’ of home buyers.

Ironically, the same can be said of the Declarations for a community — the legal contract between homeowners, the developer (known as the Declarant,in legal parlance), and their homeowners, condominium, or cooperative association.

Regular readers of IAC know that the Declarations of Covenant, Conditions, and Restrictions is a very one-sided contract. The “contract” is written by and for developers. Future home buyers and investors in homes and community property don’t take part in writing the rules of this HOA game.

It’s true that that legal deck is stacked against new construction home buyers. Home warranties and community Declarations offer virtually no protection for housing consumers and property owners.

Mass-production home builders certainly know how to protect themselves from liability.

Here’s what the HOA real estate industry doesn’t want home buyers to know.

Developers see to it that the Declarations and governing documents of the Association are written primarily to protect their own interests.

Developers commonly use the Declarations, Covenants, ByLaws, and Articles of Incorporation to create numerous obstacles for consumers to make warranty claims. Put another way, real estate developers used the governing documents to avoid liability for themselves and home builders.

Before the condo and HOA trend began in the 1970s, a home builder relied heavily on reputation and word of mouth to sell new homes. HOAs were relatively rare, limited to condos and vacation home properties. But these days, where the majority of new construction occurs in HOA-governed communities, real estate Developers and mass-production home builders have mastered the art of protecting their reputations.

The Covenants, Conditions, and Restrictions of a condo, co-op, or planned community HOA often include requirements for a developer’s “right to cure” defects before filing a lawsuit. Mediation is almost always a prerequisite to filing a lawsuit. Unfortunately, these pre-litigation processes often waste the HOA’s time and money, delaying the process of making necessary repairs.

Sometimes HOA governing documents require binding arbitration — with a confidentiality clause — to settle disputes over warranty claims. In some states, a developer’s rights are codified by law, enacted under the pretense of “consumer protection.”

Some of the more common Developer-friendly contract provisions include the following:

  • Limiting the warranty period to six years, even though many latent defects appear seven to ten years following construction.
  • Excluding certain components of construction from the warranty.
  • Requiring owners or owners’ associations to settle warranty claims through binding arbitration, thereby giving up their right to file a lawsuit in civil court. Adding ‘poison pill’ provisions to Declarations, such as requiring a vote of all homeowners to approve the HOA board’s decision to proceed with litigation. (In recent years, these kinds of Declaration provisions have been outlawed in a few states, including Massachusetts, Colorado, and California.)
  • Stacking the HOA board with developer affiliates for several years following transition of the HOA from developer to homeowner control.
  • Requiring all out-of-court settlements to include a confidentiality agreement. This prevents future homebuyers from becoming aware of the history of defects, warranty claims, and litigation against developers, home builders, and contractors.

Developer control prevents resolution of construction defect claims

Many housing consumers are not aware of one critically important fact.

Most HOAs are controlled by the developer during the build-out period. That’s the period of time — many months or years — when construction and sale of homes is active in the community.

In many cases, de facto developer control continues well beyond the date of legal transition of responsibility of the association’s management to the homeowners. A big clue this might apply to your association: several seats on the HOA board are still held by hold-over affiliates of the developer.

Common sense dictates that HOA boards who are allies of the developer will almost never pursue defect claims. They’ll just stick the current homeowners with a big HOA bill for repairs and renovations to correct construction defects, poor workmanship, and safety hazards.

The double whammy of construction defect litigation

As I noted in the interview with Fox13, it’s risky for homeowners — especially in a community association setting — to engage in litigation with a developer, home builders, and construction companies.

First of all, it’s complex litigation. That means it can take several years of intense investigation, depositions, subpoenas of legal records, and gathering evidence through invasive testing, necessary for expert testimony as to the nature of construction defects and possible remedies.

Legal fees add up quickly, and can sometimes exceed the cost of making repairs. That’s why litigation rarely proceeds, except in the most serious cases. Even then, according to a study conducted by trade group, Community Associations Institute, an HOA that files a lawsuit for construction defects is likely to recoup only part (maybe half) of their actual costs to repair, replace, or rebuild their common property.

And, as mentioned previously, during the time that the Association is involved in litigation, home sellers must disclose the defects and pending lawsuit to prospective home buyers. That can scare away buyers and seriously limit resale prices.

Also, because lenders tend to avoid writing mortgages for defective property still in litigation, it can be difficult to impossible to sell one’s home until the construction defect case is settled and repairs are completed.

In some cases, in addition to sharing the costs of maintaining the common property, a homeowner must also pay for damages to their personal dwelling and property. That’s a lot of financial and mental stress for property owners.

Passing the buck to the HOA

As noted above, sometimes a homeowners or condo association decides that its community’s construction defects are outrageously expensive and serious enough to warrant a lawsuit.

In that case, homeowners should prepare for a long legal battle.

Typically, a developer will first try to dismiss the lawsuit. One strategy is to deflect blame to the HOA or condo association, claiming that the Association has not properly maintained the structure or infrastructure. Generally, attorneys for the developer will deny that construction quality was subpar, or that poor quality materials were used in the construction process.

All of the professionals involved in the building process will blame each other for poor workmanship and defects. The developer will lay blame on home builders, architects, and various contractors for their respective roles. Builders and contractors will blame each other as well as any subcontractors who helped during the construction process.

During this time, local media may become aware of the litigation, generating unfavorable publicity for the community as well as the defendants in the lawsuit.

Going to extreme lengths to protect its reputation, the developer will often accuse the HOA of being negligent, by failing to properly maintain the common property. But homeowner boards are led by volunteers, who often lack expertise in construction and building management. And poorly designed or constructed property is often difficult, if not impossible, to “maintain” in a way that avoids further damage.

Pre-construction inspections: the fox watching the hen house?

Also on the Fox13 report, Attorney John Morris also noted that builder home inspections for new home construction are worthless. He advises paying for your own inspection, a more thorough one that examines the condition of the exterior envelope of the home and its major mechanical systems.

But, did you ever wonder who conducts building code inspections for the common property of a condominium building or planned communities?

In many cases, a developer or homebuilder hires an engineer to file inspection reports with local governments. The professional then attests to the fact that the structures meet building codes and permit conditions. In fact, the professional engineer might even be the same person who designed the building or infrastructure, in order to obtain building permits from local governments.

Full disclosure: I know this to be true from personal experience. My spouse and I once owned a home in a planned community. When a problem developed with our community’s stormwater drainage system, my review of public records revealed that the design engineer signed off on all “as-built” inspection reports. The officers of two County Building Code departments and officials of our regional Water Management District merely accepted these reports at face value, choosing not to second-guess the developer’s hand-picked Professional Engineer.

Needless to say, I was stunned to discover this case of the fox watching the hen house.

IAC has since confirmed with numerous legal and engineering experts that this ineffective inspection process is common practice in many parts of the U.S. Local governments often claim they only have a ministerial duty to ensure codes are met. In other words, a local County or City inspector doesn’t have to personally sign off on all building inspections. At best, a code inspector might make an appearance only after a complaint is filed by property owners.

When homeowners unite, is success possible?

If you’re only one of a few homeowners, or the only one, adversely affected by construction defects in common areas, you’re fighting a David vs. Goliath battle.

But if a larger group of homeowners joins forces, are they more likely to win the fight for justice?

Sometimes the answer is yes.

Consider the example of New Jersey homeowners being bullied into paying fees by a lake homeowner association. Note: Although this case does not involve a construction defect lawsuit, it’s an encouraging success story of homeowners uniting behind common cause.

Homeowners hit with “surprise” HOA fees

Thousands of property owners purchased their homes near the Ramapo Mountain Lakes (RML) Club, with the understanding that they had no legal obligation to pay annual maintenance fees for a nearby recreational lake. Instead, each homeowner had the option of voluntarily joining the Lake Club, and paying annual dues.

Then, in 2017, the lake homeowners association, RML, started billing non-lake club members for lake maintenance fees. Homeowners were suddenly faced with “suprise” mandatory HOA fees to pay for maintenance of a recreational lake they never used. When they didn’t pay the fees, RML slapped liens on their homes.

To fight back, 800 or so of these New Jersey homeowners united, hired a couple of lawyers, and sued Ramapo Mountain Lakes (RML) Association.

Unfortunately, the homeowners’ case suffered a setback in 2018. Due to an amendment to state law 2017, which broadly defined an HOA as any planned community, a judge ruled in favor of RML, upholding the HOA fees and property liens.

But homeowners and their attorneys didn’t give up the fight. They introduced a bill in the state Legislature to clarify that owners of property within the boundaries of a voluntary homeowners or lake association cannot magically change their status to a mandatory membership association, without the contractual consent of homeowners.

In 2020, Senate Bill 908 was passed by both chambers of the New Jersey Legilsature and signed by the Governor. Ramapo Mountain Lakes has been forced to cancel the liens against properties, and stop collection efforts against homeowners who are not obligated to pay HOA fees for lake maintenance.

As this example illustrates, it’s possible for homeowners to succeed in obtaining justice, if the group is willing to unite and support one another.

Theoretically, homeowners can join forces to convince their HOA to file common area warranty claims and litigation on their behalf. However, the existence of a homeowners association is a complicating factor in cases involving defects in common property of a planned community, condominium, or housing cooperative.

Most of the time, homeowners in the HOA-governed community don’t see their problems, or possible solutions, in the same light.

Homeowners under HOA-governance often bicker amongst themselves

That leads to a reality check: how to deal with the weird and unpredictable social dymanic of living in an HOA-governed community.

When defects involve common property, that is, property owned or maintained in common by all homeowners, members of the community often disagree about how and when to fix problems. There’s rarely homeowner consensus on the HOA’s decision to pursue litigation.

Home and apartment owners who are directly affected by damages to personal property tend to favor litigation, to help compensate them for their significant repair costs and inconvenience.

But owners who aren’t directly impacted by water leaks, mold, flooding, or other issues are more likely to favor avoiding litigation. Some owners prefer to suck it up, write a check, and repair issues as soon as it’s convenient.

Another group of homeowners will argue that they should not be obligated to pay for correcting defects that have damaged someone else’s condo or back yard. The group of “it’s-not-my-problem” homeowners will be sorely disappointed. They soon learn that, as members of a common interest community governed by an HOA, they are indeed legally obligated to foot their share of the bill to correct any defects in common property.

Because of this collective HOA governance structure, all too often, the homeowner who complains about real damages is hated by some neighbors who resent being forced to pay for something that won’t directly benefit them.

Will media coverage shame builders and HOAs to do the right thing?

It’s true that sometimes media exposure of poor quality construction, complicated by a non-responsive developer or home builder, gets the desired response. As a matter of reputation management, the publicized problem gets fixed to homeowners’ satisfaction.

But be aware that media exposure can also backfire on homeowners.

That was certainly the case for Joe and Jill Nixon, former owners of a home in Fulshear County, Texas. They were shunned by their neighbors after they publicized an extreme erosion problem in their back yard. The Nixons’ back yard was literally crumbling into a ravine, allegedly caused by an improperly designed and/or maintained storm drainage system for the planned community.

The HOA was responsible for maintaining the storm drainage ravine. The HOA blamed the developer for a poor and unsafe design. The developer blamed the County for approving construction of the drainage basin as built. No one wanted to take responsibility, so the Nixons went to local media to expose the problem.

Their neighbors were unhappy that the Nixons publicized their community’s problems.

The Nixons were forced to leave their home, both for their own safety and to escape their hostile neighbors. The couple’s case settled out of court last year, under a confidentiality agreement. That means consumers will never know if or how much the developer or the HOA compensated the Nixon’s for their damages.

In a similar case, former condo owner Michelle Germano of Virginia was also treated poorly by her neighbors. That hostile reaction followed her decision to go to the local news media with her condo horror story.

Germano struggled for years with expensive damages to her condo, as well as adverse health effects, caused by toxic Chinese drywall in her new home. The condo owner was forced to move out of her condo to protect her health and well-being. But, even though she couldn’t live there, her condo association insisted she continue to pay her condo fees!

It took several years of litigation to stop the HOA collection lawyers and to get rid of her unlivable condo. (It was eventually purchased by an investor who was willing to gut the property.)

For interested readers, I’ve included links to articles on both of these cases in the reference section of this post.

How homeowners and housing consumers can help themselves

Real life examples cited in this post clearly illustrate an important point. Fighting against an HOA or its developer is extremely challenging and expensive. And that fight for justice can be complicated by a lack of support from ones’ neighbors.

So, are there solutions to this vexing problem?

Yes. Here are three steps homeowners can take to help themselves.

First and foremost, each member of the community must recognize that solutions require full cooperation and understanding among community members. Homeowners must embrace the fact that, in order to fix construction deficiencies in the common property, they truly are all in it together. Every owner is jointly responsible to pay their share of expenses to improve their community.

Second, homeowners must be prepared to work toward solutions with their neighbors, possibly without the support of their HOA board, when that’s not feasible. The more homeowners who are willing to unite for a common cause, the lighter the financial and social burdens of engaging in warranty claims and litigation.

Third, homeowners can organize, then appoint one or two spokespersons to educate state legislators and local government officials about the obstacles they face in resolving serious problems with shoddy construction in their HOA-governed communities. With group support, consumer-friendly legislative change is possible.

By making local governments aware of challenges faced by property owners in HOA-governed communities, perhaps constituents can prompt positive change to local zoning and planning policies. The developer-centric HOA-governance model creates the perfect environment for shoddy construction and future decline in property values and quality of life. Ultimately, to prevent problems with defective and shoddy construction, housing consumers must demand better alternatives to common interest housing development.

References:

FOX 13 Investigates: Newly-constructed home buyers find Utah gives them few options to fix defects By: Nate CarlislePosted at 1:57 PM, Feb 03, 2021  and last updated 11:45 PM, Feb 03, 2021

Daybreak homeowners file lawsuit accusing builders of cutting corners on construction By: Tamara Vaifanua Posted at 8:19 PM, Apr 12, 2017  and last updated 10:19 PM, Apr 12, 2017

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