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Correcting Defects without Litigation - Schneider Mitola

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Marc H. Schneider, Managing Partner, Schneider Mitola. How can your board effectively address sponsor construction defects without litigation? BACKSTORY Our firm represents a co-op that was a product of new construction and that had numerous construction-related defects. Shortly after the tenant-shareholders obtained control of the co-op’s board of directors from the sponsor-developer, the shareholders received notification from the municipality that the sponsor had requested a hearing concerning the release of a bond that was required to be posted with the municipality to ensure that certain improvements were properly completed. The notice was received with very little time before the hearing was to be held. Our firm attempted to have the hearing date adjourned so that the co-op could gather the necessary information to present the municipality the proper evidence of the defects and reasons for not releasing the bond. The municipality initially rejected the request for the adjournment, and the municipality representative appeared to be of the belief that there were no defects at the co-op and the bond should be released. Ultimately, a short adjournment was reluctantly granted and it soon became apparent that it was going to be difficult to convince the governing body of the municipality not to release the board. I immediately communicated with the board and the co-op’s engineer and began to prepare for the hearing.

I appeared at the adjourned hearing and initially listened to the municipality’s representative explain how there were no defects and that the bond should be released. I made a presentation and then had the co-op’s engineer speak about the defects. I was able to convince the municipality to require a site inspection to demonstrate the defects whereby the co-op’s engineer would be present.

We also provided the planning board representatives and the sponsor with a list of the defects. Shortly after the sponsor received the lists, the sponsor’s contractor showed up at the co-op unannounced and began making certain limited repairs. At the initial site inspection, the municipality’s representative refused to conduct the site inspection because of my firm’s presence, and the inspection was canceled.

Since it appeared that the sponsor and the co-op’s engineer were not in agreement on the repairs the sponsor was attempting to complete, when my office attended the next hearing I explained why our presence was necessary: because of the co-op’s right to have its legal representative be present to protect its rights.

The municipality required a new inspection date, at which the county attorney would be present. A walk-through of the property thereafter occurred and the municipal representative was reluctant to change his initial position. Accordingly, I recommended that at the next municipal meeting the board enlist as many residents as it could and prepare them to attend the next hearing so the municipality’s board of elected officials could see the number of residents in favor of not releasing the bond.

Ultimately, the municipality was convinced that the repairs were necessary and required a portion of the bond in an amount sufficient to pay for the needed repairs (based upon the estimate given to the municipality by the co-op’s engineer) be held until the repairs were made. Ultimately, this led to an agreement between the sponsor and the co-op on the scope of the repairs that had to be made, after the completion of which the bond could be released. The agreed-upon repairs were actually made at the sponsor’s sole cost and expense shortly thereafter.

COMMENT It is important for a board to avail itself of all possible remedies when faced with construction defects from the sponsor. If defects are perceived during the time a sponsor is still in control of a board, it is critical that unit-owners/shareholders notify the sponsor in writing by filing the appropriate warranty forms, and also by contacting municipal representatives.

Once the sponsor gives up control of the board, it is extremely important to obtain an engineer to conduct a thorough inspection and to also follow up with the municipality. The follow-up with a municipality is critical when attempting to have a municipality hold a bond that is scheduled for release, as a sponsor will want any such bond released as soon as construction is complete and all municipal inspection approvals are obtained. You should note, municipal approval of a project does not mean that a project is defect-free. The time frame between completion of construction and a bond release is small. Many times, although a community may get statutory notice of a bond release municipal hearing, the community members may not get actual notice.

Therefore, there is a short period of time to get a community engineer to opine on defects. Likewise, even if a sponsor is willing to make repairs, this does not mean they are the right repairs. Before a sponsor is allowed to correct certain perceived construction deficiencies, the community’s engineer should opine on the instrumentality and methodology of the repairs to ensure that they are being performed appropriately.

Litigation, which is, many times, the main route taken when a board cannot get a sponsor to make necessary repairs, is expensive. While it may not always be possible to avoid litigation, there are other avenues to take in order to obtain a recovery. If there are construction defects at your community association, it is recommended that you immediately contact your attorney and an engineer to protect your rights, which should include immediate action to avail yourself of the assistance of the municipality.

If a bond exists, the municipality should be put on immediate notice of the defects and a demand should be made to: (1) not have the bond released; and (2) compel the sponsor to make the necessary repairs. In addition, do not underestimate the voice of the voting populace. If any hearings are held where possible release of the bonds is being discussed, you should strongly consider (with the advice of your counsel) having as many residents as possible attend the hearing to show their opposition to the release.

From the Desk of MHS:

A condo trying to collect arrears faced a counterclaim from the delinquent unit-owner, who argued that a contractor hired by the condo had conducted a lewd act on the roof by spying through the skylight on the owner in the shower.

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