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How should a new board deal with construction defects?
AUTHORDeborah B. Koplovitz, Shareholder, Anderson Kill
PAGE #p. 6
When a new building has construction issues, check the sponsor’s warranty to see who should pay for repairs
We were faced with a situation in which a new board came to us for advice on how to handle construction defects in the apartments or the common elements of the building. Our first step in situations like that is to look at the offering plan and see what it says and also at the purchase contracts and see what they say. What kind of warranty did the sponsor provide?
After we look at that, we are able to advise the board. The first thing that has to happen is that they have to hire an engineer or an architect to go from roof to basement and identify all the problems. We’re talking about the common elements, because that’s where the board’s responsibility lies. Once the architect and engineer have done a walk-through, they also must go through and identify any fire or building code violations. After that, the board can go ahead and notify the sponsor about the issues that need to be corrected. The sponsor and the board can now start a dialog.
There is a very tight time frame in such situations, and dealing with it depends on the size of the building and also what’s in the offering plan. It’s very important that the board members act quickly, because they may lose the opportunity to exercise their rights to demand that the sponsor make the repairs.
The other issue that comes up a lot of times for new boards is the sponsor insisting on retaining control of a building. That can also be a real problem for boards and for unit-owners. The sponsor may not have a right to be on the board but may be retaining control to avoid anyone raising these warranty issues.
Again, the board has to act quickly and decisively and not be wary of spending money while working with the building’s legal professionals and architects to find the best way to approach the situation. Often, the board does not want to spend the money – maybe it is a small building – or else the board is afraid of opening a can of worms and discovering that they have a lot of issues they may want to avoid.
In several situations, the boards were able to negotiate very favorable settlements without having to litigate with the sponsors.
This story addresses the problem of placing the financial burden of construction defects on the appropriate person or entity: the sponsor or developer of a new building. In buildings, as in life, we can’t put our heads in the sand. It’s better to know what you’re dealing with. It’s better to spend the money at the outset, and take the opportunity to get the sponsor to pay for all of those things. Because you may be stuck with a poor settlement – and still end up being responsible for those things anyway.