Condominium Conversions: Can Construction Defect Claims Be Avoided After the Running of the Statute of Repose?
February 17, 2016
By: Timothy E. Reilly
Colorado Real Estate Journal
Apartment projects continue to dominate the multi-family market with condominium construction at historic lows. The most recent data indicates that condominiums make up just 3.4 percent of the new home sales in the Denver Metropolitan area, compared to nearly 23 percent in 2007. While some may argue otherwise, it is clear that the lack of condominium construction is primarily caused by defects litigation. Owners, developers, and contractors involved in the construction of apartments often ask whether these projects will later be converted to condominiums. The implicit question is: can construction defect liability be avoided if an apartment project is converted to condominiums after the running of the statute of repose? We will review a case example to assist in analyzing that question, but first a basic review of condominium conversions.
What is a Conversion?
The term “condominium conversion” is not statutorily defined. The Subdivision Developer’s Act, however, defines a “subdivision” as any real property divided into twenty or more interests intended solely for residential use and offered for sale, lease, or transfer. This definition includes the “conversion of an existing structure into a common interest community of twenty or more residential units.” See C.R.S. §12-61-401 et seq. The law requires that certain subdivisions (including condominium conversions and their developers) must register with the Colorado Real Estate Commission prior to selling, leasing, transferring or negotiating to sell or lease a part of that subdivision. For more information refer to the Commission’s Subdivision Developer Program website: https://www.colorado.gov/pacific/dora/subdivision-developer-program.
Statute of Repose
The statute of repose requires that any defect claim must be brought within six years from the date of substantial completion with only one exception. That is, claims discovered in the fifth and sixth year following substantial completion may be brought within two years. Thus, all defect claims brought more than eight years after substantial completion are time barred. The phrase “substantial completion” is not statutorily defined; however, a recent Colorado appellate decision concluded that substantial completion is the date when a certificate of occupancy is issued. The issuance of the certificate of occupancy is an official verification that a building is in full compliance with current building codes, and is safe for occupancy.
Across the country there are few appellate court cases that address the liability of the parties involved in the construction of a later converted project. Perhaps the lack of court cases represents some anecdotal evidence that such liability can be difficult to establish. An example of how the statute of repose can protect the parties involved in the original construction is the case of Sandy v. Superior Court (1988) 201 Cal. App. 3d 1277. Sandy was an architect who rendered services for an apartment project. Years after the project was substantially complete it was purchased by a new owner for the purpose of converting the project to condominiums. The converter undertook massive renovation and reconstruction. As the units were sold a homeowners association was created. The converter never had any relation or contact with Sandy. Subsequently, the association sued the converter for damages resulting from construction defects in the condominiums. The converter filed a complaint for indemnification naming some 40 defendants, including the subcontractors with whom the converter contracted for the renovation of the project, as well as many individuals and entities who were only involved in the original construction. The latter group included Sandy.
Sandy moved for summary judgment asserting that the claims against him were made after the expiration of the statute of repose. The converter countered that since he was timely sued by the association then his defect claims against Sandy were also timely. The court rejected the converter’s argument and granted summary judgment in Sandy’s favor. The court’s analysis was traditional in that it applied the statute of repose to bar the claims based on the date of substantial completion and the date the claims were filed. Of importance, the Court found that there was no connection between the parties involved in the original construction and the converter. The scenario could present itself in defect claims in Colorado.
It is anticipated that a traditional application of the statute of repose will likely be used to bar defect claims in the context of condominium conversions. If a project is converted into condominiums and more than eight years have passed since original construction then any defect claims are likely time barred as to the parties involved in the original construction. There are numerous fact changes to this case example that could create a different result. What if an owner, developer, or contractor was involved in warranty work after substantial completion? Or what if years later these parties were involved in repairs at the project? Simply stated, a party’s continued or increased involvement may result in increased liability. Similarly, parties involved in a construction project that is pre-mapped as condominiums or that appears postured for later conversion should be cautious to take on any increased involvement.
Finally, some owners, lenders, and contractors involved in apartment construction may address the potential for condominium conversions by including contractual promises not to convert, indemnification clauses, and letters of credit to secure payment of liability insurance for a converted project. This article does not address the impact these methods may have on the parties’ liabilities. Similarly, the liability of the “converter” is not addressed here. The converter, and other parties involved in the conversion process, may be subject to liabilities based any disclosure requirements at the point of sale, negligence and other construction defect theories of liability.
This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.
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