One of the first orders of business for a new homeowner association Board of Directors is to conduct an evaluation of the physical condition of the premises and determine if there are any structural defects which need to be repaired.

Most purchase agreements for new construction in a homeowner association contain a 12 month express warranty for materials and workmanship. In addition, there is a common law implied warranty of habitability which also exists to cover latent defects for a specified period of time after discovery. Lastly, most states have a statute of limitations on these types of defects running from the date of defect discovery and usually a set period of time from the actual completion of construction.

Determining the Scope & Extent of the Defects - New construction requires a "breaking-in" period involving building settlement, seasoning of lumber, concrete drying, etc. Statute of limitations permitting, it is recommended that an association experience a full cycle of seasons prior to commencing the final inspection process. Serious defects apparent to the untrained eye should obviously be handled on an ongoing basis and owners should be reminded to report defects promptly.

The Spring Walk Through - Designate a committee to walk the grounds and inspect the premises to make note of obvious physical defects. Chipping paint, cracked masonry, dead shrubbery, etc. should be specifically identified by location. Often a builder will request to participate to create his own "punch list".

How to Assess the Damages - Since a Board generally consists of lay people, they should hire a qualified and licensed architectural/engineering firm that is experienced in dealing with multifamily residential developments. The selected candidate should be given the Board’s inspection report and then compile a comprehensive report containing:

• Scope, extent and locations of defects
• Building code violations (if any)
• Cause of defects
• Recommended procedures for repairing defects
• Itemized costs for any repairs to be made
• Anticipated remaining useful life of all major amenities (roofs, parking lots, siding. etc.)

The purpose of the report is three-fold:

(1) to establish a basis for discussions with the developer for possible settlement of developer liability;

(2) to establish an initial basis for potential litigation, and,

(3) to provide the Board with information to help establish proper reserves for future repairs and replacements.

Commencing Negotiations - Once the engineering report has been completed, the developer should be notified in writing as to the extent and scope of the defects and should be invited to meet informally to discuss the issues. The association should provide a copy of the report to the developer in advance.

If the developer is willing to discuss the issues, an association should be prepared to refute the customary defenses:

• Ordinary wear and tear not covered by warranty
• Lack of preventive maintenance
• Negligence
• Waiver of the implied warranty

A developer should be given a reasonable opportunity to repair construction defects. As a practical matter, most experienced developers budget for after sale repair work. However, the Board should consider if:
(a) The developer has a track record for living up to his word;
(b) This is merely a stalling tactic, or
(c) The repair work will be worse than the original construction.

When Negotiation is Unsuccessful - If the developer is uncooperative, the Board needs to determine if the scope of repairs warrants the expense of legal action. The Board should also get a legal opinion as to the legal theories of recovery and the risks and liability involved in pursuing litigation.

Advising the Membership - Due to the potential for enormous costs and lengthy delay, it is important that the Board remember that the owners will underwrite the cost. A special meeting should be called to meet with the Board, attorney and engineer to discuss the ramifications.

Final Resolution - Lawsuits may drag on for years while costs escalate and the buildings deteriorate. The Board’s time, patience and nerves will likely be stretched to the limit. These possibilities must be carefully evaluated. An alternative of negotiation should be seriously considered recognizing that accepting a piece of the pie may be bigger, after a lawsuit is finished, than the whole pie. Get good advice, don’t act rashly and keep the idea of compromise in clear view.

Thanks to attorney Jordan I. Shifrin for excerpts from his excellent book "Guilt by Association".

For more information on this subject, see www.Regenesis.net.

Published: January 6, 2000

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Richard Thompson owns Regenesis, a management consulting company that specializes in condominium and homeowner associations. He is a nationally recognized expert on HOA management issues. Regenesis publishes The Regenesis Report, a monthly newsletter for HOA boards, developers and managers. To subscribe, go to Regenesis.net. He can be contacted by email at .