I previously wrote an article entitled “The Hidden Dangers of Construction Defect Litigation” for the Common Interests magazine, the monthly periodical of the Rocky Mountain Chapter of the Community Associations Institute. In that article, I discussed the potential negative effects of homeowners associations bringing construction defect suits as anything other than a last resort. The purpose of this post is to bring to light, by way of a real life example, the problems discussed in my previous article.
I have recently seen a lawsuit filed by an individual homeowner within a common interest community against the homeowners association, its management company, and the attorneys retained by the association to represent it in a construction defect lawsuit against the original developer, general contractor, and one of the design professionals. In his suit, the homeowner complains that the association’s construction defect attorneys “neglected to amend [their] complaint to include only and specifically the claims for damages for those properties, those buildings or condominium units, either by owner or specific locations, which had sustained damages or had faulty construction for which damages were being sought.” As a result of claiming damages throughout the entire community, the homeowner alleged that the entire community was tarred “with the black brush of litigation.”
As the homeowner explained in his complaint, he purchased a condominium for his daughter-in-law when she moved to Colorado to care for him after the death of his wife. After several years, the daughter-in-law left Colorado and the homeowner used the condominium as a rental property. Earlier this year, the homeowner tried to sell his condominium and learned that, despite the fact that he does not believe there are any construction defects within his unit, Freddie Mac and Fannie Mae notified all banks in Colorado and elsewhere that there would be no mortgage funds available for his development until the pending construction defect was resolved. Because his development was blackballed, the homeowner could not reasonably sell his condominium and, as a result, the resale and rental values plummeted. Ultimately, a default in the payment of the mortgage occurred and the homeowner’s property has gone into foreclosure.
With respect to the homeowners association, the homeowner claimed that it did not discharge its obligation to protect the interests of all of its members by failing to properly supervise the actions of the construction defect law firm it retained to represent it. With respect to the property management company, the homeowner claimed that as the association’s management agent it owed the association’s members the same duties as does the association. The homeowner claimed that the management company breached its obligation to the homeowners because it was directly involved in the retention of the construction defect law firm.
While this is certainly an untenable situation for the homeowner involved, it serves as a cautionary tale for homeowners associations contemplating construction defect lawsuits. The problem will be made worse, as suggested in my previous article, if the association does not recover enough money to repair all of the defects it has alleged to exist. If that happens, the members of the association will be left with the unenviable position of having to decide whether to impose a special assessment to repair the alleged defects or to not perform repairs, leaving themselves with a disclosure issue when they sell their homes. If they go down the latter route, the stigma associated with the construction defect lawsuit is sure to impact the development for years to come.