THE MARYLAND COURT of Special Appeals recently issued an opinion in Greenstein v. Council of Unit Owners of Avalon Court Six Condominium, Inc. finding that an association can be sued by its unit owner members if it fails to take timely legal action against a developer for defects.
In the case of first impression concerning duties of board members when confronted with construction issues within the common elements of a condominium, the court held that the board has a duty to initiate litigation against the developer for construction defects, and its failure to do so within the statute of limitations can result in liability to the individual owners.
The Maryland court held: "The duty to maintain, repair and replace the common elements creates a concomitant obligation on the part of the association to pursue recovery from the developer on behalf of the unit owners for damage to the common elements caused by the developer’s negligence, breach of contract or violation of any applicable law."
In another recent South Carolina Court of Appeals decision in Fisher v. Shipyard Village of Council of Co-Owners, Inc., the court held the board has a duty to investigate causes of damage to the common elements and to pursue all responsible parties for the damage.
In Fisher, many buildings in the condominium leaked around windows and balconies, and repairs were attempted. When the repairs failed, many of the unit owners sued.
The court held that the association and the board has a duty to thoroughly investigate the cause of the leaks, and bring appropriate claims for the defects, but also held that there is a presumption that the board acts in good faith.
This is consistent with well-established law in California. Although California appellate courts have not directly dealt with the issue of the board ignoring construction defects, it has been well established for 35 years that the board owes a fiduciary duty to HOA members, since the case of Raven’s Cove Townhomes, Inc. v Knuppe Development Co. Raven’s Cove was a construction defect case, where the HOA also sued former board members who were employees of the builder. The 1981 appellate court held that the former board members had breached their fiduciary duty to the HOA by failing to set aside operating or reserve funds.
In California, it is already well established that an association owes a fiduciary duty to HOA members to maintain the common area in a safe manner, and to make a reasonable inquiry regarding maintenance issues and to enforce the CC&Rs and other governing documents. This duty, and its fiduciary nature, has been reiterated by several California courts. It is very likely that a California trial or appellate court would extend the rule first announced in Raven’s Cove and find a breach of fiduciary duty by a board that does not conduct required inspections that would have uncovered construction defects or does not pursue the builder to fund repairs.
In addition, three distinct requirements exist that mandate regular inspections of the common area: (1) Many CC&Rs require annual inspections of the common area by a third party independent inspector; (2) The Davis-Sterling Act requires an inspection of major building components at least every three years as part of the reserve study; and (3) SB800 requires associations follow maintenance requirements from the builder and product manufacturer.
It is not much of a leap to envision a California court applying existing California law and ruling similarly to the Maryland and South Carolina courts. The bottom line is: (1) conduct regular inspections by an independent third party professional; (2) bring appropriate claims against the developer and general contractor for defects before the various statutes of limitations expire.
The board is required to conduct these inspections, and its fiduciary duty requires it to look at the builder to pay for repairs, rather than paying out of reserves or with a special assessment.
Ritchie Lipson is senior counsel for Kasdan LippSmith Weber Turner, LLP. For the past 19 years, he has limited his practice to representation of commercial investors, homeowner associations and residential property owners to assist in the fair resolution of their claims for defective construction.