Real Estate | Avoiding Common Pitfalls to Recovery of Damages in Construction Defect Cases

Attorney: Brian Wisdorf ( email)

Many believed that the residential construction defect issues that riddled the news in the late 1980s through the 1990s would fade as developers/builders became more accustomed to ever changing building codes. That has not been the case. Construction defects in residential construction continue to be an on-going problem. Homeowners and associations need to be aware of what is required of them upon discovery of an injury.

Homeowners and associations need to know what constitutes an “injury”, which in turn, triggers the need to take action. In the world of construction defects, an “injury” can be anything from a stained wall or ceiling, the presence of flies in a home, small traces of water on a window sill, sporadic water leaks in a roof, and drafts through outlets and sockets. Basically, an “injury” is any evidence that the exterior of the dwelling is failing to keep nature’s elements and creatures out. It does not matter when the cause (the construction defect) of the “injury” is discovered.

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A homeowner’s knowledge of an injury is considered knowledge by the association even if the association’s board is not actually aware of it. Homeowners must inform their board of any injury discovered. Otherwise, the homeowner and the association will run the risk of the losing their right to recover.

The date homeowners/associations discover or should have discovered the injury starts the clock on a number of deadlines. If homeowners/associations fail to comply with the deadlines, they will be barred from recovery. For example, if a homeowner/association discovers a puddle of water on a window sill or on the floor in a dwelling or common area, both the homeowner’s and association’s deadlines begin to run even though neither of them are aware of why the leak occurred or the actual extent of the damage that is occurring due to the leak. It does not matter how much water pools on the floor, how large the area of discoloration on the ceiling or wall is, or how many cracks there are in the foundation, floor, wall or ceiling. The clock will begin to run on the claims once homeowner/association knows or should have known about the injury. Homeowners and associations therefore must take action once the injury is discovered and should not wait until the cause of the injury is determined.

There are five key points that homeowners and associations need to remember when potential construction defects arise. First, they need to understand what type of claims they may have. Second, they need to know what to do within six months of discovery of an injury in order to preserve potential warranty claims. Third, they need to understand that they must commence legal proceedings within two years of discovery of injury and breach of warranty, which may be two different dates. Fourth, they need to know that their claims do not last forever. Finally, they need to avoid empty promises made by the developer/builder.

Construction Defect Claims that May be Held by Homeowners and Associations.

The relationships between homeowners, associations, developers, and builders can be confusing when trying to figure out what types of claims that homeowners/associations may have against developers/builders. Generally speaking, homeowners and associations may have contract, negligence, express warranty claims and statutory warranty claims under the Minnesota Statutes Chapter 515B and Minnesota Statutes § 327A.02.

A breach of contract claim may exist where there was a contract between the association/homeowner and the developer/builder who constructed the dwelling or improvement. A breach of contract claim may also arise from the association’s declaration. These same documents may also contain express warranties. Associations and homeowners should review all contracts and association documents when an injury is discovered to determine if there are possibly breach of contract and warranty claims.

A negligence claim may exist even if there is not a contract between homeowner/association and developer/builder. The homeowner/association must establish a duty owed by the developer/builder that is outside of those duties set forth in any contract/association document. They must also establish that the developer/builder breached that duty and caused damages as a result. Many times a negligence claim is based on the developer/builder’s failure to use reasonable care in directly performing the work or overseeing those who performed the work that led to the injury.

All residential dwellings have certain statutory warranties associated with them under Minnesota Statutes § 327A.02. Every person, firm or company that constructs and sells a new home provides certain warranties to the initial purchaser and any subsequent purchaser of the dwelling. Every home improvement contractor who repairs, remodels, alters, converts, modernizes, or adds to an existing home also provides certain warranties to the current and any subsequent owner. Those warranties are:

• During the one-year period from and after the warranty date the dwelling/home improvement shall be free of defects caused by faulty workmanship and defective materials due to non-compliance with building standards;
• During the two-year period from and after the warranty date, the dwelling/home improvement shall be free from defects caused by faulty installation of plumbing, electrical, heating, and cooling systems due to non-compliance with building standards; and
• During the ten-year period from and after the warranty date, the dwelling/home improvement shall be free from major construction defects due to non-compliance with building standards.

Minn. Stat. § 327A.02 warranties also apply to common interest communities such as condominiums. There are many parts of a dwelling that are considered common elements or limited common elements under the association documents. The association documents may also provide the association with authority to bring claims on behalf of its members, including warranty claims.

Homeowners and associations do not have warranty claims where the damage is caused by something they installed, materials they provided, normal wear and tear, normal shrinkage, insufficient ventilation, improper maintenance, acts of God, subsequent grade and landscaping changes or in the case of home improvement work, loss or damage due to defects in the existing structure and systems not caused by the home improvement. These “causes” are not defined by Minnesota Statutes Chapter 327A and have not yet been clarified by Minnesota courts.

In addition to warranty claims under Minnesota Statutes Chapter 327A, homeowners and associations may also have warranty claims under Minnesota Statutes Chapter 515B. They should check their association’s governing documents and Minnesota Statutes Chapter 515B to determine if Minnesota Statutes Chapter 515B applies.

Associations and homeowners falling under the umbrella of Minnesota Statutes Chapter 515B may have statutory implied warranties unless the homeowner disclaims them at the time of purchase in a document separate from the purchase agreement. Minnesota Chapter 515B provides that the declarant:

impliedly warrants to each purchaser that: “(1) a unit and the common elements in the common interest community are suitable for the ordinary uses of real estate of its type; and (2) any improvements subject to use rights by the purchaser, made or contracted for by the declarant, or made by any person in contemplation of the creation of the common interest community, will be (i) free from defective materials and (ii) constructed in accordance with applicable law, according to sound engineering and construction standards, and in a workmanlike manner.” See Minn. Stat. § 515B.4-113 (b)(2011)(emphasis added).

Once an injury is discovered, homeowners should bring the injury to the association’s attention and discuss with the Board who will provide notice to the Developer/Builder and pursue the claims.

Minn. Stat. § 327A Warranties Will Be Lost if Homeowners and Associations Fail to Give the Builder Written Notice Within 6 Months of Their Discovery of the Injury.

Homeowners and associations must give written notice to the developer/builder within six months of the date they discover the injury or should have discovered the injury in order to preserve their 327A statutory warranty claims. Verbal notice is not enough. Homeowners/associations should consult with an attorney to determine the form and content of the written notice.

Once the initial notice required for a 327A statutory warranty claim is provided, developers/builders have 30 days to inspect the injury and property. The developer/builder has 15 days from the inspection to provide the homeowner/association with a scope of repair. If the scope of repair is provided within the time required and the parties cannot agree to the scope of repair, Minnesota law now requires the parties to submit the issue to non-binding arbitration before litigation is commenced. If the scope of repair is not provided within the time required, the homeowner/association can commence litigation or demand binding arbitration. Whether a homeowner/association commences litigation or demands binding arbitration will depend on what the contract and declaration may require.

Homeowners/associations also need to check all contracts and association documents to determine if they establish additional notice requirements that impact a homeowner/association’s ability to bring contract, negligence, and express warranty claims even if not otherwise required under Minnesota Statutes or common law.

Homeowners and Associations Must Commence Legal Proceedings Within Two Years of the Triggering Event.

Homeowners and associations must commence legal proceedings before their claims are barred by the passage of time. Their written notice within six months of discovery of the injury is not enough. Minnesota law provides homeowners and associations with two years from the date of discovery of the injury to commence legal proceedings on breach of contract, breach of express warranty, and negligence claims. Minnesota law also requires statutory warranty claims to be brought within two years. However, the implied statutory warranties have to be brought within two years of the date of discovery of the breach of warranty. The date of discovery of the injury and the date of discovery of the breach of warranty may be two different dates. The date of discovery of the injury is the date you discover the nature’s elements or creatures intrusion into the interior of the dwelling. The date of breach of warranty occurs when the homeowner/association becomes aware of the developer/builder’s inability or unwillingness to uphold a warranty claim. Hence, the breach of warranty likely will be discovered after they discover the injury.

The two year statute of limitations seems like a long time, but can run quickly. In the case of breach of contract, express warranty and negligence claims, homeowners/associations may not realize that there is an injury when they should. Many people may think that the injury observed is simply a one-time occurrence and there is no immediate need to be alarmed. It may be months before the injury appears again, leaving a significantly shorter period of time to deal with the developer/builder prior to commencing litigation. Homeowners/associations will also likely try to work with the developers/builders in coming up with a cooperative resolution. The process will likely include numerous site visits, expert reports and repair estimates. These things take time. In addition, the parties will ultimately have to negotiate over the scope of repair, who is going to perform the repair, and who is going to pay for the repair. In a breach of warranty scenario, the breach may occur in a grey area that does not jump out at the homeowner/association right away. For example, a homeowner and association may have ongoing conversations with the developer/builder about the injury, the extent of the damage, and scope of repair. There is typically a grey area during these conversations as to when did the developer/builder notify the homeowner/association that it was not going to honor the warranty claim. As a result, homeowners/associations should consider bringing their statutory warranty claims within two years of discovery of the injury in order to be safe.

Homeowner and Association Claims Arising from Construction Defects Do Not Last Forever.

Homeowner and association claims for construction defects do not last forever. Certain claims will be available for a longer period of time than others (1 year versus 2 years, 6 years versus 10 years). The date on which the periods begin to run also vary. Therefore, the last date on which a homeowner/association can bring each of the types of claims discussed herein vary.

Breach of contract, express warranty, and negligence claims must be brought within ten years of substantial completion of the construction. The date of substantial completion is the “date when construction is sufficiently completed so that the owner or the owner’s representative can occupy or use the improvement for the intended purpose.” If the injury is discovered within the ninth or tenth year after the date of substantial completion, homeowners/associations still have two years to commence litigation even if that deadline falls outside of the ten year period.

The implied warranties under Minn. Stat. § 327A.02 terminate after each specified period following the “warranty date”. The “warranty date” for a new dwelling is the earliest of: (1) the move-in date; or (2) the date of closing. In the case of a home improvement, the warranty date is the date on which the home improvement work was completed. A 327A warranty claim for faulty workmanship only lasts for one year after the warranty date. A warranty claim for a major construction defect lasts for 10 years from the “warranty date”, unless the breach of warranty associated with a major construction defect occurs within the ninth or tenth year of the warranty period. In that case, the time frame to commence litigation is still two years, which is similar to the extension provided for contract, negligence and express warranty claims.

Minnesota Chapter 515B implied warranties last for 2 to 6 years after the cause of action accrues. They accrue as to the unit at the earlier of: (1) occupancy; or (2) conveyance to a bona fide purchaser. As for the common elements, the warranty accrues on the latest of: (1) the completion of the common element; (2) first conveyance of a unit; or (3) termination of the declarant’s control.

Empty Promises Homeowners and Associations Can Avoid.

Homeowners and associations must at a minimum provide notice within six months of discovery of an “injury” and plan on commencing litigation or arbitration within two years from the date of discovery of the “injury”. They cannot fall for empty promises provided by developers/builders, the developers/builders’ insurance companies and/or the developers/builders’ attorneys. Developers/builders may make representations such as: “we will look into it”; “we will notify the subcontractor(s) who performed the work”; and, “the subcontractors are not cooperating”. They may continue to make assurances that they are working on it until the two year statute of limitations has expired. Once they believe the two years has expired, they may quit answering and returning calls. Although unfair, there is no guaranty that a court will prevent these developers/builders from asserting a statute of limitation defense due to these representations.

If a developer/builder makes a representation that it will “fix it”, the homeowner/association may have a defense to the developer/builder’s statute of limitations argument. However, a judge or jury must determine if the reliance was reasonable. What one person believes to be reasonable may be considered unreasonable to another person. For example, a significant gap in time between the representation/assurance that the developer/builder will “fix it” and running of the statute of limitations may result in the homeowner/association’s claim being barred by the statute of limitations as such delay may be held to be unreasonable; i.e., you should have known that the developer/association was misleading you at some point.

Homeowners and associations can still work towards resolution with their developers/builders after providing the necessary notices and commencing litigation or arbitration. The key is to avoid empty promises and the statute of limitation defense, and by doing so, put themselves in a better position to recover their damages.

Many of the issues addressed in this article, and other issues that may confront homeowners and associations regarding construction defects, are time-sensitive due to statutes of limitation or other deadlines. The information in this article is general information based on the law in effect at the time of this writing and does not constitute legal advice regarding action to be taken in any particular case, which may vary depending on the facts, governing documents and applicable statutes. Homeowners and associations should obtain advice from an attorney immediately once they believe that they have discovered an injury in order to timely address these issues.

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To learn more about this article, please call Brian at (952) 953-8848.