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Protect Valuable Property Rights in the event of construction defects and the resulting damage to your condominium or townhome project.


An Overview of the Survivor’s Guide to Construction Defect Resolution in Virginia

Why are Buildings Often Poorly Built?

Workers in the construction industry, especially residential construction, are not always well trained.  The owners of some companies that employ them are often focused on getting the job done and in getting paid as soon as possible.  They are less focused on getting it done correctly.  For them, the primary goal is simply to “pass inspection”.

The experience, expertise and diligence of building inspectors depends on the inspector in question, that inspector’s work load and other factors, including the inspector’s motivation to thoroughly inspect the project.  Building inspectors, and the cities and counties that employ them, are rarely held liable for approving defective construction. So their incentive to ensure that work is done properly and is code compliant may be limited.  When this reality is combined with the fact that the goal of many contractors is merely to “pass inspection”, the result is that many projects satisfy building inspections and obtain approval even though the projects contain defective construction.

VIRGINIA CONDOMINIUM ACT WARRANTY

The Virginia Condominium Act (Condo Act), at Va. Code § 55-79.79, establishes a warranty for the quality of the construction of the individual units and the condominium common elements.

For each unit, the declarant of a new condominium project warrants or guarantees each unit against structural defects and warrants that the units are fit for habitation and were constructed in a workmanlike manner.  As to the common elements, the Condo Act provides that the declarant shall warrant or guarantee all of the common elements against structural defects.

Courts applying the Condo Act’s definition of “structural defects” have applied the term broadly to include a wide range of defects.  Thus, the statutory warranty against structural defects will provide a condominium association with an effective legal remedy against a developer where the defective construction of common elements has resulted in serious water intrusion problems.

The warranty period is two years for both unit specific defects and common element defects.  As to defects in the individual units, the warranty period begins to run from the date that unit is first sold.  For common element defects, the warranty period typically begins to run when the common element is completed or when the first unit is sold, whichever is later. 

An action can be brought to enforce the statutory warranty within five years after the date the warranty goes into effect.  For common element defects, this means five years from the later of completion of the common element or sale of the first unit.  This five year period is significantly longer than the enforcement period for statutory warranties provided by many other states.

The Condo Act specifically eliminates any “privity” requirement.  Therefore, in an appropriate case, owners who did not purchase directly from the developer, and the association itself, can take advantage of the Condominium Act’s statutory warranties of construction quality.  Moreover, there is no provision in the Condominium Act authorizing disclaimer of these statutory warranties by the developer. 

The Condo Act requires an association to send the developer written notice by registered or certified mail identifying the construction defects.

The statute provides that sending the notice temporarily stops or “tolls” the statute of limitations (i.e., the period within which an action must be filed) from running for a period of up to six months to provide the developer with a reasonable time in which to cure the defects.

CONDOMINIUM OFFERING STATEMENT DISCLOSURE REQUIREMENT

A declarant is required by the Condo Act to provide a public offering statement to all purchasers of a condominium unit.  The public offering statement must “disclose fully and accurately the characteristics of the condominium and the units …”  The disclosure requirement has been applied to mandate the disclosure of defects in construction.

Both an association and unit owners can bring suit against a declarant for the failure to comply with the terms of this disclosure provision.  Additionally, agents of a corporation that established and registered a condominium can potentially be held individually liable for a violation of this provision.

It would appear that a claim alleging a violation of the disclosure requirement must be brought within two years of the disclosure.  If the declarant knew or should have known of its failure to comply with the disclosure provision, the enforcement period will likely begin when the plaintiff discovered the violation.

STATUTORY IMPLIED WARRANTY FOR NON-CONDOMINIUM NEW DEVELOPMENT

Individual homeowners and homeowner associations not governed by the Condo Act will be subject to the warranty provisions of Va. Code § 55-70.1.  The warranty rights under that statute are similar to the warranty rights under the Virginia Condominium Act.  However, unlike the Condo Act, this statutory implied warranty allows a developer to disclaim the statutory warranties, provided the disclaimer provision satisfies specified statutory requirements.

Additionally, the warranty period and the period for enforcement of the warranty are significantly shorter than those provided by the Condo Act warranty.  The statutory implied warranty period itself is only one year (five years for foundations) and the statute requires a claimant to file suit to enforce the warranty within two years after a breach of the warranty.  For a unit that contains construction defects at the time of sale, breach is considered to occur at the time of transfer of title.  As with the Condo Act, pre-suit notification is required and tolls the limitation period for enforcement by up to six months.  The statute does provide that the warranty survives the transfer of title to a subsequent buyer.

COMMON LAW IMPLIED WARRANTIES

Statutory implied warranties are warranties established by statute through the legislative process.  Virginia’s statutory implied warranties are discussed in sections II and IV of this Overview.  Common law warranties are warranties created by courts rather than by statute.  In Virginia, while there are statutory implied warranties arising out of the purchase of a completed dwelling, there are no similar judicially created common law warranties with respect to such a purchase.

However, Virginia does have a judicially created implied warranty of construction quality arising out of a contract to construct a dwelling.  Unit owners in a condo or townhome project usually purchase a completed dwelling from a declarant.  Because the dwelling is completed at the time of purchase, the judicially created common law implied warranty does not apply.

However, where a developer sells a lot to a purchaser and agrees to construct a dwelling on that lot, or where an owner of a lot enters into an agreement with a contractor to build a dwelling on the lot, there are judicially created common law warranties for the quality of construction of that dwelling.

EXPRESS WARRANTIES

Express warranties are warranties expressly contained in developer sales agreements.  They are separate and apart from, and usually do not supersede, statutory warranties.  Their value varies depending on their content and on whether they confer rights not already conferred by statute.  Because the statutory warranties provided for condos offer greater protections than the statutory implied warranties provided for non-condominium associations, express warranties may be of greater potential benefit to non-condominium homeowners associations.

In any event, express warranties, since they are voluntary on the part of the developer, typically contain limitations that diminish their value.  So anyone relying on such warranties should make sure to carefully review the “fine print”.  Such a review is likely to reveal a member of qualifications to the express warranty that potentially, substantially diminish the warranty’s value.

The statute of limitations on an action for breach of an express warranty is five years, unless that time period is reduced by agreement of the parties.  The limitations period likely begins to run on the date of sale rather than on the discovery of the defect.

NEGLIGENCE

Many states allow an owner to sue a developer or contractor for negligent construction of a dwelling.  Virginia generally does not.  The legal rationale is that a negligence claim is prohibited by the “economic loss doctrine”, which provides that where a party sues for purely economic losses, the party that is suing is limited to a breach of contract or breach of statutory warranty cause of action.  Virginia courts generally view damage to property resulting from defects in the construction of that property to be an economic loss. Thus, a homeowner is limited to seeking recovery based on some other theory of liability.

These other theories of liability would include statutory warranty, implied warranty, express warranty and other theories of liability discussed within the Survivor’s Guide.

MISREPRESENTATION

It is often (but not always) difficult for an association to prevail on a misrepresentation claim.  To begin with, a court may rule that a misrepresentation claim can in no event be made by an association absent unit owner assignments of the claim to the association.

Assuming the association can overcome a “lack of association standing” defense, an association would still have to prove the usual elements of a misrepresentation claim, including materiality of the misrepresentation and reliance on the misrepresentation by the purchasers.

Additionally, unless the misrepresentation is in writing, it may be hard to prove. Where there is a provision in the sales agreement specifically stating that the buyer cannot rely on oral representations, if the representation is oral, it will be hard if not impossible to convince a court that buyers had the right to rely on it.

The statute of limitations on a misrepresentation claim is two years from the date the misrepresentation was or should have been discovered.

VIRGINIA CONSUMER PROTECTION ACT

Virginia has also adopted a consumer protection statute, the Virginia Consumer Protection Act (VCPA), which protects against fraudulent practices in consumer transactions.

The VPCA covers the sale of residences by builders and developers to consumers and has been applied to defects in condominiums.

A purchaser may proceed on a theory of misrepresentation by nondisclosure under the VCPA but, in addition to proving the elements of misrepresentation, the homeowner must also show that the decision not to disclose a material fact was knowing and deliberate.  This additional hurdle makes maintaining a claim under the VCPA difficult because there are few circumstances where a knowing and deliberate non-disclosure can be proved.

Under the VCPA, the measure of damages is actual damages suffered, and if the violation is willful, treble damages are recoverable.  Attorney fees and court costs are also recoverable under the VCPA.

The statute of limitations for a VCPA violation is two years.  The right of action normally accrues and the limitation period begins to run when the breach of contract occurs.  However, if the VCPA action is based on any misrepresentation or fraudulent concealment, the limitations period will probably begin to run when the fraud or misrepresentation was or should have been discovered.

BREACH OF FIDUCIARY DUTY

Under the Condo Act, declarant appointed board members are subject to liability as fiduciaries of the unit owners for their action or omissions during the period of declarant control.

If any individual board member puts the interests of the builder above those of the association, that board member may be personally liable for any damage caused to the association.  In addition, individuals elected to the board of directors by the builder may not be afforded any of the protections provided to other volunteer directors and may not be covered under the association’s directors’ and officers’ liability insurance.

The statute of limitations period to bring a claim for breach of fiduciary duty is two years from the breach.

U.C.C. CLAIM AGAINST PRODUCT SUPPLIER OR MANUFACTURER

The Virginia Uniform Commercial Code (“UCC”) provides statutory warranties for “merchantability” and “fitness for the sale” of consumer goods.  While a home is considered to be real property and outside of the scope of the UCC, items conveyed to a buyer pursuant to a home sales contract, which maintain their distinct character as “goods”, can be covered under the provisions of the UCC.  For example, courts have broadly applied the UCC to permit claims related to a wide range of building components, including: air conditioning units, screens, sliding glass doors, windows, dishwashers, refrigerators and carpet. 

As a result, a homeowner or association may have a claim against a material supplier for a defective product.  Privity of contract is not required. The statute of limitations period is four years from the delivery of the goods, but can be reduced by contract to one year.

CLASS ACTIONS

The Condo Act permits one or more unit owners, in the absence of action by the association, to bring a collective action as a representative of all unit owners with respect to defects involving individual units.  This permits one or more unit owners to take action representing all affected unit owners without incurring the cost of pursuing individual lawsuits.  Such an action would commonly be referred to as a “class action”.

Outside of the Condo Act, Virginia is not a class-action state, and “an individual or entity does not acquire standing to sue in a representative capacity by asserting the rights of another, unless authorized by statute to do so.”  The Property Owners’ Association Act does permit a class action by unit owners for violations of the Act.

DISPUTE RESOLUTION – CAN WE JUST SETTLE WITHOUT A LAWSUIT?

No one likes a lawsuit.  However, sometimes they are the most effective way of getting a matter settled.

Letters can be ignored; a lawsuit cannot.  As a result, a suit is a sure way to get the developer’s attention.  More than that, it will probably get the attention of the developer’s insurers, which is important because it is often the insurers who fund a settlement of a construction defect claim.

The filing of a lawsuit obligates the insurer to take action on behalf of its insured.  If there is no lawsuit, an insurer can ignore a claim against its insured without much risk.  But if it ignores a lawsuit that has been served on its insured, an insurer may face serious consequences.

Insurers for developers, and the developers themselves, know that if a construction defect claim brought by a homeowners association proceeds to trial, the result is likely to be unfavorable for the developer and its insurers.  Therefore, the developer and its insurers are likely to work hard to get the suit resolved before it goes that far.  Thus, the filing and service of a lawsuit should in most circumstances be looked at as a positive event, which furthers the resolution of the dispute.

Moreover, an association should keep in mind that just because a lawsuit needs to be filed does not necessarily mean that the association will have to go to trial to get the claim resolved.  Actually, the opposite is usually true because most cases are resolved before a matter proceeds to trial.

THE LITIGATION PROCESS

To get the case resolved, the claimant has to explain what defects exist, how to correct them, and how much it will cost to correct them.  Based on the claimant’s identification of the defects, the developer can then bring the appropriate subcontractors into the lawsuit to share in the liability.

The developer and the subcontractors will tender the defense of the suit against them to their liability insurers.  These insurers will hire counsel to defend their insureds.  Counsel will in turn hire experts to evaluate the plaintiff’s claim.  The defense experts will do additional investigation to verify the accuracy of the claimant’s contentions.  The experts for the different sides will then get together and try to narrow their areas of disagreement.

After this all has taken place, the parties will usually use the services of a mediator to facilitate a settlement.  The mediator will not act as an arbitrator.  That is, the mediator won’t decide the case.  Instead, the mediator will use his or her powers of persuasion to get the parties to compromise and thereby to reach agreement.

Most cases are resolved in this fashion.  Relatively few actually go to trial.

WHAT TO TELL THE HOMEOWNERS

Whenever an association elects to pursue a construction defect claim, the board should keep the unit owners informed as to the status of the litigation.  Homeowners usually don’t need to know, and don’t want to know, all the details.

However, most will want to receive periodic, regular reports on what progress in general is being made.  With counsel’s assistance, a board should be able to provide that information to homeowners.

HOMEOWNER APPROVAL OF CLAIM FILING AND INITIATION OF LAWSUIT

While the Condo Act specifically authorizes a condominium association to assert and settle claims related to the common elements, that right is subject to any restrictions and limitations imposed by the condominium instruments.  “Condominium instruments” include the association’s articles of incorporation and by-laws, and will usually also include a declaration of covenants, conditions and restrictions.

A declarant may include in the condominium instruments a restriction on the association’s ability to make a construction defect claim against the declarant.  Typically, the restriction prevents an association board from filing a lawsuit without unit owner approval and then requires that the approval be by a “super” majority of the unit owners.

These kinds of restrictions are difficult but usually not impossible to satisfy by an association whose board wants to take action but whose hands are tied by a restriction.  Most unit owners will approve litigation against a developer if they understand the association’s rights and the potential costs of repair.  This is especially true where a unit owner assessment to cover the attorney fee expense while the claim is pending can be avoided through the use of a contingent fee agreement with the attorney.

Additionally, it may be possible to remove the unit owner approval requirement from the association’s governing documents by amending these documents.

However, there may be circumstances in which the super majority requirement cannot be satisfied, either with respect to amending governing documents or obtaining unit owner approval for initiating litigation.  If this is the case, there are still other possibilities if an association cannot get the necessary unit owner votes to approve the filing of a lawsuit or to eliminate the approval requirement from the association’s governing documents.  A lawyer with substantial litigation experience representing associations with defect claims is likely to be aware of these possibilities and should be consulted.

SELECTING THE RIGHT LAW FIRM

Not every law firm has experience in the resolution of major construction defect claims.  An association’s general counsel may focus on rules enforcement, collections, amending governing documents, and other matters having little to do with complex construction defect issues.  An association with a construction defect claim would be well advised to retain counsel with substantial experience in handling construction defect claims and the insurance coverage issues often involved in the resolution of such claims.

HIRING AN ATTORNEY ON A CONTINGENT FEE VERSUS AN HOURLY FEE BASIS

As a practical matter, it may be necessary to hire an attorney on an hourly rather than a contingent fee basis for the limited purpose of submitting a claim to the developer and determining whether the developer will fix the problems without a lawsuit.  However, if a lawsuit becomes necessary, which is very often the case, a contingent fee is often a realistic option.  Whether in the long run a contingent fee will turn out to be less expensive than an hourly fee will depend on the outcome of the case and on how much time the attorney had to spend to obtain that outcome.

Since the outcome and the attorney time in getting there are difficult to predict at the outset of a case, it isn’t always an easy task to predict going into a case whether a contingent fee or hourly fee will turn out to be more expensive.  However, with a contingent fee, a lawyer defers payment until the case is resolved, and takes the risk of an unsuccessful outcome.  Because of the additional risk and financial burden for the attorney, it should be expected that if the case is successful, the contingent fee may end up more costly than an hourly fee.

In any event, a contingent fee may enable an association to prosecute a construction defect claim without having to assess unit owners for attorney fees as the case proceeds.  That fact alone is often the primary reason why an association may decide to hire an attorney to prosecute a construction defect case on a contingent fee rather than on an hourly fee basis.

Also, in deciding whether to hire an attorney on a contingent fee or on an hourly basis a condo association board should keep in mind that under the Condo Act, an association may be entitled to an attorney fee award if it successfully prosecutes the construction defect claim against its declarant.  While the amount of the award may not be equal to the full amount of the attorney fee payable to the association’s counsel, the amount awarded to the association for attorney fees may still be substantial.

STANDING OF THE ASSOCIATION TO ENFORCE STATUTORY WARRANTIES

With respect to condo associations, an association has standing to maintain a claim on behalf of unit owners regarding any violation of the Condo Act or the specific condominium instruments.  One or more unit owners may bring a class action on behalf of aggrieved unit owners as to defects within the units themselves if the association itself takes no action; however, an association has the exclusive ability to bring a collective claim related to the common elements.

That said, in circumstances, where an association declines to pursue an action related to the common elements, unit owners can consider pursuing an action to force action by the association.

The Virginia Property Owners’ Association Act, which applies to associations not governed by the Condo Act, has a similar provision regarding violations of that Act.  As discussed, above class actions are otherwise limited to circumstances where there is a specific statutory authorization.

COMMON DEVELOPER DEFENSES

The failure to properly maintain the project, the failure to comply with applicable pre-suit notice requirements and the failure to timely file a claim are common defenses to a defect suit.

As to the last defense, an association can take a few simple steps to ensure it does not sleep on its claims: (1) know when the period for taking legal action expires, (2) timely hire an expert to investigate the condition of the property, and (3) consult an attorney regarding association rights sooner rather than later.

Lack of association standing to make the claim may also be asserted as a defense.  Lack of association standing is more likely to be a defense if the claimant is not a condominium association.

Regardless of whether the association is a condominium association or not, the association’s governing documents (primarily the declaration and by-laws) should always be reviewed to determine what provisions exist in those documents that may address association standing issues.  An association board should keep in mind that any uncertainty regarding an association’s standing to bring a claim can probably be eliminated in many situations if the association simply takes an assignment of unit owner claims.

ANALYZING DEVELOPER INSURANCE COVERAGE ISSUES

The fact that a defendant has or had liability insurance does not necessarily mean the liability insurance will fully cover the insured’s liability.  Defects without physical damage are not usually covered by a contractor’s liability policy.  Policies have liability limits.  Some policies are exhausted by payments on prior claims.  Policy exclusions may limit or entirely eliminate coverage.

Most settlements are funded by insurers under liability policies because many responsible parties are out of business or for other reasons don’t have the financial resources to fund a settlement.  So obtaining access to insurance money is often essential to the successful resolution of a construction defect case.

In hiring counsel to represent it in a construction defect case, an association should make sure that it hires a law firm that understands the myriad of insurance coverage issues that are relevant to the resolution of construction defect disputes.

THE MEDIATION PROCESS

Most cases are resolved through mediation, which are settlement discussions facilitated by an independent intermediary (the mediator). Some mediators are former judges.  Others are practicing attorneys with expertise in construction defect or insurance issues, who devote some, most, or all of their time to acting as a mediator or arbitrator.

An arbitrator acts like a judge or jury and decides the disputed claims.  In contrast, the mediator’s sole function will be to get the parties themselves to reach agreement.

The mediator’s sole tool is the power of persuasion.  The mediator uses this tool to lower the plaintiff’s expectations and to raise the defense’s assessment of the settlement value of the case.

A skilled mediator is usually effective in getting cases settled.  However, most construction defect cases involve many parties, lawyers, experts and insurance adjusters.  So it often takes several mediation sessions over several weeks, and perhaps over several months, to get the job done.  But if counsel, their experts, adjusters and clients act reasonably, as they ultimately usually do, the case gets resolved.  The amount for which the case is resolved is likely to be less than what the plaintiff initially demanded and more than what the defense initially thought they would have to pay.

FACTORS THAT DETERMINE WHEN A CLAIM IS RESOLVED AND FOR HOW MUCH

When a claim is resolved and for how much depends on a wide range of factors, many of which are not in the control of plaintiff’s counsel.  Among these factors are the following:

  1. How serious and widespread are the problems, and how costly are they to correct?
  2. What is the attitude toward the claims of the various defense attorneys, their adjusters and experts?
  3. Is there enough insurance money available to fund a reasonable settlement?
  4. How effective is the mediator?
  5. What is the attitude of the trial judge?  Will that judge move the case through the system with reasonable speed, and will that judge issue rulings that weaken or strengthen the plaintiff’s ability to ultimately prevail?
  6. Has association delay in making its claim compromised its value by making the association vulnerable to a statute of limitations defense? Association delay in making a claim is often the biggest hurdle to a satisfactory resolution of a claim.

Ultimately, most cases do settle.  So the question is usually, when and for how much.  It is the job of plaintiff’s counsel to ensure that the answer to the first question is “as soon as possible”, taking into account the desire of the defense to delay the process. The answer to the second question is, “for as much as possible”, taking into account the financial circumstances of the parties on the defense side, and the insurance coverage questions that inevitably will arise.

RIGHT TO RECOVER ATTORNEY FEES

It may be possible under the Condo Act for a condo association to obtain an attorney fee award arising out of a construction defect claim against the developer.  Therefore, a condo association should always include attorney fees in any settlement demand it makes in a dispute resolution process in a lawsuit asserting a statutory warranty claim.

The Property Owners’ Association Act similarly provides for the recovery of attorney fees and costs to the prevailing party in matters arising from a violation of the provisions of that Act.  However, the Property Owners’ Association Act does not provide a warranty against defects and, thus, is unlikely to result in any award of attorney fees for a defect claim brought by a homeowners association.

Alternatively, there may be a provision in the association’s governing documents or in the purchase agreements between the declarant and the original buyers which would provide for an award of attorney fees in a dispute between unit owners and the declarant.

WHAT IF THE DEVELOPER IS BANKRUPT OR OUT OF BUSINESS AND WITHOUT ASSETS OR INSURANCE?

Even if a developer is out of business, has no assets and has no insurance, it may be possible to fund an adequate settlement.  First of all, as far as an insurer goes, the issue isn’t whether the developer has insurance when the developer was sued, but rather whether the developer had insurance when the damage occurred as a result of the defects.

Second, regardless of the insurance the developer had or didn’t have, the contractors may have had insurance that may cover some or all of the claim.

Third, there is also the possibility that the person or persons who controlled the developer entity will have personal liability for some or all of the debts of the corporate entity.

CONCLUSION: KEY POINTS TO REMEMBER

  1. Associations and their unit owners have a wide range of rights that arise as a result of defects in the construction of the project.
  2. The ability of an association or unit owners to enforce those rights depends on the claimant initiating legal action in a timely manner.
  3. Under the Virginia Condo Act, an association has a right to seek an award of attorney fees in an action against the declarant arising out of that Act’s statutory warranty provisions.
  4. Most defect claims settle before trial, but it often takes the initiation of legal proceedings to get the dispute resolution process to move forward.
  5. An association may want to consider retaining a law firm that is able to assist the association in resolving a construction defect claim on a contingent fee basis.  Our law firm is often willing to do so.
  6. An association may be able to obtain a substantial recovery, even where the declarant has gone bankrupt or out of business, by relying on declarant and contractor liability insurance policies in effect when property damage occurred as result of defective construction.
  7. A prudent association board should consult with counsel regarding association statutory warranty rights while such rights are still enforceable.