Condominium development was booming in the 2000s. This came to a screeching halt with the advent of the Great Recession. Single family home development, similarly robust prior to the Great Recession, also came to a halt. However, starting about 2012, single family home development took off again and has remained fairly robust since (present pandemic-related circumstances excluded). Interestingly, condominium development never bounced back. For instance, in the 5 year period prior to 2010, over 60 condominiums were developed in Omaha. However, for the period 2015-2019, less than 20 condominiums were developed.
Why is that? What explains this disparity between single family home development and condominium development?
The prevailing belief is that this limited condominium development had little to do with the economy, which was of course very strong over this period. Rather, many observers have pointed to the influx of construction defect litigation as the proverbial wet blanket. Those who know this cottage industry of litigation know what this is about: litigation commenced by condominium owners and condominium associations, often with minor or meritless construction defect complaints, where the attorneys’ fees and other costs are excessive. These are much like class-action lawsuits. Instead of facing one lawsuit brought by one owner of a house, a developer is faced with lawsuits brought by 50 condominium owners. Related to this, the cost of insurance coverage for construction defects skyrocketed. As a result, developers grew wary of spending money on quality projects.
1. PENDING CHANGES.
Proposed changes to the condominium law in Nebraska may help to cure this problem. LB 808, which is currently being considered by the Unicameral, proposes the following changes to the condominium law:
a. Statute of Limitations.
The first change is to the statute of limitations for claims made by condominium owners or condominium associations against the developer. As it stands now, there is a 4 year statute of limitations. This amendment would reduce the statute of limitations to 2 years. Further, when selling a condominium, the developer and the buyer can agree to reduce the statute of limitations for breach of express and implied warranties to 1 year.
b. Condominium association must maintain and adhere to preventative maintenance plans.
The Declaration is the document that creates a condominium. This change in the law states that any new Declaration must contain language that a preventative maintenance plan must be prepared for the preventative maintenance of the condominium The purpose of this concept is to limit a developer’s damages if the condominium association doesn’t prepare and comply with the preventative maintenance plan. As an aside, a preventative maintenance plan, called a “reserve plan” in the condominium industry, is very important for all condominiums, regardless of age. However, in my experience, few condominium associations in Omaha have such plans in place.
c. Pre-litigation notice and cure period.
Before commencing litigation against a developer, the condominium owner must provide written notice of the proposed litigation to the developer, and the developer is given 3 months to cure the alleged defect. If the defect is such that it can’t be cured within 3 months, the cure period will be extended for so as long as the developer is diligently proceeding with repairs. As a result, a developer can cure a legitimate construction defect while avoiding the expense of litigation.
d. Limit on a condominium association’s ability to commence litigation against a developer.
One of the proposed changes to the condominium law would restrict the ability of the condominium association to commence litigation against a developer for construction defects. This litigation may only be commenced by the unit owners themselves, rather than the association. The rationale for such change is that it avoids “class action” type of lawsuits against developers.
e. Limit on developer liability for litigation expense.
The condominium developer is currently liable to the condominium association for litigation expenses, including reasonable attorney’s fees. This liability would be removed by the new law. Further, the condominium developer’s liability to a condominium association would not be for just any wrongful act, but only for the negligent acts of the developer. The negligence standard is a higher standard to meet for a plaintiff.
2. WHAT ELSE CAN BE DONE TO SPUR CONDOMINIUM DEVELOPMENT?
For one, additional direct protections for the developer should be built into the Nebraska condominium law. A recent Minnesota statute is helpful here. In Minnesota, a condominium association must follow a reserve plan, and if the association fails to do so, the developer doesn’t have any liability for damage caused by the failure of the association to comply with the reserve plan. This goes a step further than the proposed Nebraska change, which only requires the association to prepare a reserve plan. There is nothing in the proposed Nebraska statute that explicitly protects the developer from liability for damages caused by the association’s failure to follow this reserve plan.
Moreover, in Nebraska, the developer is liable for construction defects of any kind under any theory. In Minnesota, however, claims can only be made for “construction defects”. These claims are limited to those claims caused by a defect in the design or construction of the improvement. More importantly, the Minnesota statute describes what is not a construction defect, and a construction defect claim does not include claims related to subsequent maintenance.
The state of Washington is also instructive here. In Washington, the condominium law was recently changed concerning the definition of construction defect. Previously, the condominium had to comply with all laws. Under the new Washington law, the plaintiff would have to prove not just that the defect exists but that it is more than just technical. The plaintiff has to show actual physical damage to the unit. This would serve to provide developers with even more protection from frivolous construction defect suits.
Finally, in Nebraska, there is no protection for a board of directors of a condominium association when it doesn’t bring a claim for construction defects against the developer. The only thing the board of directors can do to protect themselves from claims that the board breached its fiduciary duties to the association is to file a lawsuit. As a result, a condominium association board is inclined to file lawsuits just to protect themselves from claims brought by other owners for failure to file the lawsuit. Washington state in 2019 amended its statute to reduce the personal liability of condominium association directors by granting them immunity for discretionary decisions. A condominium association director in Washington now has more leeway to make a decision to not bring a construction defect suit. Similar provisions should be considered by the Unicameral.
3. WHAT HAPPENS NEXT?
If the law as currently written passes, it will take effect three months after passage. This would open flood gates to condominium development in Omaha that have been shut since the Great Recession. We would suggest getting in on the ground floor of this new development.
Contact Bob Dailey at (402) 633-6899 or firstname.lastname@example.org to discuss these changes. Robert Dailey specializes in condominium development, including condominiums for residential, commercial and multi-use.