Buying Into Trouble

All too common. More than 90% of new-construction condominiums face claims by boards and unit-owners against the developer over construction defects. So the first thing a board wants to do when it takes over control of a new condominium from a sponsor is to hire an engineering firm to do a top-to-bottom survey of the physical condition of the building. If there are problems and a board wants to commence a breach of contract action on behalf of everyone, it has to be within six years of the first closing.

A workaround. If a sponsor maintains control beyond six years, unit-owners can still act by forming a group and commissioning a forensic engineering report to identify defects in the common elements, and then demanding action from the sponsor-controlled board. Because they have to pay for the engineering report and legal proceedings, I always advise getting as many people as possible involved to spread out the costs.

Back and forth. Approximately 30% to 40% of claims may escalate to litigation, while the majority are resolved through settlements, often facilitated by the attorney general’s office or direct negotiations between boards and developers. Sponsors don’t want a reputation of getting sued. But when they do come to the table, they typically argue about the scope of the problems, and there’s a lot of downplaying. They’ll say: “Look, we agree with some of the assessments in the report, but not all of them. Let’s whittle them down, and then we’ll do the necessary repairs.”

Cost-benefit calculation. That’s where you reach an impasse, and then you have to make a judgment call. If the defects and the cost of repairs are significant enough, you’re going to be much better off suing the developer and getting a lot more money down the road rather than taking a nominal settlement now and letting the sponsor walk.