Condominium Market - A Red Hot and Risky Business

By G. William Quatman
Shughart Thomson & Kilroy, P.C.
Kansas City, MO

Residential litigation can be very emotionally charged. Although businesses treat a leaky roof like any other commercial expense, homeowners react quite differently when the leak is in their new bedroom or kitchen. Life savings are invested in high-end residences, and many consumers expect their homes to be perfect. A high-rise condominium project can have 50 to 100 of these homeowners living in $150,000 to $2 million homes. If defects in the condo tower affect the living units or common areas of each resident, the emotions and damages are far greater and the litigation expensive.

Every major city in the U.S. has had a dramatic increase in condominium projects. Market analysts predict 2006 will be a record-breaking year in multifamily housing. In St. Louis and Kansas City, old warehouses, hospitals, office buildings -- even churches -- are being converted into hip new urban housing. Urban living is popular for baby boomers and retirees seeking second homes or smaller-scale, maintenance free living. Even the “echo boomers” are gobbling up downtown condos close to work and the new entertainment districts and ballparks. Developers are flocking to this hot market, but some architects and contractors are staying clear or using great caution for well-founded fear of getting sued or due to rising insurance costs.

Although it has not yet hit Missouri, condo defect litigation has exploded in several states, resulting in legislation that attempts to limit frivolous suits against designers and builders. The developer of the project, often a single-purpose limited liability company (LLC), may disappear once all the units are sold off, may be insolvent, uninsured or not even exist a few years after project completion – leaving building maintenance to the homeowners association. If not properly maintained, small problems grow into big ones, and should the developer no longer be around, condo associations may try to sue the architect or contractor. One major insurer reports that one out of every five claims against their insured architects/engineers involves a condominium project. Some carriers are raising their rates, imposing higher deductibles and scrutinizing their underwriting practices more intensely in “hot states.”

Most insurers for contractors have simply deleted residential coverage, absent some special endorsement, due to the rising cost of defect litigation. For example, last summer, a contractor settled a condominium lawsuit in Colorado for $39.5 million to resolve a lawsuit over a 246-unit project. These types of settlements are attracting contingent-fee plaintiff-oriented law firms, some of whom advertise on the Internet their success in representing condo associations, boasting multi-million dollar awards and settlements. In some states, condo association property managers report being courted heavily by law firms seeking to represent the unit owners in construction defect litigation. One manager of 130 condominium complexes said she “was deluged” with boxes of cookies and other gifts sent by lawyers at a trade show. Proactive measures have been taken in some states, like Kansas, where it is illegal for any person to “provide or offer to provide anything of monetary value to a property manager of an association” or to the homeowners association to encourage a claim for damages arising from a construction defect. .

One contractor in Nevada who had built more than 3,500 condominium and townhouse units closed his company due, in part, to liability and higher insurance premiums after he was hit with a $15 million construction defect lawsuit by the homeowners association for a 208-unit condominium complex, which cost only $9 million to build. After two years of litigation, the contractor settled the suit for $3.8 million, causing his insurance premiums to increase.

The growing condo crisis has resulted in new “right-to-cure” laws being passed in 27 states, including Missouri, in an attempt to curb any frivolous suits and to give the parties involved a cooling off period, in which they can investigate and try to resolve problems short of a class action lawsuit. These laws have detailed “pre-claim” requirements for notice to builders and, in some states, designers. As well, these laws require mediation before a condo owner or association can sue for damages. Without such notice and inspection, a condo defect lawsuit must be dismissed until the parties complete the pre-claim process of notice, inspection and mediation. Many states, including Missouri, require specific contract notice provisions to invoke protection of the law. Missouri is among the states that has a law giving some protection to any person, company, firm, partnership, corporation, association, or other entity that is engaged in the business of designing, developing, constructing, or substantially remodeling residences.

Whether you are a developer, architect or contractor, condominium projects require a proactive risk management plan and an evaluation of the risks versus the reward. Have your lawyer and insurance advisor review the contracts, declarations, association by-laws and unit purchase agreements with an eye toward reasonable protection against claims in this high-risk project type.