Chapter 17 CONSTRUCTION DEFECTS IN COMMON INTEREST COMMUNITIES

• Jurisdiction: North Carolina

17 CONSTRUCTION DEFECTS IN COMMON INTEREST COMMUNITIES

§ 17.01. In General

Many planned communities and condominiums will run across a problem in the original construction of either the common elements or perhaps other property that the association is responsible for maintaining at some point in time. Whether such a problem rises to the level of a "construction defect" depends on the severity of the problem, the original design, applicable building codes, manufacturers' application instructions, the prevailing standards of workmanship in the area the property is located, and the consequences of the problem to the association and its members. A defect can be in errors of design, errors in processing, faulty workmanship, use of faulty or improper materials, or some combination thereof. For example, an association may experience failing retaining walls because of unsuitable soils, failing parking and private roads because of inadequate compaction, a crumbling pool because of inadequate concrete, a leaking roof because of faulty workmanship in the installation of the roof, and deteriorating siding because of defective siding materials. All of these may fall within the broad category of "defect" in the original construction for which an association may have a remedy. Although an association may not have a viable implied warranty claim against a builder for a mere aesthetic problem, the association does not have to sit idly by while the building, foundation or roads crumble around it to see whether a serious defect and claim against the builder or developer may exist. As one court has noted:

The implied warranty is intended to ensure that serious structural deficiencies will be fixed before major damage results. The condominiums do not have to degrade to a state where they are uninhabitable for this doctrine to apply. Rather, if the violations present a substantial risk of future danger, the implied warranty of habitability is a viable claim. The homeowners' association does not have to wait until their windows cave in or portions of their deck rot off before the warranty applies.¹

Homeowners associations, and especially condominium associations, are oftentimes the best situated to identify these defects since they are, in most cases, legally responsible for maintaining, replacing, repairing and providing for the day-to-day upkeep of the property in question. It is important for the board and its counsel to have a basic understanding of some of the legal issues that arise when a defect in original construction is identified by an association. Whether an association has recourse against a developer or builder for the defect will depend on a number of factors, including when the defect was discovered, when the improvement was completed, whether the association has standing to sue, and whether the builder or developer is still in business and/or has insurance that may cover the damages associated with the defect. Finally, whether the association has a valid claim it can assert will depend, at least in part, on where the defect is located because there are some areas that are simply not of any concern to an association. In short, in addition to the complicated issues in routine construction litigation, an association, as a representative body, has a host of other legal issues that must be addressed when analyzing its rights relating to a construction defect. The board will want to analyze these complicated issues carefully because litigation — particularly construction defect litigation — can be very divisive within a community, as well as protracted and expensive.

§ 17.02. Standing Issues

One of the most important and most litigated issues an association must confront is whether a "defect" is any of its business. In other words, does the association even have the power to seek redress against the original builder or developer for the faulty construction? Or does the location of the problem, coupled with the maintenance responsibilities of the association in its legal documents, make the defect none of its concern? The complicated ownership structure of the common elements and the maintenance responsibilities of an association with respect to property not owned by the association unfortunately culminate in some rather tedious issues to consider when a defect is present. The type of common interest community involved will also impact whether the association has standing to seek redress for defects. There are a number of cases from other jurisdictions that are instructive and several cases in North Carolina that provide guidance.

In the case of direct ownership of the common elements by a planned community, the answer is clear — the association absolutely would have standing to sue a builder and developer for defective construction. The Court of Appeals has held that the association is a necessary party in such disputes.² Under the PCA, the "common elements" means any real estate within a planned community owned or leased by the association, other than a lot.³ The PCA grants the association the power to institute, defend, or intervene in litigation or administrative proceedings on matters "affecting the planned community."⁴ Since almost all owners have easements over the common elements owned by a planned community, clearly the structural integrity and quality of construction on property owned by and deeded to the association and used by its members would be a matter affecting the planned community. Therefore, in the case of clubhouses, private roads, tennis courts, pools, golf courses, walking trails, ponds, BMPs and other common elements owned by an association in a planned community, the association would have standing to bring suit against a builder or developer. Most courts have held associations have standing in these straightforward situations, including North Carolina.⁵ However, in condominium and townhome associations, where the association may have some maintenance responsibilities for property not directly owned by the association, the matter can be more complicated.

In a condominium association, the siding, roof and decks may be considered either limited common elements, or common elements for which the association is responsible for maintaining.⁶ Or, in the case of a townhome association, the property may very well simply be the property of the owner, not the association. This property is not, however, owned by the association. Rather, in most instances, the owners of the townhome own the property (the townhomes) in fee simple, subject to the obligation of the association to maintain the exterior of the townhomes and the corresponding obligation of the owner to pay assessments on a uniform basis, which defrays the cost of such maintenance. In the case of a condominium, the owners all have undivided interests in the common elements, with all owners effectively "owning" a portion of the common elements.⁷ However, condominium associations are almost universally obligated to maintain the common elements even though the association does not hold a deed to them.⁸ In addition, the Condominium Act expressly recognizes that the association has an insurable interest in the common elements despite the association not "owning" the common elements.⁹ It is also not uncommon for an association's legal documents to require that the association insure the structure of the townhomes. In either case — a condominium or townhome association — does the association have standing to bring an action against the builder or developer in the event the siding, roofs, decks or other areas for which the association was formed to maintain are defectively constructed? Does it matter that the association does not "own" the property for these types of developments?

Case law throughout the country, including in North Carolina, holds that the association does have standing to sue for such construction defects in its representative capacity on behalf of its members in townhome and condominium settings. A condominium association or townhome association that is legally obligated to maintain and assess its members for the maintenance, repair and replacement of property not owned by the association would, in most instances, have standing to sue the original builder of the structures.¹⁰ North Carolina has adopted the standing test initially set forth in Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 97 S. Ct. 2434 (1977), which requires the following criteria to be met by an association before a court will consider the association to have standing: "(a) [the association's] members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization's purpose; and (c) neither the claim asserted, nor the relief requested, requires the participation of the individual members in the lawsuit."¹¹ A condominium or townhome association obligated to maintain defectively constructed property owned by another owner (but maintained by the association) would meet all three of these standing requirements if it chose to sue the developer or builder on behalf of its members. The first element is met since the owners would have standing as owners to sue the builder, even as remote vendees of the builder.¹² The second element would likely be met since the Condominium Act makes the interest an association would seek to protect in defective construction claims germane to the association's purchase. For instance, N.C.G.S. § 47C-3-107(a) states the association is responsible for causing the common elements to be maintained, repaired, and replaced when necessary and to assess the lot owners as necessary to recover the costs of such maintenance, repair, or replacement. In the case of common elements under the Condominium Act, associations have an insurable interest in condominium buildings and, by extension, would also have a legally protectable interest in the same property for the purposes...