BY RONALD M. SANDGRUND, LESLIE A. TUFT, AND JENNIFER A. SEIDMAN
Part 2 of this article discusses how construction professionals can mitigate liability risks when undertaking condominium renovations and conversions.
Part 1 of this article examined potential liabilities arising from converting rental units to condos. This Part 2 discusses how to mitigate those risks, including related statute of limitations/repose and liability insurance issues. While this discussion focuses on apartment to condo conversions, it also addresses potential liabilities arising from renovating and selling existing condos as well as turning industrial space into residences. Nothing in this article constitutes legal advice; rather, it offers ideas for practitioners to consider as they apply their independent thought and expertise to the unique circumstances at hand. This article does not discuss the related topic of legal prerequisites for creating common interest communities.
Construction Professional Risk Mitigation
professionals may find their construction defect risk
magnified when converting an apartment complex into condos
due to liability exposures "from non-privity owners
Construction professionals building new apartments may wish to consider the suggestions in the checklists3 herein to reduce their liability risk from a later conversion of those apartments. Construction professionals must also consider that Colorado's Homeowner Protection Act (HPA), CRS § 13-20-806(7), may restrict or void the effect of some of these provisions for residential property. In Broomfield Senior Living Owner, LLC v. R.G. Brinkmann Co.,4 discussed in Part 1, the Colorado Court of Appeals found the HPA voided a contractually shortened limitation period between a construction professional and a property owner because the underlying project involved residential property.
While to err is human,5 forgiveness may not always follow. Therefore, construction professionals should take risk mitigation measures at the outset to avoid problems later. Of course, conducting due diligence before purchasing an existing structure (the requirements of which are beyond this article's scope) is also vital.6Once the decision to convert the project has been made, risk mitigation should encompass investigating and remedying existing defects as well as careful planning, design, construction, quality control, and customer satisfaction services. Construction professionals renovating apartments and converting them to condos should7
■ carefully select the project;
■ hire qualified, competent, and experienced construction professionals with successful track records in multi-family housing construction;
■ coordinate the work with design document requirements and correctly sequence trades;
■ verify that the community's governing documents are appropriate for the contemplated project;
■ have a qualified expert review the conversion plans before beginning construction, and then document ongoing inspections to help ensure quality control and compliance with applicable standards, which may include the International Existing Building Code and Colorado municipal ordinances governing condo conversions;8
■ survey existing tenants to identify known problems and develop appropriate strategies to address and, if appropriate, disclose those problems;
■ ensure the design drawings conform to the governing documents;
■ identify and correct existing building code violations9 and other conditions that create safety threats;10
■ review final, as-built documents to determine whether they conform to any public records and marketing materials;
■ establish an adequate association budget, including proper reserves for foreseeable maintenance obligations (based on reasonable assumptions regarding useful life11 and the life-cycle costs of various operating and structural systems);
■ adopt simple warranty procedures, and maintain an adequate warranty department to address and resolve problems informally;
■ revise boilerplate warranty documents to explain the warranties and their requirements in plain English;
■ reasonably complete punch lists to avoid lingering warranty items and unhappy owners; and
■ maintain good relations and communications with the homeowner association (HO A) and its management personnel, and reasonably address homeowner concerns during the declarant-developer's control of the association.
With regard to the project's construction details, construction professionals should:
■ avoid exterior insulating finish systems (EIFS) and other problematic exterior claddings;
■ require that any systems involved in the conversion (e.g., waterproofing, foundation, roofing, heating, ventilation, and air-conditioning systems) are appropriately selected and properly designed and constructed, and have understandable maintenance and operation instructions;
■ mandate adequate contract administration and inspection services by an experienced design professional;
■ where appropriate, employ a water infiltration expert to review design and/or construction; and
■ use well-established designs and construction techniques, particularly regarding water infiltration and damage, and adequately tested construction materials.
Contract Protections Generally
Construction professionals should try to negotiate contract provisions to mitigate their exposure by (1) limiting their liability to those with whom they contract, including other construction professionals or purchasers of converted residences; or (2) indirectly minimizing their risk to third parties, by, for example, obtaining indemnity from those with whom they contract, or investigating and purchasing adequate insurance (this includes consulting with insurance professionals to ensure proper protection).
Contract Provisions with Other Construction Professionals
To mitigate risks arising from their work (including a potential later condo conversion), construction professionals building apartments should consider including the provisions below in their contracts with other construction professionals.
Shortened Claim Time Bar. Generally, a private statute of limitations agreed to between construction professionals is enforceable.12 However, such provisions may not apply under current law to claims brought by original and successor residential property owners because of Colorado's HPA bar against such provisions.The recent Broom/Mi Senior Living Owner, LLC caseheld that such contractual time limitations are void against property owners for claims involving "residential property."
Liability Limitations. Construction professionals may consider contractually limiting their liability to the contracted-for fee, a sum certain, or available insurance, and expressly disclaiming third-party beneficiary status to nonparties. Consequential damage waivers, liquidated damages, and exclusive remedy provisions may be useful. However, as explained above, the HPA may limit or bar such provisions' reach and effectiveness as to residential property.
Indemnification, Insurance, and Additional Insured Status. While indemnity provisions frequently allocate risk in the construction business, Colorado's anti-indemnity statute seeks to "ensure that every construction business in the state is financially responsible under the tort liability system for losses that a business has caused."15 And while requiring additional insured status under another party's liability insurance is advisable, the desired scope of such insurance may be challenging to secure on an additional insured basis, especially for long-term "completed operations" risks (i.e., latent defect risks arising long after the work is completed).16 Design professionals and general contractors may also demand from owners special indemnity provisions triggered in the event of an apartment to condo conversion.
Requiring the various parties to the interrelated contracts underlying a construction project to maintain "adequate insurance" is advisable, but unless insurance requirements are delineated and confirmed, and completed operations coverage is maintained into the future when property damage from latent defects may first manifest, such coverage offers little benefit after substantial completion. Wrap policies, with completed operations coverage extending through the anticipated repose period, combined with mutual subrogation waivers, should provide helpful protection, although extensions of the repose period under the rare circumstances described below may create problems.17 Of course, indemnity is only as effective as the indemnitor's ability to pay, so adequate financial investigation and warranties, with appropriate personal guarantees, may be prudent.
Site Use Limitations. While some construction professionals may seek contractual or title limitations precluding conversion, developers may not agree to such a request, which could reduce the value of the land and its improvements, and which title restrictions might be struck down later if not time-limited. While precluding conversions entirely is unlikely, a construction professional might consider contractually voiding warranties upon conversion.
Attorney Fees Clause. Requiring the non-prevailing party to pay the prevailing party's legal costs and...