Red-hot condominium market comes with risk

While 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 there are defects in the condo tower that 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 United States has had a dramatic increase in condominium projects. Market analysts predict 2006 will be a record-breaking year in multifamily housing.

Springfield also is getting into the act with its increased conversion of old downtown buildings into loft 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 to the new entertainment districts and ballparks. While developers are flocking to this hot market, some architects and contractors are staying clear or using great caution because of well-founded fear of getting sued and rising insurance costs.

Though 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, 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 if the developer is no longer 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 which advertise on the Internet their success in representing condo associations, boasting multimillion dollar awards and settlements. 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, such as 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.

The growing condo crisis has resulted in new “right-to-cure” laws 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 “preclaim” requirements for notice to builders and (in some states) designers, plus 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 preclaim process of notice, inspection and mediation. Some states have adopted “certificate of merit” requirements, which force owners to obtain expert witness confirmation of defects before filing suit.

Many states, including Missouri, require specific contract notice provisions to invoke protection of the law. The new Missouri law, R.S.Mo. 436.350, gives 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, engineer or contractor, condominium projects require a proactive risk management plan and evaluation of the risks versus the reward. Have your lawyer and insurance adviser review the contracts, declarations, association bylaws and unit purchase agreements with an eye toward reasonable protection against claims in this high-risk project type.

Bill Quatman, an attorney and a licensed Missouri architect, is a shareholder in Shughart Thomson & Kilroy PC working from the firm’s Kansas City office. He can be reached at bquatman@stklaw.com. Mike Textor is a shareholder in Shughart Thomson & Kilroy, with a focus on construction law. Textor works from the firm’s Springfield office and can be reached at mtextor@stklaw.com.