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What’s Old is New Again – Construction Defects Have Important Disclosure Implications For Associatio
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Minnesota Community Living May/June 2011

What’s Old is New Again – Construction Defects Have Important Disclosure Implications For Associations

By Jennifer A. Thompson, Hammargren & Meyer, P.A.

In recent years, much has been written about residential construction defects. Attorneys, property managers, insurers, and others have offered opinions, tips, and advice on properly and diligently investigating and pursuing these types of claims. But one aspect of this problem appears to have largely been ignored. Construction defect-related issues continue to trouble associations and their members long after repairs have been made and both believe the defect claims are resolved. In particular, disclosure laws and requirements for both associations and individual members have made construction defect litigation an active and transforming area of the law.

More than two years ago, associations and members repairing construction defects rarely considered the implications these defects or the corrective work would have on their disclosure obligations during a subsequent real estate transaction. Today, in an already shaky real estate market, our clients routinely ask this question during initial meetings and carefully consider future disclosure obligations throughout the entire claim resolution process. Clearly, disclosure requirements are concerning to associations and their members, and it is a wise association that is mindful of its obligations and seeks advice regarding its disclosure obligations throughout the course of a construction defect claim and, also, at the time of proffering any future disclosure.

In order to appreciate all of the ways that disclosures may come into play during a construction defect claim (or insurance claim, or even when there is no claim but there is a required repair, other damage, or significant maintenance work), an association should be aware of not only its own disclosure requirements during a real estate transaction involving one of its units, but also its members’ disclosure requirements. Importantly, subject to some exceptions and limitations, Minnesota Statute section 513.55, subdivision 1 imposes an obligation on a seller of residential property to make written disclosure of all material facts of which he or she is aware that could adversely and significantly affect an ordinary buyer’s use or enjoyment of a home, or could adversely and significantly impact a prospective purchaser’s intended use of the home of which the seller is aware. The statute is broad and raises the question of what it means exactly to a specific seller. For instance, do I have to disclose the one time I had a little water come in through a window during a rainstorm? Is one instance of water intrusion a material fact? Could the one instance adversely and significantly affect another owner’s use and enjoyment of the home? Fact-finders, like judges, arbitrators, and juries, do not always rule consistently on these issues.

Let’s complicate the issue a little more: what if our selling member has only experienced leakage in his window once, but a majority of the other members within the association, all of whom have the same make and model of window, have experienced significant and continued leakage – does the selling member need to disclose his leakage now? Does he have to disclose the leakage the others have experienced? Is the leakage the other members are experiencing material to the selling member? For example, will the selling member, or a future owner of his unit, be responsible for increased maintenance, litigation, or insurance costs because of the leakage experienced by others? Could the other members’ leakage significantly and adversely affect the selling member’s use and enjoyment of his home? What if the association is a condominium and the selling member lives below one of the members with leaking windows; could the leakage above eventually impact the selling member’s unit?

In addition to the unit owner’s disclosure obligations, Minnesota Statute section 515B.4-107 imposes disclosure obligations on an association. An association is required to complete the statutory Resale Disclosure Certificate within ten days after receiving a request for one. There are thirteen different disclosure requests on the Resale Disclosure Certificate, some with subparts. Of particular relevance to this article is inquiry number 13, which asks an association to list, the "matters affecting the occupancy or use of the unit or the unit owner’s obligations with respect to the unit [that] are deemed material.” This disclosure obligation is different from a homeowner’s disclosure obligation under Minnesota Statute section 513.55, but there are similarities. Significantly, both statutes focus on the disclosure of information that is "material.” Material is defined as "[h]aving some logical connection with the consequential facts” and "[o]f such nature that knowledge of the item would affect a person’s decision-making process; significant; essential.”

Let us go back to the example of window leakage. When the selling member asks the association to complete a Resale Disclosure Certificate, does the association have to disclose the window leakage at the selling member’s unit? Is that leakage material? Would the fact of leakage in the selling member’s unit affect a buyer’s decision to purchase the unit? Does the answer change if we add as a fact that the majority of the other members within the association have experienced incessant window leakage, whether or not the selling member has had leakage? Even if the leakage itself is material, does it affect the occupancy or use of the unit? Or does the leakage affect the selling member’s (and any subsequent owner’s) obligation with respect to the unit (e.g. could repairs be required that would necessitate an increase in the annual budget for the upcoming fiscal year or a special assessment)?

Further complications can arise if an association believes that a fact is material and must be disclosed on the Resale Disclosure Certificate, but the member disagrees and fears that the association’s disclosure could cause a prospective purchaser to cancel a purchase agreement. Additionally, many associations and members are under the mistaken belief that if a condition that would be subject to disclosure existed in the past, but has since been repaired, it does not have to be disclosed. Minnesota Statute section 513.55 does not contain such an exception. Even a repaired problem could affect the occupancy or use of a unit or a unit owner’s disclosure obligation with respect to the unit (e.g., consider the case of a moisture intrusion issue that led to mold, which even if remediated, may affect a subsequent owner’s occupancy of the unit if that subsequent owner has severe mold sensitivities), thereby requiring disclosure on the Resale Disclosure Certificate.

The issues surrounding real estate disclosures are numerous and can be thorny. The question of disclosure requires attention early on and must continue throughout the process resolving claims for construction defects (or insurance losses, or large maintenance repairs). Associations and members have a mutual interest in limiting exposure for failing to properly disclose, while at the same time avoiding unnecessary stigma and preserving the value of the association and the units. For this reason, disclosure requirements should be a part of an association’s overall analysis from the very beginning to the very end of any construction defect claim.

So there it is – one more article on a construction defect related issue. The point being, unfortunately, what is old is new again.

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