February 28, 2002

Condo legislation creates legal slugfest

Homeowners and developers wrestle with the issue of warranties

By VINCENT B. DEPILLIS
Real Property Law Group

The words which have brought condominium developers to their knees in the state of Washington can be quoted in full in just a few lines: “The declarant and any dealer impliedly warrants that a unit and the common elements in the condominium are ... free from defective materials; and constructed in accordance with sound engineering and construction standards, and in a workmanlike manner in compliance with all laws then applicable to such improvements.”

Depillis

At first glance, this part of RCW 64.32.445 sounds entirely reasonable, even innocuous. Who would expect their new condominium unit to fall below such a standard?

This text was introduced into Washington law in 1989. In the years since, condominium construction defect litigation has grown steadily in the state, to the point where developers, contractors and insurers are pulling out of the business. The Daily Journal of Commerce has run a number of stories recently about the sorry state of the industry.

Why has the implied warranty quoted above had such a powerful effect?

First, even though it sounds reasonable, it represents a profound change from previous law, and from the law which still applies to new construction of single-family houses. Under Washington common law (law made by judges), the initial purchaser of a house has the benefit of the “implied warranty of habitability.”

Atherton case

In the leading case on the implied warranty of habitability, Atherton Condo Ass’n v. Blume Development, the Washington Supreme Court told us that the precise scope of the warranty is to be determined on a case by case basis.

There have not been many reported cases on the issue, and so we have limited guidance from the courts. Perhaps all we can say safely is that if the poor buyer really can’t live in the house, or if there is a massive violation of the code requirements as they relate to safety, the implied warranty has been violated.

The facts of successful implied warranty cases make for grim reading: e.g. massive fire code violations (Atherton); entire foundation and structural system compromised (House v. Thornton), plumbing system so defective that the owner had to rations showers, laundry and dishwashing, and suffered from “otherwise unexplained bouts of dysentery” (Brickler v. Meyers).

The other reason which Washington common law is relatively unfavorable to the purchasers is this: the homeowner has no tort claim for economic damages against the developer or the contractor. In certain other states (California being one), the home buyer has a tort claim directly against the contractor and every subcontractor for economic damages. Under the common law in Washington, the implied warranty is the only game in town.

Contrast the common law implied warranty to the statutory warranty quoted in the first paragraph.

Under the statutory warranty, the plaintiff need not convince a trial court that the homeowner suffered any damage at all. It is sufficient to show that there was a code violation.

And what is the appropriate remedy? According to the plaintiffs’ attorneys, it is, at a minimum, the cost of rebuilding the condo by the book, which is usually the most expensive of all possible remedies.

Under the common law warranty of habitability, by contrast, the plaintiff must demonstrate actual damages (loss of value, loss of use, cost of repair, etc.). The actual economic loss in many cases is less than the cost of the repair.

Park Avenue case

The current state of affairs under the statutory warranty is summed up nicely in the Park Avenue v. Buchan Developments LLC case (see Nov. 1, 2001, DJC article by Joe Nabbefeld). In that case, the developer introduced evidence showing that the actual damages amounted to no more than $250,000. The jury awarded $2.3 million in damages based on the cost of bringing the project up to code, and $760,000 in attorneys’ fees.

The case is currently under appeal, with the defendant developer arguing that the court should have enforced contractual warranty disclaimers, and that the plaintiffs should have to prove actual physical damage. This promises to be an uphill battle, given the condominium act’s limitations on warranty disclaimers and its sweeping implied warranty language.

The Park Avenue case may have been, at least in part, a catalyst for the currently pending, and controversial, efforts to revise the condominium act. Two bills were introduced in this session, both drafted by attorneys identified primarily with representation of builders and developers. They have been opposed primarily by attorneys who make their living from representing homeowner’s associations in construction defect cases.

One of these bills seems already to have fallen by the wayside. This is Senate bill 6608, which was sponsored primarily by the Master Builders Association of King and Snohomish Counties. It was a frank attempt to allow the developers to contract around the construction defect liability. It would have permitted the developer to contractually obligate the association to accept “reasonable measures by declarant to cure the conditions.” It would have allowed the developer much greater freedom to exclude entire categories of construction from the statutory implied warranties, and it would have permitted mandatory arbitration.

It seems likely that most developers would have promptly taken maximum advantage of the new contract flexibility to shift the bulk of the defect risk to the purchaser. And as discussed above, since there is no tort remedy for these defects, this would leave the homebuyers without remedy. Perhaps this is why SHB 6608 has not made it out of committee.

The other bill, SHB 2565, sponsored primarily by the Building Industry Association of Washington, is much less ambitious. It has passed out of committee, and seems headed for a vote. This bill requires that homeowners, developers and contractors all follow a process of investigation, notice and (non-binding) offer to cure, and that homeowners be fully informed before litigation is instituted.

California’s experience

The concept of SHB 2565 seems modeled on California’s Civil Code 1375 (commonly known as the “Calderon Process”), which provides a similar non-binding process of investigations and discussion as a precondition of suit.

California’s experience with Section 1375, according to Jon Epsten, a prominent condominium attorney in San Diego representing primarily homeowners’ associations, has not been particularly encouraging. Epsten says that while he supports the goal of expediting resolution, the Calderon Process has had no significant effect on reducing the frequency, cost or duration of the dispute resolution process.

Predictably, each side on the debate over SHB 2565 postures itself as the representative of truth, justice and the American way, and derides the other side’s position is cynically self-interested.

The association-oriented attorneys believe that the bill is motivated by a desire to lay traps for the unwary homeowner, and to increase the procedural costs of getting to litigation. The developer-oriented attorneys believe that the bill will discourage frivolous actions, and that opposition is motivated solely by a desire to protect the golden goose of the contingency fee.

All of these allegations have a grain of truth. When pressed, however, attorneys on both sides agree that the pending bill will have marginal effect, and that at best it will serve as a catalyst for further discussion.

At the end of the day, the real problem is that too many buildings are grossly defective. No amount of rearranging risk, or procedural refinement will keep the rain out of a badly built building.

In conversations with a number of attorneys, on both sides of the issue, there is a desire to have the legislature establish a commission or panel to do the patient work of canvassing the nation for the most successful approaches to the condo defect problem, building consensus and carefully drafting revisions to the condominium act.

I even had a developer attorney suggest that perhaps some kind of required repair bond could be part of the solution — a suggestion which mirrored one of an association attorney I had talked to just a few minutes before.

Perhaps the best course of action would be to call a timeout in the current “slugfest” — to use a description used by one attorney — and to allow time for a consensus-based solution to emerge.

Vincent B. DePillis is a founding member of the Real Property Law Group, and has practiced law for 18 years in Seattle, working primarily for developers. He received his law degree from Hastings Law School and holds a master’s degree in city planning from the University of California at Berkeley.

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