August 15, 2019

Long-awaited condo reform kicks in; here's what developers need to know

Costich

Robertson

If you haven't noticed by now, condominiums are making a comeback. After a decade of skittish condominium development, coupled with a landlord-favorable market for apartments, the Puget Sound is experiencing a resurgence in condominium development.

Developers are building dozens of projects, delivering over 1,000 new units by 2020. And new projects are continually being announced. As the pent-up demand for homeownership increases, condominiums are an increasingly attractive option, resulting in more than 80% of units being reserved during construction in the Seattle market. This favorable trend is largely seen in the high-end luxury condominium market, while the market for more affordable condominium units remains tepid.

One of the chief impediments affecting the development of more affordable condominium projects is the warranty liability exposure of developers that is associated with condominium sales. Warranties arise in two primary flavors: express warranties and implied warranties.

Express warranties are created by express representations to a purchaser, and a developer can largely mitigate these warranties by being mindful of the representations it makes and by appropriate and precise contract drafting.

Statutory implied warranties, however, have long been an amorphous concept, and the resulting litigation risk has been largely blamed in recent years for the lack of new condominium development for lower-margin projects in Washington. Most developers have shied away from the “affordable” condominium market because of the litigation risks and insurance costs associated with the implied warranty obligations.

The 2019 legislative session brought the long-sought “condo liability reform” bill, which became effective this July. The bill implements targeted reforms to address liability concerns relating to condominium defects and related implied warranty claims under the Washington Uniform Common Interest Ownership Act (WUCIOA), which itself was enacted in 2018.

Broadly speaking, WUCIOA is applicable to condominiums created after July 1, 2018. For previously existing condominiums, the prior Condominium Act (or the even earlier Horizontal Regime Act for condominiums created prior to July 1, 1990) remains applicable unless the condominium ownership amends its governing documents to adopt WUCIOA.

Under the new law, implied warranties still exist and cannot be disclaimed (apart from conspicuous disclaimers of known defects), but the statutory language around what constitutes a defect has been meaningfully revised. The bill contains two key changes.

First, an often-cited concern of developers has been that the standard for what constitutes a breach for implied warranty was too broad and exposed developers to almost certain litigation, often over what developers would characterize as questionable or frivolous defect claims. Under the prior statute, improvements were broadly required to be “constructed in accordance with sound engineering and construction standards” and “constructed in compliance with all laws then applicable to such improvements.”

The new standard is narrowed. As amended, WUCIOA now requires that improvements be “constructed in accordance with engineering and construction standards, including applicable building codes, generally accepted in the state of Washington at the time of construction.” This change reduces the subjective opinions of “experts” as the basis for a construction defect claim by a purchaser.

Further, WUCIOA has been revised to raise the bar for what constitutes an implied warranty defect. To establish an implied warranty claim, a claimant must show not only that a defect is more than technical and significant to a reasonable person, but that a defect “has caused or will cause physical damage to the unit or common elements; has materially impaired the performance of mechanical, electrical, plumbing, elevator, or similar building equipment; or presents an actual, unreasonable safety risk to the occupants of the condominium.”

These changes express a clear legislative intent to raise the bar for claimants moving forward.

In addition, a frequently cited concern of directors of condominium associations has been the threat of personal liability in failing to fulfill their fiduciary duties to the association if they fail to file a lawsuit before expiration of the statute of repose. To address this concern, the newly revised WUCIOA makes clear that officers and board members of an association “are entitled to the immunities from liability available to officers and directors under chapter 24.06 RCW.”

It is also worth noting that, apart from relying upon changes to WUCIOA, there remain other factors within developer control to mitigate the risks of condominium development. Such factors include the quality of the design and construction team, a well-designed insurance program (which may include wraps such as an owner-controlled insurance program and an owners' protective professional indemnity policy), thorough purchase documentation and appropriate warranty disclosures and disclaimers, and a comprehensive post-sale claims program that is responsive to owner concerns and issues as they arise.

How the statutory revisions will play out in practice obviously remains to be seen. However, many are hailing these changes as a huge win that should not only encourage additional high-end condominium development, but also provide more affordable ownership opportunities through new construction and potentially through conversion of existing rental inventory (for which the same implied warranty standards apply).

Russ Robertson and Larry Costich are shareholders with Schwabe, Williamson & Wyatt in Seattle. They represent clients in real estate development projects and related transactions.

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