Category Archives: Construction Defects

THE DRAWBACK OF BEING A THIRD-PARTY DEFENDANT IN A CONSTRUCTION DISPUTE

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The Florida Supreme Court just entered an opinion that potentially has huge implications in construction defect disputes. In Caduceus Properties, LLC v. William G. Graney, P.E., 39 Fla. L. Weekly S93a (2014), an owner sued its architect for design defects with its HVAC system. The architect third-partied into the dispute its mechanical engineer (sub-consultant). The architect’s third-party claims were dismissed for failure to comply with a court order and the architect ultimately declared bankruptcy. The owner, AFTER the statute of limitations expired to assert defect claims, amended its complaint to assert direct claims against the mechanical engineer (also, after the mechanical engineer had already been dismissed from the dispute). The issue the Florida Supreme Court analyzed was whether the owner could assert these claims after the expiration of the statute of limitations since the mechanical engineer was previously a third-party defendant in the dispute. Stated differently, did the owner’s claims against the mechanical engineer relate back to the original third party complaint the architect timely asserted against the mechanical engineer such that the claims were timely filed within the statute of limitations? The Florida Supreme Court held the owner could do this: “[A]n amended complaint filed after the statute of limitations has expired, naming a party who had previously been made a third-party defendant as a party defendant, relates back…to the filing of the third party complaint.”

Why are the implications huge? In a construction defect case, oftentimes there are third-party defendants.  In this case, it was a sub-consultant of the architect. In many cases, it is the general contractor that asserts third-party claims against subcontractors. Sometimes, a subcontractor moves to dismiss the claims and prevails and/or settles directly with the general contractor. Well, now, based on this ruling, even if the subcontractor is dismissed, as long as a third-party complaint was asserted against it, it could potentially be back-doored into the dispute by the owner / plaintiff. The owner would just assert a claim against the subcontractor, even after the expiration of the statute of limitations, and argue that under the Florida Supreme Court’s ruling its claims against the subcontractor relate back to the initial third-party complaint that the general contractor timely filed against the subcontractor. Ouch! Therefore, now, a third-party defendant may not get the solace they think they deserve from getting dismissed from a lawsuit or settling directly with the party that sued it. So, a subcontractor or third-party defendant that wants to settle is best getting the owner to sign off on the settlement to ensure it does not get back-doored into the very lawsuit it was dismissed from. On the other hand, this gives the owner options to sue third-party defendants brought into the dispute after the expiration of the statute of limitations if there are concerns with the solvency of the defendant it sued (e.g., general contractor or architect that are usually in direct privity of contract with the owner).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

INSURANCE RISK ASSESSMENT: OCCURRENCE; DUTIES TO DEFEND/INDEMNIFY; COBLENTZ AGREEMENT

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Understanding when an “occurrence” under a CGL policy occurs is very, very important for purposes of submitting claims to insurers. It is important relating to its duties to defend and indemnify the insured.

 

The opinion in Trovillion Const. & Development, Inc. v. Mid-Contintent Cas. Co., 2014 WL 201678 (M.D.Fla. 2014), is a good opinion that discusses liability insurance considerations in a construction defect dispute including the triggering of liability insurance. In this case, a general contractor built a condominium over a multi-year period. Construction commenced in 2003. From 2003 through 2009, the contractor’s CGL carrier was Mid-Continent. Towards the end of 2009, it switched carriers to Endurance.

 

In 2009, the developer turned over control over the condominium to the unit owners. The association hired a company to perform an inspection of the condominium which revealed certain defects and building code violations (i.e., structural framing failure, organic growth, damage to interior finishes, etc.). The association sued the general contractor and developer in 2010 for violations of the building code, breach of statutory warranties, and deceptive and unfair trade practices.

 

The general contractor, as it should, notified and tendered the defense of its lawsuit to Mid-Continent and Endurance. Mid-Continent denied coverage and refused to participate in the defense. As a result, the contractor sued its insurer Mid-Continent for breach of contract and for a declaratory action arguing that Mid-Continent has a duty to defend and indemnify it in the association’s lawsuit. While this lawsuit was going on, the association’s lawsuit against the contractor was proceeding to trial. The contractor’s insurer, Endurance, was providing a defense. Right before trial, the association and the contractor (with the agreement of Endurance) entered into a consent judgment (known as a Coblentz agreement) for $1,800,000 which was entered in favor of the association against the contractor. The settlement provided that the association would not execute against the contractor. Following the court’s entry of the judgment, the contractor amended its complaint against Mid-Continent arguing that Mid-Continent is obligated to indemnify the contractor for the $1,800,000 judgment.

 

A Coblentz agreement is a settlement agreement between a third-party claimant and an insured to resolve a lawsuit where the insured’s liability insurer has denied coverage and its duty to defend. “Under Florida law, a party seeking recovery from an insurer under a Coblentz agreement must provide: (1) a wrongful refusal to defend; (2) a duty to indemnify; and (3) that the settlement was objectively reasonable and made in good faith.” Trovillion Const., supra, at *3. “In a traditional Coblentz agreement, the insured: (1) enters into a consent judgment establishing its liability and fixing damages; and (2) assigns any cause of action it has against its insurer to the claimant [in consideration of the claimant not executing on the judgment against the insured].” Id. at n.2.

 

In order to determine whether Mid-Continent had a duty to defend, the Court needed to determine what legal theory triggered the occurrence under the CGL policies. Numerous Florida courts have applied the manifestation theory meaning that the occurrence is triggered when the damage is discovered. There are courts that have applied the injury-in-fact theory meaning that the occurrence is triggered the moment there is actual damage irrespective of whether that damage is actually discovered. This is a significant difference and important for parties in liability-related disputes dealing with property damage to understand.

 

The underlying complaint the association asserted against the contractor alleged that the defects were causing ongoing damage and was silent as to the specific date the defects began to damage the condominium. But, the association’s inspection report after the developer turned the association over indicated that damages started to occur between the time construction commenced in 2003 and the 2009 inspection performed for the association. The report further alleged that the defects were not discovered until expert consultants were retained, i.e., in 2009. Mid-Continent argued that it had no duty to defend under the manifestation theory because the complaint alleged that the manifestation (when the defects were discovered) was 2009 at a point when it was no longer insuring the contractor. However, the court applied the injury-in-fact theory in this case. This meant that Mid-Continent’s policies were triggered because the triggering point was when actual damage started to occur, and not when it was actually discovered. Again, this is a crucial distinction–for this reason the Court found that Mid-Continent had a duty to defend.

 

Finding that a duty to defend existed, the Court’s next analysis was whether Mid-Continent had a duty to indemnify based on the actual coverage in the policies. An insurer’s duty to defend is much broader than an insurer’s duty to indemnify. Under a CGL policy with a “subcontractor” exception to the “your work” exclusion, a contractor’s insurer is not liable for the defective work caused by a subcontractor, but it is liable for the repairing the damage caused by the subcontractor’s defective work. (See the “subcontractor” exception to the “your work” exclusion in the CGL policy.)

 

Interestingly, in this case, of the six annual policies Mid-Continent issued between 2003-2009, only one policy contained the “subcontractor” exception to the “your work” exclusion. The other policies, through endorsement, eliminated the “subcontractor” exception. Without the “subcontractor” exception to the “your work” exclusion in CGL policies, the insurer is able to exclude coverage for damage arising from a subcontractor’s defective work. But, with the “subcontractor” exception, the insurer is liable for damage caused by a subcontractor’s defective work. Stated differently, without the “subcontractor” exception, the contractor is probably not getting the CGL coverage it thinks it is getting or needs when constructing a project with the potential for claims down the road (such as condo projects).

 

Because only one policy contained the “subcontractor” exception, the contractor needed to establish when the property damage occurred. Obviously, it is in its best interest to have expert testimony establishing that the date the damage occurred / was occurring was with the policy period where there was a “subcontractor” exception to the “your work” exclusion. Otherwise, Mid-Continent had no duty to indemnify!

 

Furthermore, Mid-Continent argued that even if the contractor proved that damage occurred within the policy period with the “subcontractor” exception, the consent judgment did not allocate covered damage to uncovered damage. In other words, the consent judgment did not allocate the portion of the damage attributable to repairing damage caused by subcontractors’ defective work. “Florida law requires Trovillion [contractor], the party seeking recovery, to allocate the settlement amount between covered and uncovered claim [and] [i]nability to allocate precludes recovery.” Trovillion Const., supra, at *8.

 

The contractor, unfortunately, presented no evidence that it could apportion damages. Based on this issue, the Court ruled:

 

“Trovillion is not relieved of its duty to apportion damages, and its failure to make any effort to do so or to produce evidence suggesting it is capable of doing so is fatal to its indemnification claim. For that reason, and because Trovillion has failed to produce more than a scintilla of evidence suggesting that non-excluded property damage occurred at the condominium community during the MCC [Mid-Continent] policy periods, MCC’s motion for summary judgment is due to be granted….”

 

 

There are quite a few important take-aways from this case. First, know what argument needs to be made to trigger an occurrence under a liability policy. Whether it is the manifestation theory or injury-in-fact theory, consider both theories when presenting an argument and claim to a carrier. Second, know that an insurer’s duty to indemnify is much narrower than its duty to defend which is based on the allegations of the complaint. Third, if entering into a Coblentz agreement and corresponding consent judgment, include something that apportions damage between uncovered damage (a subcontractor’s defective work) and covered damage (damage caused by a subcontractor’s defective work). And, fourth, know whether your liability policy has a “subcontractor” exception to the “your work” exclusion or whether the carrier issued an endorsement that eliminated that exception. This “subcontractor” exception is important to contractors in Florida so if the endorsement that eliminated this exception was issued, make sure that you know your risks. Insurance is a critical part of risk assessment. Know your rights and appreciate your risks!

 

For more on construction defect insurance considerations, please see https://floridaconstru.wpengine.com/construct-defect-insurance-considerations/

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONSTRUCTION DEFECT INSURANCE CONSIDERATIONS

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Construction defect cases most always involve CGL insurance consideration and claims. And they should. A contractor that received a defect claim from an owner (developer or association) will want to notify their CGL insurer to provide a defense and coverage. The contractor will also want to notify the responsible subcontractors that may be liable to the contractor for the owner’s claims as well as the subcontractors’ CGL carriers. The contractor will do so claiming the responsible subcontractor is responsible to indemnify the contractor for damage arising out of the subcontractor’s work pursuant to their contractual indemnification provision. The contractor will also claim that it is an additional insured under the subcontractor’s CGL policy (as required by the contract and hopefully confirmed by the additional insured endorsement) and the carrier is responsible for contributing to its defense and providing coverage for the negligence caused by the carrier’s insured-subcontractor.

 

The Middle District opinion in Redfish Keys Villas Condominium Association, Inc. v. Amerisure Insurance Co., 2014 WL 92710 (M.D.Fla. 2014), illustrates certain CGL considerations. In this dispute, a general contractor was hired by a developer to construct a condominium. After the condominium was turned over to the association, leaks were discovered. The association claimed the leaks originated from defects. The association sent a construction defects notice to the contractor (pursuant to Florida Statutes Chapter 558) and the contractor failed to respond. The association then filed suit against the contractor. For whatever reason, although the contractor’s counsel filed a notice of appearance in the case, nothing else was done and a final default judgment was entered against the contractor for the damages the association incurred in repairing the leaks.

 

After the judgment was obtained, the contractor’s CGL insurer reached out to the association, apparently not realizing a judgment had been entered against its insured. Upon receiving a copy of the judgment, the insurer denied coverage based on the contractor’s failure to provide notice of the claim to the insurer. However, although not discussed in the opinion, the insurer knew about the contractor’s claim as it was the one that followed-up with the association. Most likely, the association, as it should, notified the contractor’s carrier of the defect claims although it is uncertain whether they notified the carrier of the lawsuit. Or, perhaps, the contractor, as it should, notified its carrier when it received the construction defects notice from the association.

 

The association filed suit against the contractor’s insurer in federal court for a declaratory action and for the insurer’s breach of an intended third party beneficiary contract, that being the CGL insurance policy was for the benefit of third parties such as the association. The insurer moved to dismiss the breach of intended third party beneficiary contract claim. The Middle District denied the insurer’s motion to dismiss. The Middle District found that as a condition precedent to the association suing the insurer, the association needed to comply with Florida Statute s. 627.4136 which essentially requires a third party not insured by a liability insurer to first obtain a settlement or verdict against the insured as a condition precedent to suing the insurer for coverage under the policy. The association complied with this condition precedent as it sued the insured-contractor and obtained a judgment. The Middle District further found that in Florida, “an injured third party may maintain a cause of action against an insurer as an intended third party beneficiary under a liability insurance policy.” Redfish, supra, at *3 citing Shingleton v. Bussey, 223 So.2d 713 (Fla. 1969). In other words, the MIddle District found that as long as the association complied with Florida Statute s. 627.4136 (the condition precedent to a third party suing a liability insurer statute) it could maintain a breach of an intended third party beneficiary contract claim against the CGL insurer.

 

When representing the owner, it is good practice to notify the contractor’s insurer of not only the defect claim but of any potential lawsuit (to avoid any lack of notice coverage defense, especially if the contractor does not have an attorney on board at the time of the lawsuit). Further, when representing the contractor, it is good practice to not only notify the contractor’s CGL insurer, but to notify the responsible subcontractors’ carriers of the same (based on additional insured and indemnity requirements). And, irrespective of a subcontractor’s insurer’s position, it is good practice to keep the insurers apprised of any third party lawsuit the contractor files against the insured-subcontractors (again, to avoid any lack of notice coverage defense). While the Middle District in Redfish only entered a ruling on the insurer’s motion to dismiss at this stage, the insurer’s lack of notice coverage defense will certainly be a defense that the insurer relies on in the dispute.

 

Insurance considerations are a crucial part of construction defect claims. Understanding how to preserve rights and navigate through the process cannot be overstated.

 

 

 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

A LANDLORD’S REFUSAL TO TIMELY PERFORM NEEDED REPAIRS / MAINTENANCE ITEMS

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What happens if the landlord refuses to timely repair defects or perform necessary maintenance items that it is otherwise responsible to perform per the lease? What happens if the landlord makes rental space untenantable? The case of Katz Deli of Aventura, Inc. v. Waterways Plaza, LLC, 38 Fla. L. Weekly D2511b (Fla. 3d DCA 2013), illustrates the issue of “constructive eviction” and a tenant’s recourse against its landlord including its recovery of lost profits when a landlord does not timely implement needed repairs that impacts a tenant’s business.

 

In this case, a successful deli in Pembroke Pines opened a new location in a shopping plaza in Aventura. After a couple of years of growing revenue, the deli leased larger space within the same Aventura plaza. The lease for the larger space was for five years, with 3% annual rent increases, and with three lease renewal options for five-year terms. Of importance to this case, the landlord was required to make all of the required repairs to the shopping plaza’s structure and roof.

 

After the execution of the lease, the shopping plaza was purchased by the defendant-landlord (which assumed the deli’s existing lease). The new landlord learned exercising its due diligence of inspecting the plaza’s condition prior to purchase that the roof needed to be replaced (re-roofed). Yet, even though it purchased the plaza, it did not timely replace the roof. As a result, leaks started at the deli and became progressively worse resulting in mold and a musty odor in the deli. Naturally, this condition caused the deli to lose business and customers and reached the point where the deli could not continue to operate as a restaurant. Then, suspiciously, after the deli vacated the space, the landlord decided to re-roof the space and found new tenants that leased the space at a much higher rental rate.  The deli sued the landlord for breach of lease (breach of contract) and constructive eviction.

 

The deli argued that the landlord constructively evicted it in order to capitalize on substantially higher rental rates because the agreed-upon rental rate in the lease that the deli entered into with the former landlord (and that the defendant assumed when it purchased the plaza) was well below market rate.

 

At a bench trial, the deli argued that its damages consisted of lost profits. It utilized an accounting expert to prove lost profits. The landlord contended that lost profits was not the proper damages methodology and the deli should have proven its damages by analyzing the market value of the deli since the deli was destroyed. The reason the landlord argued this is because the deli put on no evidence as to these damages (meaning, if this was the proper methodology, the deli would be entitled to no damages because it failed to put on any evidence of these damages). The trial court found that the deli was entitled to lost profits but only awarded lost profits through the end of the initial lease term, and not the three five year lease renewal options.

 

On Appeal, the Third District Court of Appeal maintained:

 

“A constructive eviction constitutes a breach of the covenant of quiet enjoyment. Furthermore, Waterways’ [landlord] grossly negligent failure to repair the roof as required by the lease was a breach of its contract. In an action for breach of contract, the goal is to place the injured party in the position it would have been in had the other party not breached the contract so as to give the aggrieved party the benefit of its bargain. However, a successful plaintiff is not entitled to be placed, because of that breach, in a position better than that which he would have occupied had the contract been performed. The injured party may only recover those damages that naturally flow from the breach and can reasonably be said to have been contemplated by the parties at the time that the contract was made. It is not necessary that the parties have contemplated the exact injury that occurred as long as the actual consequences could have reasonably been expected to flow from the breach.”

Waterways Plaza, supra (internal citations and quotations omitted).

 

When dealing with the issue of a landlord constructively evicting its tenant, there are cases that hold that the measure of damages is the market value of the business as of the date of loss when the business is completely destroyed. This is why the landlord argued that this should have been the damages methodology employed by the deli. “However, where, as here, a business [the deli] continues after suffering from an act of negligence the business is entitled to recover the lost profits attributable to defendant’s [landlord] negligent act, but cannot recover both lost profits, and the market value of the business.” Waterways Plaza, supra (internal quotations omitted).

 

The deli was not completely destroyed when the leaks started. Rather, the leaks progressed over a period of time until the space was untenantable. Largely for these reasons, there was no bright line test as to when the deli was completely destroyed. As the Third District explained: “Awarding market value for a business that has been slowly reduced to nothing due to a defendant’s breach, thereby leaving the plaintiff without an adequate recovery, would be completely inequitable, and is not the law in Florida.” Waterways Plaza, supra.

 

Since lost profits was the proper damages methodology, the Third District next analyzed whether the deli sufficiently proved such damages during the trial.

 

“Lost profits are recoverable regardless of how well established a business is so long as there is some ‘yardstick’ by which prospective profits can be measured.
***
A business can recover lost prospective profits regardless of whether it is established or has any ‘track record.’ The party must prove that 1) the defendant’s action caused the damage and 2) there is some standard by which the amount of damages may be adequately determined.
***
Any ‘yardstick’ used to show the amount of profits must be reasonable, and the loss of the profits as a result of the [defendant’s conduct] must be reasonably certain. Lost profits must be established with a reasonable degree of certainty and must be a natural consequence of the wrong. The projected profits cannot be mere speculation or conjecture, but the inability to prove a precise damages amount will not prevent a plaintiff from recovering so long as it is clear that some loss resulting from the defendant’s actions is certain.”

Waterways Plaza, supra.

 

The deli was able to establish a yardstick because it had another location in Pembroke Pines, had success at its former smaller space within the same shopping plaza, and had limited success during the short time it was in the larger space prior to the leaks. Thus, it was able to demonstrate a history of sales that enabled its expert to establish sale projections and projected profit.

 

Even though lost profits was the proper damages methodology, the deli wanted lost profits that extended through all lease renewals. The deli argued it clearly would have renewed the lease based on the success at that location and plaza prior to the leaks, because its rent was well below market rate, and because the successor tenants leasing the same space after the re-roof were still leasing the space close to ten years after the deli vacated the space. Despite this evidence, the Third District held that this was a question of fact to be determined by the trier of fact, and because the fact finder was the judge, the judge’s fact finding will be presumed correct on appeal unless clearly erroneous. Since the trial judge found that lost profits extending beyond the original five year lease term was speculative, the Third District affirmed the court’s fact finding because it was not clearly erroneous.

 

Notably, the deli also tried to foreclose an equitable lien and recorded a lis pendens against the shopping plaza. The deli’s equitable lien theory was based on the following language in the lease: “Tenant shall look solely and only to the Landlord’s interest in the Plaza in the event of any default or breach.” Waterways Plaza, supra. However, the lis pendens was discharged and the equitable lien claim was dismissed by the trial court. The deli appealed this arguing that the dismissal of the lis pendens to foreclose its equitable lien was error. The Third District affirmed the trial court finding that the language in the lease did not give the tenant an interest in the landlord’s property that would entitle it to an equitable lien and lis pendens.

 

This case illustrates options a tenant has when its rental space becomes untenantable, especially due to the landlord’s failure to timely implement or perform needed repairs / maintenance items. This case further illustrates the importance of knowing and proving a party’s correct damages methodology due to a breach.  Also, considering the factual circumstances in lost profit cases, such as this case, and how a party establishes its lost profits provides future guidance to ensure that these damages are proven with their required reasonable degree of certainty!

 

 

For more information on proving lost profits, please see: https://floridaconstru.wpengine.com/proving-lost-profit-damages-with-a-reasonable-degree-of-certainty/

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONDOMINIUM ASSOCIATION RIGHTS REGARDING CONSTRUCTION DEFECTS & THE STATUTE OF LIMITATIONS FOR STATUTORY IMPLIED WARRANTIES

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Contractors, subcontractors, suppliers, developers, and design professionals that are involved in the design and construction of condominiums need to appreciate three items relating to the construction of condominiums and the rights of condominium associations:

 

(1) The condominium association, upon turnover from the developer to the unit owners, may sue for matters affecting the common elements or matters of common interest concerning most or all of the unit owners (Fla. Stat. s. 718.111)

 

(2) The condominium association’s statute of limitations to assert construction defect claims does not begin to accrue until the developer has turned over control of the association to the unit owners (Fla. Stat. s. 718.124); and

 

(3) The developer, the contractor, subcontractors, and suppliers owe certain statutory implied warranties to the unit owners that can be asserted by the association as a class representative (Fla. Stat. s. 718.203). For instance, under Fla. Stat. 718.203(2): “The contractor, and all subcontractors and suppliers, grant to the developer and to the purchaser of each unit implied warranties of fitness as to the work performed or materials supplied by them as follows: (a) For a period of 3 years from the date of completion of construction of a building or improvement, a warranty as to the roof and structural components of the building or improvement and mechanical and plumbing elements serving a building or an improvement, except mechanical elements serving only one unit.”

 

A.  THE STATUTE OF LIMITATIONS FOR STATUTORY IMPLIED WARRANTY CLAIMS

 

A topic that comes up is the statute of limitations for an association to assert a statutory implied warranty claim since the statutory implied warranties kick in from the completion of the building (i.e., the Certificate of Occupancy) and are of a shorter time period than the four year statute of limitations period from the time the defect was discovered (or should have been discovered with the exercise of due diligence).

 

This issue was addressed by the Florida Supreme Court in Charley Tropino & Sons, Inc. v. Seawatch at Marathon Condominium, Ass’n, Inc., 658 So.2d 922 (Fla.1994). In this case, three condominium buildings were constructed and the last building received its Certificate of Occupancy in April 1983. The association was turned over from the developer to the unit owners more than two years later in August 1985. The association then asserted a construction defect lawsuit that included claims for breach of statutory warranties against the general contractor, developer, etc., (over defective concrete and metal decking) in May 1988: more than five years from the Certificate of Occupancy of the last building and almost two years from when the association was turned over to the unit owners.

 

The Florida Supreme Court was asked to determine whether the turnover of the association from the developer to the unit owners extended the time for unit owners to assert a breach of statutory implied warranty claim.  (Based on the facts of the case, the question was whether the association in 1988 could assert breach of statutory warranty claims against the developer, general contractor, etc., when the Certificate of Occupancy was issued more than five years earlier for the last building and unit owners obtained control of the association approximately two years earlier.) The Court answered this question “Yes,” maintaining:

 

“[A] condominium association has a statutory right to file suit on behalf of its unit owners for breach of implied warranty of fitness and merchantability for construction defects affecting the common interest. Such a suit must be filed within the general time limits set out in chapter 95, but the commencing of this limitations period shall be tolled until control of the association passes from the developer to the unit owners.”
Charley Tropino, 658 So.2d 925.

 

This means that the statutory implied warranty period is not a statute of limitations. Rather, it is simply the time period in which the life of the warranty applies to cover defects that occur within that time period. However, these claims are then tolled until the association is turned over to the unit owners at which time the association has four years to assert its breach of statutory warranty claims. See Saltponds Condominium Ass’n v. Walbridge Aldinger Co., 979 So.2d 1240 (Fla.3d DCA 2008) (a condominium association was turned over in August 2002 and had until August 2006 to preserve its rights to sue for breach of statutory implied warranty claims).

 

Let’s apply this law to hypotheticals because it is confusing:

 

Hypothetical 1: A Certificate of Occupancy was issued for a condominium tower in March 2005. The condominium association was turned over to the unit owners on April 2008. Due to construction defects, the association filed a lawsuit against the general contractor for structural defects in February 2012 that included breach of statutory warranty claims.

 

Under s. 718.203, as referenced above, the contractor owes to the association an implied warranty for structural components from three years from the completion of the building (defined as the Certificate of Occupancy date). This means that a breach of this implied warranty should have taken place between March 2005 (Certificate of Occupancy date) and March 2008 (three years from that date). But, and this is an important but, the condominium association does not need to file suit on this breach of the implied warranty until April 2012 (four years from the April 2008 date the condominium association was turned over to the unit owners since the statute of limitations is tolled until an association is turned over to the unit owners).

 

Hypothetical 2: An interesting twist to the above hypothetical is if the association did not file its lawsuit until March 2014-nine years from the Certificate of Occupancy date and six years from the turnover date. Under these dates, the association will have to assert that it did not discover the defects until on or after March 2010 in order to fall within the four year statute of limitations. However, by doing this, the condominium association really should NOT have a breach of statutory warranty claim against the general contractor because the life of the warranty would have expired before the breach of that duty was actually discovered.

 

Hypothetical 3: Now, let’s assume the association did not file suit until March 2016 or eleven years from the Certificate of Occupancy date and argues that it did not discover the defects until March 2014. Under this context, the association should not have any claims since the turnover of the association to unit owners has no bearing and does not toll the ten year statute of repose period to file suit (i.e., the last date a lawsuit must be filed-not matter what). See Sabal Chase Homeowners Ass’n, Inc. v. Walt Disney World Co., 726 So.2d 796 (Fla. 3d DCA 1999) (finding that turnover of condominium association to unit owners did not extend the statute of repose).

 

B.  TIDBITS FOR CONTRACTORS CONSTRUCTING CONDOMINIUMS

 

General contractors constructing condominiums need to operate under the presumption that there is a strong likelihood that the association will assert construction defect related claims including breach of statutory warranty claims. Many condominium associations retain engineers at turnover or shortly thereafter to perform a comprehensive analysis of the plans, as-built plans, submittals, and condition of the condominium to determine if there are any design / construction defects. Associations will want to do this to ensure they preserve warranty-related items / claims and provide parties notice of those items sooner than later. Contractors, knowing claims are forthcoming, need to be proactive:

 

  • They will want to hire subcontractors that do not have residential or condominium exclusions in their policies, or an exclusion in a liability policy that excludes coverage for condominium projects.
  • They will want to ensure that they maintain the appropriate liability coverage with completed operations coverage and are identified as an additional insured under subcontractor policies.
  • They may want to account for the presumed claim in their price knowing that certain overhead may be devoted to addressing claims long after completion.
  • I have also seen escrow provisions included in the developer-contractor contract where an escrow account is to be funded and maintained during the statute of repose period to offset claims. I have never been a big fan of this since (i) parties prefer to have the money instead of having that money fund an account for ten years, (ii) it could, perhaps, serve as motivation that there is money to fund claims that are not otherwise insurable claims, and (iii) it could lead to disputes down the road as to the allocation of that money in the event a dispute is initiated and fingers are pointed as to the cause of the defect.
  • If the contractor and the developer are in a dispute over certain defects and a settlement is reached, the settlement should reflect that the developer is entering into this agreement on behalf of the association (assuming it is still in control of the association) and accepts money, etc., for the specific items in consideration for a full and final release for the defects. This way, at a minimum, the contractor could create an argument in the event the association later files suit against the contractor for the same exact defects that the defects were already resolved and accepted by the developer on behalf of the association.

 

For more on condominium statutory warranties, please see https://floridaconstru.wpengine.com/florida-condominium-acts-statutory-warranties-difference-between-manufacturer-and-supplier/

 

https://floridaconstru.wpengine.com/statutory-implied-warranties-for-condominium-associations/

 

For more on the statute of limitations and statute of repose, please see: https://floridaconstru.wpengine.com/watering-down-the-10-year-statute-of-repose-period-for-construction-disputes/

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

WATERING DOWN THE 10 YEAR STATUTE OF REPOSE PERIOD FOR CONSTRUCTION DEFECT DISPUTES

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Yes, it appears that the Second District Court of Appeals in Clearwater Housing Authority v. Future Capital Holding Corp., 38 Fla. L. Weekly D2323a (2nd DCA 2013), just entered an opinion that has watered down the ten year statute of repose for construction disputes. That is right – watered down the statute of repose. This is excellent for owners with construction latent defect disputes, but bad for contractors and design professionals.

 

The statute of limitations for construction disputes is governed by Florida Statute s. 95.11(3)(c):

 

(c) Within Four Years. An action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

 

The bolded language above is the ten year statute of repose language, which means that a lawsuit brought after this date is forever barred even if it is otherwise filed within four years from the date an owner discovered a latent defect (the statute of limitations period). In other words, after this repose period, latent defects become moot.

 

However, the Second District in Clearwater Housing Authority gave owner an excellent argument to extend the repose period. In this case, an owner hired a contractor and design professionals for purposes of building an apartment project in Clearwater. The property was then purchased by Clearwater Housing Authority. The Certificate of Occupancy was issued in 2000 and this was when Clearwater Housing Authority took possession of the property. However, a final plat was not submitted by the engineers on the project until 2003.

 

In 2009, Clearwater Housing Authority initiated a dispute for construction defects against various parties. But, in 2011, it amended its complaint to assert a claim against Future Capital Holding Corporation (“Future Capital”). Future Capital did the right thing and moved for summary judgment due to the expiration of the statute of repose. The math was simple. The Certificate of Occupancy occurred in 2000 and it was brought into the lawsuit in 2011, more than 10 years after-the-fact. The trial court agreed and summary judgment was entered in favor of Future Capital.

 

Clearwater Housing Authority creatively argued that the engineer did not submit the final plat until 2003 and this marked the date that triggered the beginning of the repose period; thus, it had until 2013 to assert claims for construction defects. This argument was based on the repose language: “[T]he action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.” Stated differently, “the [ten year] repose period commences on the latest date that any of the listed entities—the professional engineer, registered architect, or licensed contractor—completed or terminated their contract.” Clearwater Housing Authority, supra.

 

The Second District reversed the summary judgment based on Clearwater Housing Authority’s argument and because an issue of fact remained as to when the contract was completed.

 

What effect does this have? A huge effect! An owner can sue a contractor or design professional outside of ten years from the issuance of the Certificate of Occupancy and argue that the repose period did not run based on the following arguments: (a) the contractor’s contract was not completed until well after the Certificate of Occupancy date because the contractor was doing endless punchlist work or (b) the design professional had not completed its contract because it was required to submit as-built plans (or some relatively minor task) which it did not do until well after the Certificate of Occupancy. Therefore, based on this holding, owners can be very creative as to when contracts were arguably completed to create questions of fact to postpone the repose period, especially if they are concerned with this defense. On the other hand, contractors and design professionals sued for construction defects that otherwise have a statute of repose argument, like Future Capital seemed to have in the Clearwater Housing Authority case, need to appreciate that a creative owner will be able to create a question of fact to preclude the entry of summary judgment.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CONTRIBUTION CLAIMS TO PASS-THROUGH LIABILITY

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In lawsuits, there are times the defendant elects to sue a third-party defendant to pass-through its liability to the plaintiff to the third-party defendant. For example, in a construction defect scenario where the owner sues the general contractor, the general contractor will often sue subcontractors (third-party defendants) in order to pass-through its liability to the owner to subcontractors that performed the scopes of work at-issue. In other situations, a defendant may assert a cross-claim against another defendant to, among other things, pass-through any liability it has to the plaintiff to the other defendant. For example, in a construction defect scenario where the owner sues both the general contractor and subcontractors, the general contractor will often assert a cross-claim against the subcontractors to pass through its liability to the subcontractors.

 

A claim for contribution used to be a common claim asserted to pass-through liability in negligence-related actions. Contribution claims were routine in negligence actions when there used to be joint and several liability, i.e., a party could be responsible for all of the plaintiff’s damages irrespective of its percentage of fault with other defendants. “To state a claim for contribution, the claimant must allege a common liability to the injured party [plaintiff].” Horowitz v. Laske, 855 So.2d 169, 174(Fla. 5th DCA 2003). In other words, the defendant and third-party defendant must be jointly liable / negligent to the plaintiff for the injuries the plaintiff sustained. Therefore, by asserting a contribution claim, the defendant ensures that fault is allocated to another party that is jointly liable for the damages sustained by the plaintiff.

 

However, Florida abolished joint and several liability in negligence actions and, now, a defendant can only be liable based on its determined percentage of fault. See Fla. Stat. s. 768.81; see also T&S Enterprises Handicap Accessibility, Inc. v. Wink Indus. Maintenance & Repair, Inc., 11 So.3d 411 (Fla. 2d DCA 2009) (affirming dismissal of defendant’s third party claim for contribution in underlying negligence action due to abolishment of joint and several liability). Because of this, third-party defendants or cross-claim defendants that are sued for contribution should argue that the contribution claim is moot because the party suing it can only be held liable for its percentage of fault or negligence. Some judges will dismiss a contribution claim for this reason on a motion to dismiss, but others will still allow the claim to proceed beyond a motion to dismiss for judicial efficiency and economy since it is easier to wrap up a dispute in one litigation instead of many (considering contribution claims have been routine claims to pass-through liability).

 


The opinion in Martinez v. Miami-Dade County, 2013 WL 5434159 (S.D.Fla. 2013) is a non-construction case that illustrates how a claim for contribution can proceed. In this case, a plaintiff sued Miami-Dade County and a bar for injuries the plaintiff sustained by off-duty police officers providing security for the bar. The claims against Miami-Dade Couty were sounded in intentional tort theories and not negligence theories. Miami-Dade County asserted a cross-claim against the bar and included a claim for contribution. The bar moved to dismiss the contribution claim arguing that contribution claims are obsolete under Florida law since there is no more joint and several liability. The Southern District Court disagreed expressing that because the plaintiff’s theories against Miami-Dade County were sounded in intentional tort and not negligence, section 768.81 did not apply. (Notably, section 768.81 section does not apply to intentional tort theories of liability.)

 

Under section 768.81, a negligence action means “without limitation, a civil action for damages based upon a theory of negligence, strict liability, products liability, professional malpractice whether couched in terms of contract or tort, or breach of warranty and like theories. The substance of an action, not conclusory terms used by a party, determines whether an action is a negligence action.” Fla. Stat. s. 768.81(1)(c). Therefore, even if the claims asserted are not labeled negligence claims, this section still applies to bar joint and several liability to ensure a party is only liable for their percentage of fault. It is designed so that substance over form is analyzed to determine whether the plaintiff’s underlying action is a negligence action even if it is not labeled as such.

 

This opinion in Martinez, however, could support the argument that a contribution claim could be asserted outside of a negligence claim such as a breach of contract action (since, in the case, a contribution claim was still allowed to proceed in an intentional tort action). And, even though section 768.81 shifts the focus from the label of the plaintiff’s claims to the actual substance underlying the claims, the objective is to argue that plaintiff’s claims are not based in negligence, but based in a material breach of a contractual provision. For example, in a construction defect setting, when the general contractor is sued for breach of contract, there may be strategic reasons why the general contractor would want to attempt to assert a contribution claim in addition to an indemnification claim against subcontractors to pass-through liability. The general contractor would argue that the plaintiff’s claims are not based in negligence but based in contract since the plaintiff is asserting that the project was not constructed per the contract documents (or in a workmanlike manner) per contractual provisions.

 

Finally, if a general contractor elects to assert a contribution claim, it is important to remember that the claim will only survive if it asserts and can establish that it and the subcontractor(s) share a common liability to the owner. This is challenging.

 

In Helmet House Corp. v. Stoddard, 861 So.2d 1178 (Fla. 4th DCA 2003), a contractor was sued by an owner for breach of contract and breach of warranty for defective construction of a roof. The contractor asserted a third party party complaint against its roofing subcontractor for contribution. The Fourth District held that the contractor could not pursue a contribution claim against its subcontractor because the subcontractor did not share a common obligation / liability to the owner. The Fourth District found that parties share a common liability if they are joint tortfeasors or co-obligors on an obligation. Importantly, many subcontracts contain flow-down provisions that bind the subcontractor to the general contractor to the same extent the general contractor is bound to the owner. Flow-down provisions attempt to impose the exact same liability on the subcontractor that the general contractor assumes towards the owner. With this type of provision, or an alternative provision that would make the owner an intended third-party beneficiary of the subcontract, there may be an argument that subcontractors do indeed share a common liability to the owner with the general contractor for defects with their scopes of work.  From the general contractor’s perspective, the objective is to pass-through liability for defective construction with arguments based on the plaintiff’s allegations in the complaint.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE SCOPE OF A RELEASE IN A SETTLEMENT AND CONTRACTUAL INDEMNIFICATION

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Pilot Construction Services, Inc. v. Babe’s Plumbing, Inc., 111 So.3d 955 (Fla. 2d 2013) is a case that touches on two relevant issues. The first issue pertains to the scope of a release in a settlement agreement. The second issue pertains to contractual indemnification—an issue of importance to all in construction.

 

I. Scope of Release

 

In Pilot Construction, a private college hired a general contractor to renovate a residence hall. After completion, the college discovered deficiencies in bathrooms and showers that resulted in leaks and water damage. The college sued the general contractor for breach of contract and breach of express warranty. The college also sued the plumber (subcontractor) for breach of express warranty due to plumbing deficiencies that caused water damage.

 

The plumber settled directly with the college and a settlement and release agreement was executed. The college, however, continued to pursue claims against the general contractor including defects and damage that arose out of the plumber’s work. The general contractor then settled with the college, but instead of this dispute being dismissed, the general contractor pursued cross-claims against the plumber for indemnity, breach of warranty, and equitable subrogation.

 

The issue on summary judgment was whether the general contractor could pursue claims (such as indemnity) against the plumber when the plumber settled with the college and was released by the college. The trial court found that the general contractor could not pursue such claims and entered summary judgment in favor of the plumber.

 

On appeal, the Second District analyzed the scope of the release which provided in two portions:

 

First Portion: “Nothing within this Release is intended to be nor shall it be construed as any kind of waiver, limitation, or compromise to any claim or defense New College has or may have against any party or entity other than Babe’s Plumbing, Inc.” Pilot Construction, 111 So.3d at 958.

 

Clearly, the college wanted this reservation in the settlement so that it could continue to pursue claims against the general contractor inclusive of damage that arose out of the subcontractor’s work.

 

Second Portion: The settlement also included a release of the plumber for everything (known and unknown damages) in connection with the plumber’s work at the college.

 

Clearly, the plumber wanted this provision so that it would be released by the college (owner) for its scope of work at the project.

 

So, what was the problem? The Second District found that the release to the plumber actually conflicted with the reservation language since the settlement was not limiting claims against other parties, especially as it relates to the subcontractor’s scope of work. Based on the conflicting portions, the court held as follows:

 

  1. the general contractor could pursue its claims against the plumber because it was not an intended-third-party beneficiary of the college and plumber’s settlement as demonstrated by the fact that the settlement allowed the college to pursue damages (arising from the plumber’s work) against the general contractor;
  2. the fact that the plumber settled with the college does not release the plumber from the general contractor’s claim for indemnification since the general contractor could still be liable to the college for the plumber’s scope of work; and
  3. nothing in the release would prevent the general contractor from pursuing a breach of warranty claim against the plumber.

 

As the court explained, “Because the language of the release does not apply to bar Pilot’s [general contractor] claims against Babe’s [plumber], the trial court erred in granting summary judgment….” Pilot Construction, 111 So.3d at 959.

 

This decision is important to any party participating in a multi-party construction defect case. If a subcontractor is getting sued directly by the owner, its best bet is to effectuate a settlement directly with the owner and general contractor whereby the owner and general contractor both release the subcontractor relating to the project. Due to the subcontractor’s indemnification obligations and requirement to identify the general contractor as an additional insured, it will ideally want a release ending it and its insurance carrier’s involvement in the dispute. Or, if that is not possible, make certain that the settlement does not have reservation language that allows the owner to pursue any defects and damage arising from the subcontractor’s scope of work against the general contractor. Better language would reflect that the owner is not pursuing any defects or damage arising from the subcontractor’s scope of work against the general contractor pursuant to this settlement (i.e., a release of the general contractor relating to the subcontractor’s scope of work). The general contractor may still be able to pursue claims against the subcontractor; but, if the owner is releasing the general contractor for the subcontractor’s work, such claims could be tenuous since the owner cannot pursue such damage against the general contractor. (Although, the general contractor’s insurer could still pursue an additional insured claim to recoup defense costs associated with defending the general contractor.)

 

If a subcontractor is being sued by the general contractor only, some of the same rationale applies. The general contractor can settle directly with the subcontractor; however, it assumes the risk associated with the subcontractor’s work since the owner is still pursuing claims against the general contractor arising from the subcontractor’s work. This isn’t always a bad thing based on the dollar amount of the settlement and the ultimate settlement with the owner. In other scenarios, the general contractor only wants to settle with a subcontractor if it can contemporaneously settle with the owner so that it is getting a release from the owner for the subcontractor’s scope of work. An owner will likely not want to do this, nor should it, if damages cannot necessarily be isolated to that subcontractor’s scope of work (such as a water intrusion dispute where multiple scopes contribute to water intrusion and damage). Other times, the general contractor will not settle with subcontractors independent of a global settlement with the owner in perhaps an effort to minimize its contribution to the settlement.

 

Ultimately, there are numerous strategies that come into play when negotiating settlements and releases based on the party. There really is no one-size-fits-all model as it is dependent on the nature of the dispute.  It is important to understand what is being released, what is not being released, and the scope of the release when entering into a settlement so that any risks can be appreciated.

 

II. Contractual Indemnification – Florida Statute s. 725.06

 

The plumber in Pilot Construction also argued that Florida Statute s. 725.06 barred the general contractor’s claims because the general contractor was seeking indemnification for its OWN negligence. The Second District dismissed this argument because the general contractor was only seeking indemnification for the subcontractor’s negligence:

 

“Section 725.06 would only bar Pilot’s claims for indemnification if Pilot’s claims were based on Pilot’s own negligence. A plain reading of Pilot’s claims against Babe’s shows that Pilot’s suit against Babe’s was based on Babe’s failures to correctly install shower pans and drains in the residence hall bathrooms. “
Pilot, 111 So.3d at 959.

 

The Second District’s ruling is interesting because it does not discuss the contractual indemnification language in the contract. Section 725.06 is a statute that essentially says that the first party cannot require the second party to indemnify it for its own negligence unless there is a “monetary limitation on the extent of the indemnification that bears a reasonable commercial relationship to the contract and is part of the project specifications or bid documents, if any.” See Fla. Stat. s. 725.06. Without compliance with this section, the indemnification provision is unenforceable. This is why it is always good practice to include a monetary limitation and identify it is part of the bid documents because most indemnifications are drafted in broad form that would require the second party to indemnify the first party for any and all damage caused wholly or partly by the second party. However, the Second District appears to focus less on the indemnification language in the subcontract and more on the actual claims that were asserted by the general contractor. Thus, if there is a concern with the enforceability of the indemnification provision, this case could support an argument for the general contractor that because the contractual indemnification claim being asserted is confined to the subcontractor’s (or second party) own negligence, the claim should be entitled to proceed.

 

For more information on contractual indemnification please see: https://floridaconstru.wpengine.com/buttoning-up-contractual-indemnification-language/

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

STATUTE OF LIMITATIONS ON PERFORMANCE BOND CLAIMS

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Owners need to understand the benefit of a performance bond before deciding they do not want to reimburse the contractor for the premium associated with the bond. The performance bond is designed to guarantee the contractor’s faithful performance of the contract. There are numerous ways the bond can come into play. If the contractor goes bankrupt during construction, the owner can assert a claim against the bond. If the contractor gets terminated for default, the owner can assert a claim against the bond. And, if there are construction defects, particularly latent defects, the owner can assert a claim against the bond. Naturally, a benefit of the performance bond is that the contract is presumably guaranteed by a solvent surety (insurance company), which is important based on the value of the contract and/or perceived solvency of the hired contractor.

 

Importantly, performance bonds have a five year statute of limitations irrespective of the ten year statute of repose period in Florida. See Federal Ins. Co. v. Southwest Retirement Center, Inc., 707 So.2d 1119 (Fla. 1998). The Florida Supreme Court in Southwest Retirement Center held that the statute of limitations on a performance bond in a case involving latent defects accrues (begins to run) “on the date of acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” Id. at 1121. Thus, the statute of limitations begins to run on this date and expires five years thereafter—no matter when the defect was discovered.

 

A factual issue can arise based on parties’ differing interpretations as to the meaning of “acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” The opinion in GBMC, LLC v. Proset Systems, Inc., 2013 WL 1629162 (N.D.Fla. 2013), illustrates this factual issue. In this case, the performance bond surety moved for summary judgment arguing that the statute of limitations began to accrue on the date of substantial completion. To support this position, the surety pointed to the construction contract that maintained that the statute of limitations accrues no later than the date of substantial completion. (Notably, this is common language in construction contracts, particularly the AIA Document A201 which appears to be the general conditions of the contract executed by the parties.) The Northern District of Florida, however, did not buy this argument because it is illegal under Florida law for parties to contractually shorten the statute of limitations. See Fla. Stat. s. 95.03. In other words, if substantial completion occurred before the “acceptance of the project has having been completed according to the terms and conditions set out in the contract,” then the parties were illegally agreeing to shorten the limitations period. Because there were material facts in dispute as to when the contract was accepted as completed, the surety’s motion for summary judgment was denied.

 

Owners that plan on asserting a claim against a performance bond for latent defects need to understand when the statute of limitations accrues for purposes of their claim. Based on the project’s completion, the owner will want to create a factual issue as to when it accepted as completed the contract since this date is arguably later than the substantial completion date and, thus, the certificate of occupancy date. This language is a benefit to the owner asserting a latent defect claim on the cusp of five years from the date it started using the project for its intended purpose, particularly if the owner did not release retainage until well after occupancy. Contractors (indemnifying their surety) and sureties need to recognize this so they can start framing a statute of limitations defense based on facts supporting when the contract was accepted as completed by the owner. The contractor should do this by tracking the temporary and/or final certificate of occupancy dates and when final payment was made to argue that the owner accepted the project when it started occupying the project for its intended purpose. A contractor or surety will need to persuasively make this argument if the certificate of occupancy was issued more than five years from the lawsuit but the owner’s final payment to the contractor for retainage was within five years from the lawsuit. The reason being is that language “accepted as completed” allows the owner to argue that they never accepted the project as completed by virtue of not issuing the final payment until an extended period after the certificate of occupancy.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

HOMEOWNERS ASSOCIATIONS AND COMMON LAW IMPLIED WARRANTIES

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The Florida Supreme Court’s decision in Maronda Homes, Inc. of Florida v. Lakeview Reserve Homeowner’s Association, Inc., 38 Fla. L. Weekly S573a (Fla. 2013) has been a long awaited decision for both homeowners associations and home builders.

 

This case started when a homeowners association sued the home builder of the residential subdivision for common law breach of implied warranties of fitness and merchantability (also known as the warranty of habitability in the residential context) due to construction defects. The association asserted that infrastructure, particularly as it pertained to the storm water drainage system, was defective and was causing substantial flooding and other damage (e.g., severe soil erosion, damage to roadways, etc.).

 

The trial court entered summary judgment for the home builder finding that common law implied warranties do not extend to infrastructure, private roadways, drainage systems, retention ponds, or other common locations in a subdivision because these structures (or construction improvements) do not immediately support the homes.

 

On appeal, the Fifth District reversed the trial court holding that the common law implied warranties are applicable to the facts of the case. The Fifth District maintained that the common law implied warranties “have application to improvements to real property that not only support residences in a structural sense, but also apply to improvements which provide ‘essential services’ for the habitability of homes.” Maronda Homes, supra. Essential services for the habitability of homes include “roads for ingress and egress, drainage systems to divert flooding, retention ponds to correct water flow damage, and underground pipes (whether they be storm water or sanitary sewer pipes) which are necessary for living accommodations.” Id. In other words, the Fifth District held that the common law implied warranties apply to structures / construction improvements in a subdivision that immediately support the homes in the form of essential services. Id.

 

After the Fifth District’s holding, the Florida Legislature enacted Florida Statute s. 553.835 which it intended to apply retroactively (meaning the homeowners association would have no claims against the home builder in Maronda). This statute was enacted as a reaction to the Fifth District’s ruling to apply common law implied warranties to improvements that support the homes in a subdivision. This statute provided:

 

“There is no cause of action in law or equity to a purchaser of a home or to a homeowners association based upon the doctrine or theory of implied warranty of fitness and merchantability or habitability for damages to offsite improvements.”

 

Offsite improvements were defined in the statute as follows:

 

“(a) The street, road, driveway, sidewalk, drainage, utilities, or any other improvement or structure that is not located on or under the lot on which a new home is constructed, excluding such improvements that are shared by and part of the overall structure of two or more separately owned homes that are adjoined or attached whereby such improvements affect the fitness and merchantability or habitability of one or more of the adjoining structures; and

(b) The street, road, driveway, sidewalk, drainage, utilities, or any other improvement or structure that is located on or under the lot but that does not immediately and directly support the fitness and merchantability of the home itself.”

 

Based on this new statute, the Florida Supreme Court needed to determine (a) whether the statute applied retroactively and (b) if it did not apply retroactively, do the common law implied warranties apply to structures / construction improvements in a subdivision that immediately support the homes in the form of essential services.

 

The Florida Supreme Court, agreeing with the homeowners association, held that (a) the statute did not apply retroactively, and (b) the Fifth District’s ruling was correct with their “essential services” test or standard to “determine whether a defect in an improvement beyond the actual confines of a home impacts the habitability and residential use of the home.” Maronda Homes, supra.

 

However, what the Florida Supreme Court importantly touched upon was the enforceability or constitutionality of Florida Statute s. 553.835 moving forward. Under this new statute, if the homeowners in Maronda sued today, its common law implied warranty claims would be barred by virtue of this statute (since its claims were asserted after the enactment of the statute).

 

An important portion of the Florida Supreme Court’s opinion provides:

 

“Article I, section 21 of the Florida Constitution declares the right to access the courts, stating that ‘The courts shall be open to every person for redress of any injury, and justice shall be administered without sale, denial or delay. In Kluger v. White, 281 So.2d 1, 3-4 (Fla. 1973), this Court interpreted the meaning of the phrase ‘redress of any injury.’ It held that where a cause of action exists under the statutory or common law of Florida, the Florida Legislature may not abolish that action unless it provides a reasonable alternative for redress of injuries, or demonstrates an overpowering public necessity for its abrogation and no other means by which to meet that necessity.”

 

Here, Lakeview Reserve [association] contends that section 553.835 violates article 1, section 21, because it abolishes the cause of action for breach of the implied warranties and fails to provide a reasonable alternative or demonstrate an overpowering public necessity for that abrogation. Maronda Homes…allege that although section 553.835 curtails the cause of action for breach of the implied warranties, it preserves other viable remedies that may exist in tort, contract, or by statute, such as negligence, misrepresentation, and rescission.

 

Section 553.835 violates the right of access to courts because it attempts to abolish the common law cause of action for breach of the implied warranties for certain injuries to property. In section 553.835(4), the Legislature establishes its intent to abolish some implied warranties by expressly limiting a cause of action for their breach by eliminating “offsite improvements for that action’s scope, even if such improvements impact the on-site habitability of the home….The statute even provides that the purpose of the law is to place limitations on the applicability of the doctrine or theory of implied warranty of fitness and merchantability, and to reject the decision by the Fifth District Court of Appeal in the Maronda case. This is a clear violation of separation of powers because the Legislature does not sit as a supervising appellate court over our district courts of appeal.”

 

Based on this portion of the decision, a homeowners association that has potential claims for “offsite improvements” after the enactment of s. 553.835 may still have these common law implied warranty claims based on an argument that the statute violates constitutional rights. If the statute is determined to violate constitutional rights by trying to abrogate common law implied warranties, the association will still have to satisfy the “essential services” standard set forth by the Fifth District and approved by the Florida Supreme Court in Maronda.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.