The following article was first published on Law 360, October 2021
There has been much written about the tragic condominium collapse in Surfside, Florida. Losing 98 lives alone makes that one of the worst residential failures in US history. Then there is the wipeout of owner equity that might occur if there is insufficient insurance coverage. We and others have written about the possible causes of this catastrophe and its many legal implications. We have also written about how boards of directors can rally owner support for what may prove expensive investigations and repairs. But what about how the Champlain Towers event could intimidate potential buyers, alienate lenders, and depress property values?
One report put the pre-collapse price for repairs at the Champlain Towers complex at $18 million, or an average of $132,000 per unit. No one can say whether that proposed repair would have saved the building. It could have cost a great deal more. But even without the extensive deterioration found at Surfside, special assessments of this size are not unusual as many condominiums age, often putting the cost of needed repairs out of reach of many owners and deterring buyers. So how can buyers prepare themselves to make an informed decision about purchasing a condominium unit?
First, we must point out that the Champlain Towers failure was a very rare event. Buildings rarely collapse spontaneously on their own. But structures, whether wood or concrete, do decay over time if not adequately investigated or maintained. Some of that decay can lead to the failure of portions of the structure. Balconies, stairways, foundations, and the underlying soil, and rot or corrosion of the framing or reinforcing steel can lead to costly repairs if not caught in time.
Any prospective condo buyer should ask questions and obtain information, not only about the visible amenities or upgrades to the unit itself but also what expenses might be levied on the owners by the homeowner's association for future repairs to the common areas. Boards of directors can provide the information, but that is often not the case because they consider it proprietary or just don't know. Either way, a prospective buyer should ask questions and then evaluate the answers as part of deciding whether to buy.
Condominium buyers, as a group, are probably the least informed purchasers of real estate. They have very few tools to evaluate the risk or value of a purchase. Some inspections can be obtained. There are statutory disclosures that a seller must provide. And prospective buyers can huddle with their real estate professionals, study price "comps," and assign value to location, age, and amenities. None of this, however, is a foolproof gauge of value.
Buyers often hire a "home inspector," but unlike similar inspections of single-family homes, pre-purchase inspections of condominiums cover only a tiny portion of the property. Such assessments usually involve an interior inspection of the unit's appliances, fixtures, flooring, paint, windows, internal plumbing and electrical, and similar "separate interest" elements. The review may also include a cursory overview of the project's exteriorappearance, paint, landscaping, parking lots, maybe recreational facilitiesbut rarely would that include the entire project or the structural condition of the "common areas" of the building. With a condominium, the common area is everything but the air space inside the units. The significance of this is grounded in the ownership model. The buyer doesn't just purchase the air space. With the unit, the buyer also buys an undivided interest in the whole condominium project, including all the structural elements of the building. The buyer is thus responsible for a percentage of the cost to maintain and repair the entire development.
Home inspections of single-family homes are different. There, the inspector can investigate most, if not all, of the building. The mechanical systemsplumbing, electrical, HVACare mostly accessible. The inspector can view the attic space and the entire roof. The foundation of the home is often visible. The home inspection report for an individual home can capture most items needing immediate or near-term repair and provide the potential buyer with a tool to negotiate with the Seller. Because of this, the condition of the property is more accurately reflected in the sales price.
But because the home inspection of a condominium is not likely to include many common area conditions maintained by the homeowners' association, the potential condo buyer has almost no way to predict future expenses and any owner assessments that might be necessary if the association's reserves are inadequate. Without information on what repairs are essential but deferred, whether funding for those repairs exists or will require future contributions from owners, and most important, whether the homeowners' association has adequately inspected the property even to have that information, the buyer lacks many tools necessary to negotiate a fair price.
The statutory "disclosures" required by California Civil Code §1102 is a checklist of potential issues, but the following phrase premises those questions: "Are you (Seller) aware of any of the following:" followed by the list of questions regarding what the Seller knows about the condition of the project. But look at that closelyif the Seller is not "aware" of a negative condition, they can check the "no" box. In a condominium project, individual owners and even boards of directors are often unaware of construction conditions that may have a very negative impact on value when finally known.
What additional information should a buyer seek to level the playing field? What questions should they ask the Seller to make an informed offer?
Has there been a "reserve study?"
In California, and some other states, statutes require the homeowners' association to periodically analyze specific building components to determine what repairs will be necessary in the foreseeable futuresay ten to twenty yearsand how much cash should the association be banking to fund those repairs when necessary?
If there has been a reserve study, is the association meeting the reserve study funding requirements?
In California, perhaps half of the condominium associations have substantial reserve underfunding. Studies have shown that the average homeowners' association has only about 50% of the funding required to meet the demands of the reserve study. This question may elicit an answer that understates the truth, depending on how much of the building has been inspected to know how much funding is needed.
Have there been inspections that go beyond those required for the typical reserve study?
The reserve study statute in CaliforniaCivil Code §5550requires only those components that are visible and accessible to be included in the analysis. If buildings were only constructed of roofing materials and paint, that might be ok, but there are many more components in a typical building beyond just visible ones. California condo buyers do have a distinct advantage over buyers in almost any other state. California requires "intrusive" inspections of certain structural components. Civil Code §5551, added in 2020, mandates a safety inspection of exterior elevated elements," built primarily of wood, which support human occupancy. Such things as balconies, elevated walkways, and outside staircases must be inspected periodically. And not just those portions that are visiblethe inspections must inspect the load-bearing componentsjoists, ledgers, decking, railingsthat provide the essential support for each exterior element, even if that means opening a portion of the building to assess those components.
Have the structural inspections required by Civil Code §5551 revealed necessary repairs, and if so, is the funding available to complete those repairs?
Structural repairs can be costly, especially in older buildings that have experienced gradual deterioration over many years or decades. This can mean unexpected, large special assessments, for which no reserves have been set aside. This "hidden damage" may progress for years until discovered, or until a component failure reveals its extent.
Do the investigations reveal a life-safety issue not yet repaired?
Civil Code §5551 requires "emergency repairs," i.e., those necessary to mitigate a threat to life-safety, be done immediately. Have repairs for those components been scheduled? To keep assessments low, many boards of directors will defer needed repairs. Unfortunately, this often leads to more expensive repairs as the building ages. For example, water intrusion over a long period can rot or corrode structural elements of a building and lead to failure. However, if regular maintenance is timely performed, the pathways that allow water to penetrate beyond the surface of the building can often be repaired economically. Caulking and paint are prime examples. But left too long, mere caulking or painting won't be enough to repair the damage to the enclosed portions of the walls, balconies, decks, shear walls, and roofs. Severe structural damage can occur that could endanger the occupants. Only timely routine maintenance and periodic intrusive inspections can protect a building from hidden damage.
If the project is less than ten years old, has the homeowners' association looked for construction defects still the developer's responsibility?
Every condominium association generally has a limited period to discover and claim compensation for construction defects. California Civil Code §896 provides building standards that every developer must meet. If they don't, the association can pursue a legal claim. If a claim is not asserted within that limited periodusually ten years or a shorter period for some components, the claim may be lost forever. These periods are known as statutes of "repose," and they vary by component. Although Civil Code §5551 requires intrusive inspections of certain exterior elevated elements within six years from a certificate of occupancy, that statute does not require inspections of other building components often problematic.
Every new homeowner's association responsible for common area infrastructure should have all those components inspected well before their ten-year (or shorter) anniversary. Some law firms that handle construction defect claims will arrange for an inspection of those projects that have not reached ten years from substantial completion and can initiate negotiations with the developer or bring a legal claim if necessary. Construction issues discovered after the Statute of Repose has run will likely be the sole responsibility of the owners.
Has the Association brought claims against the developer, and if so, what result?
The construction of new condominium buildings frequently lacks the quality control that eliminates defects. When faced with an expensive repair of a construction defect, a condominium association will often institute a claim against the builder of the project. It is a fair question to ask if this has occurred, and if so, what was the outcome? Boards of directors manage litigation and, during litigation, are often asked not to share the opinions of experts or expectations of the result. This allows the attorneys representing the association to discuss the matter with the directors without fear that information will get to the defendants. Once the litigation has been concluded, the results can be shared with owners subject to the terms of any settlement.
Settlements or trials often result in a compromise, and the recovery will usually be less than the original demand. What is important is whether the association will address the problems with the funds received or whether the owners will be asked to contribute. This may not be known during the litigation or even later until the repair work is complete. And that may not fit the timetable of a prospective buyer. Still, if information is available, it may not show up in the usual financial records of the association, so the question must be asked by the buyer.
Answers to the questions above can reveal a lot about the condition of the building not otherwise discovered in a typical home inspection. They are not necessarily the complete source of the information a buyer should have since serious construction issues often remain undiscovered for many years. But this additional knowledge of building conditions and the funding available for necessary repairs will equip a prospective buyer with better tools to judge whether the price listed reflects the actual value.
Once primarily an economic problem, hidden damage has become a much more severe problema matter of life and death.
California COVID-19 restrictions have been lifted, let us help guide your Board as you weigh your options and move forward.
Effective in 2020 and 2021, Davis-Stirling CID Act Amendments affecting association operations.
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