Wyman v. Ayer Properties: SJC Holds That Economic Loss Doctrine Inapplicable In Condominium Construction Defect Claims
In an important ruling which will make it less difficult for condominium associations and trustees to seek redress for faulty or defective construction, the Supreme Judicial Court has jettisoned the “economic loss doctrine” in the condominium context and affirmed a $300,000 plus judgment against a Lowell based real estate construction company over faulty construction at a condominium. A link to the opinion can be found here.
The economic loss doctrine provides that a claimant must suffer some sort of property damage or personal injury in a negligent construction claim before being able to recover compensatory damages. The strict application of the economic loss doctrine in condominium construction defects was often the “magic bullet” used by insurance companies to defend these claims. Using some much needed common sense, the court held that the doctrine should not apply strictly in the condominium setting due to the peculiar nature of a condominium ownership structure with the association/trustees owning the common areas but with unit owners having contracts with the developer.
Going forward, condominium trustees will likely have more success in recovering their losses for defective construction against developers over common areas. On the flip side, insurance premiums for construction companies may rise due to the increased liability exposure.
Condominiums remain hot in the Greater Boston area, often the new starter home for the young professional buyer. I am also seeing quite a lot of two and three family homes in the Boston, Cambridge, and Somerville area being converted into condominiums. While condos are usually a great investment, buying one requires some unique due diligence. You must be satisfied that the condominium project as a whole is financially healthy and that you are not buying into a major “money pit.”
The role of the buyer’s attorney in a condominium purchase is to review the condominium documents including the master deed, declaration of trust/by-laws, budget and meeting minutes, if any. The documents, however, only tell so much of the story. What’s really important is what may be lurking behind those documents. Here are some good questions to ask:
How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment. Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands. Others, like theBoston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit. It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condomininium.
Is there a professional management company or is the association self-managed? Usually, a professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. Self-managed condos tend to have a higher incidence of dysfunction.
Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Ask whether there are any pending lawsuits.
Purchase and Sale Agreement Tips
Regardless of the answers you receive, my practice is to insert a comprehensive condominium verification provision in the purchase and sale agreement. This will make the seller go on the record as to some important aspects of the condominium financial’s health and should go a long way to ensure that the buyer is not stepping into a huge special assessment or other major financial catastrophe. If issues arise prior to the closing, this provision will give the buyer an “out” to terminate the deal and return the deposits.
Condominium Verification Information. The Seller represents that, to the best of his/her knowledge, the following information is true and accurate as of the date of this Agreement and shall remain true as of the date of closing:
The condominium documents provided to the Buyer and/or available for downloading on the ____ County Registry of Deeds are true, accurate and complete copies of all documents recorded with the Registry of Deeds as of the date hereof and that no other documents and/or amendments which adversely impact the Unit being purchased will be recorded which have not been presented to the Buyer.
The current condominium monthly fees are $_____ per month.
Seller has not received any notice of nor is Seller aware of any special assessments for the Unit, whether or not assessments are due now or in the future, and Seller is aware of no immediate pending improvements, repairs or replacements or plans therefore which would likely result in a supplemental assessment or significant increase in the monthly common expenses for the Unit.
In the event there are any supplemental assessments owed with respect to the Unit on the closing date, Seller shall be obligated to pay such assessments in full prior to closing notwithstanding any agreement by the organization of unit owners to allow such payments to be made in installments but only to the extend Seller’s lender agrees to allow said payment on the HUD-1 Settlement Statement. Otherwise, Buyer may either agree to accept the obligation to pay said assessment or terminate the agreement by written notice to Seller within 5 days of receipt of notice of said assessment.
The master insurance policy for the unit conforms with the requirements of the Condominium Documents.
There is presently no litigation threatened or pending by or against the Seller, or the Condominium Association, which would cause the Condominium to not be in compliance with current secondary mortgage market guidelines.
The Seller shall promptly notify the Buyer of any change in facts which arise prior to the closing which would make any such representation untrue if such state of facts had existed on the date of execution of this Agreement. The provisions of this paragraph shall survive delivery of the deed.
If you have any questions about purchasing a Massachusetts condominium unit, please contact me at [email protected].
I’ve been getting a fair amount of calls these days regarding what I like to term dysfunctional condominium management. Usually these are smaller, self-managed condominiums, converted multi-family homes, etc. Sometimes, however, the problem of dysfunctional condominium management can plague larger condominiums.
As I often tell clients, condominiums often bring out the worst in people. Professionalism and respect get thrown out the door, and childish behavior rules.
The problems can range from poor to no financial management, unpaid monthly condominium fees, problems with the transition from the original developer to the association of unit owners, power hungry condo trustees, special assessments, and disputes over costly repairs and capital improvements. Here’s some advice for would-be condominium buyers and condo unit owners to prevent and deal with dysfunctional condominium management problems.
Dealing With A Dysfunctional Condominium Board of Trustees or Association
A. Financial Mismanagement
A condominium is supposed to run like a democracy with trustees being elected by the majority of unit owners, and subject to being voted out of office when they do a poor job. The procedures for elections and removal should be set forth in the condominium declaration of trust/by-laws. In the case of financial mismanagement, unit owners often may have difficulty enforcing the internal governance rules. At minimum, disgruntled unit owners should call a special meeting and attempt to removal or vote out trustees who are causing problems. If the internal governance doesn’t work, unit owners may seek legal action for “breach of fiduciary duty” against the trustees in the Superior Court. In egregious cases, the court can grant preliminary injunctions and other remedies to protect the unit owners from financial harm.
B. Unpaid Condominium Fees
With the down economy, unpaid condo fees have become a real problem, especially for smaller condos who rely on the monthly income to pay common area expenses. Fortunately, we have a strong Massachusetts condominium lien law with some teeth, called the “Super Lien Law.” Condominium associations can file a lien for unpaid condo fees against the delinquent owner, and the first 6 months of unpaid fees will have “super-priority” status over and above the mortgage(s) on the unit. The association can then foreclose on the lien and sell the unit at auction. Attorneys’ fees and collection costs can also be pursued. The condominium may even require that a unit owner’s tenant pay the association rent to pay down the unpaid fees. These are a very valuable enforcement mechanisms to ensure that condominiums get their condo fees paid. Often the mortgage lender will pay the condo fees on behalf of the borrower to avoid the super-priority lien.
C. Transition Issues
For new construction condominiums, the developer desires to have control over the condo management during the majority of the sell out process. This, however, can create conflicts with unit owners who have bought units. Typically, the condo documents will give the developer control over the association until 75% of the units are sold out or 3 years after the master deed is recorded, whichever is earlier. But what if the developer isn’t managing the finances properly or isn’t doing much of anything? Often the only viable remedy in this type of situation is a Superior Court lawsuit for breach of fiduciary duty against the developer-trustees.
Questions To Ask Before You Buy Into A Dysfunctional Condominium
What are the condominium by-laws, rules & regulations? You or your attorney must read these condominium documents and make it a condition of your offer. Condominium by-laws and rules are supposed to provide a structure for good decision making. Make sure you carefully review the rules and regulations before buying.
What is the monthly condominium fee and what does it pay for? The monthly condominium fee can range quite dramatically from condominium to condominium. The fee is a by-product of the number of units, the annual expenses to maintain the common area, whether the condo is professionally managed or self-managed, the age and condition of the project, and other variables such as litigation. For budgeting and financing you need to know the monthly fee and exactly what you are getting for it.
How much money is in the capital reserve account and how much is funded annually? The capital reserve fund is like an insurance policy for the inevitable capital repairs every building requires. As a general rule, the fund should contain at least 10% of the annual revenue budget, and in the case of older projects, even more. If the capital reserve account is poorly funded, there is a higher risk of a special assessment. Get a copy of the last 2 years budget, the current reserve account funding level and any capital reserve study.
Are there any contemplated or pending special assessments? Special assessments are one time fees for capital improvements payable by every unit owner. Some special assessments can run in the thousands, others like the Boston Harbor Towers $75 Million renovation project, in the millions. You need to be aware if you are buying a special assessment along with your unit. It’s a good idea to ask for the last 2 years of condominium meeting minutes to check what’s been going on with the condomininium.
Is there a professional management company or is the association self-managed? Usually, a professional management company, while an added cost, can add great value to a condominium with well run governance and management of common areas. Self-managed condos tend to have a higher incidence of dysfunction.
Is the condominium involved in any pending legal actions? Legal disputes between owners, with developers or with the association can signal trouble and a poorly run organization. Ask whether there are any pending lawsuits.
How many units are owner occupied? A large percentage of renters can create unwanted noise and neighbor issues, and result in a higher incidence of dysfunction. It can also raise re-sale and financing issues with the new Fannie Mae and FHA condominium regulations which limit owner-occupancy rates.
What is the condominium fee delinquency rate? Again, a signal of financial trouble. Plus lending guidelines want to see the rate at 15% or less.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Wyman v. Ayer Properties: SJC Holds That Economic Loss Doctrine Inapplicable In Condominium Construction Defect Claims
