June 18, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 16

This is part 16 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 88, subsection (g)
88(g) - In the event that no settlement agreement and releases are executed with respect to any phase of completed common elements or improvements during the period of declarant control of the executive board of the association, any statutes of limitation or repose applicable to such phase shall be extended for a period of one year after the assumption of control of the executive board by unit owners other than the declarant. In addition, the declarant controlled board shall not be obligated to commence suit for any such claims during its period of control.

This provision of Section 88 seeks to limit the statute of limitations on construction defect claims to one year following the transition of control of the Association from the developer to the independent unit owners. Under current law, the independent unit owners get six years from the date of transition for statutes of limitations and ten years from the date of transition under the state statute of repose (at a minimum as to claims against the developer). This provision, therefore, severely limits current legal rights. There is no benefit here to anyone other than the developer. This provision would allow a developer to conceal the existence of defects during the entire time it controls the Association, which could be several years, then turn over control to the independent unit owners. Then, if the independent unit owners do not discover the defects or act upon them within one year of getting control, they could possibly lose the claim entirely.
This provision also completely eliminates the well settled fiduciary duty that board members appointed by the developer to the developer-controlled Association have to ferret out defects and deal with them, be it by lawsuit or otherwise. In other words, they have no liability whatsoever for burying their heads in the sand.

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May 28, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 15

This is part 15 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.


Section 88, subsection (f)

§88(f) - If no settlement agreement is approved by the committee within 180 days after the committee's receipt of the declarant's request for inspection, the parties shall be obligated to proceed to mediation within 30 days thereafter in accordance with the rules of the American Arbitration Association. If no settlement is reached through mediation within 15 days after commencement of same, then the parties shall promptly proceed to non﷓binding arbitration of any remaining issues in accordance with the rules of the American Arbitration Association, and such mediation and non﷓binding arbitration shall be conditions precedent to any litigation of the warranty and construction defect claims against the declarant, which shall also require the approval of a majority of the unit owners other than the declarant. All professional fees and expenses reasonably incurred by the association with regard to the mediation or arbitration, or both, shall be borne by the non﷓declarant unit owners and paid by the association promptly upon the receipt of written authorization of the committee.

The language of subsection (f) of Section 88 has a number of glaring problems. They are discussed separately below:
If no settlement agreement is approved by the committee within 180 days after the committee's receipt of the declarant's request for inspection, the parties shall be obligated to proceed to mediation within 30 days thereafter in accordance with the rules of the American Arbitration Association.

The 180 day limit imposed by this section, when taken with the 150 day period for the committee to complete its inspections and provide the developer with a report, basically means that the committee has only 30 days in which to decide whether to settle a common element claim or they will be obligated in get involved in mediation under the rules of the American Arbitration Association, another potentially costly endeavor.
If no settlement is reached through mediation within 15 days after commencement of same, then the parties shall promptly proceed to non﷓binding arbitration of any remaining issues in accordance with the rules of the American Arbitration Association . . . .

This provision is also remarkable. It requires the “parties” to go into non-binding arbitration if no settlement is reached over the common elements. Presumably, the “parties” are the developer and the independent unit owners on the committee created by Section 88. As discussed in detail above with reference to Section 87, arbitration under the American Arbitration Association rules is a long, costly, burdensome process. How are the outnumbered unit owners, who may number only a handful, to pay for this costly process? In addition, Section 88 gives the developer the power to force multiple arbitrations over each common element as it is completed. This gives the developer the ability to bleed the independent unit owners dry with multiple, costly arbitration procedures. The pressure on the independent unit owners to accept cheap settlements of common element claims will be tremendous. Again, this is clearly intentional.
. . . and such mediation and non﷓binding arbitration shall be conditions precedent to any litigation of the warranty and construction defect claims against the declarant, which shall also require the approval of a majority of the unit owners other than the declarant.

Not only does Section 88 allow the developer to force multiple inspections and negotiations for each and every common element as it is completed, the Section requires that the independent unit owners, many of whom have likely just moved into the development, to get involved in both mediation and arbitration. Then, if the unit owners somehow weather all of that with their resolve intact, they still have to have a majority vote of the independent unit owners before any litigation is commenced. This entire process is incredibly burdensome which, again, appears to be intentional. And, since the developer can force this process for every common element as it is completed, the unit owners will be asked to vote again and again on issues that, by themselves, may not seem sufficient to get involved in costly litigation but, if they were able to consider them all together, might be enough to warrant litigation. By forcing each issue to be evaluated and voted on separately, the developer can avoid the cumulative affect of many improperly constructed items.
All professional fees and expenses reasonably incurred by the association with regard to the mediation or arbitration, or both, shall be borne by the non﷓declarant unit owners and paid by the association promptly upon the receipt of written authorization of the committee.

Again, where is this money coming from for all of this? Given the developer’s ability to force multiple procedures under Section 88 over multiple common elements, neither the Association nor the independent unit owners will have the funds necessary to pay for the expenses of the inspections, mediations and arbitrations. This will be especially true if there are only a small percentage of units in the development owned by independent unit owners.

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May 24, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 14

This is part 14 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.


Section 88, subsection (e)

§88(e) - If a settlement agreement is finalized between the committee and the declarant, the declarant controlled executive board shall have the authority to execute such an agreement and to release the declarant from all liability with respect to the completed common elements and improvements, subject to such terms and conditions as may be acceptable to the committee. Any such settlement agreement and release shall be legally binding upon the association and the unit owners, provided that its form is approved by the independent legal counsel retained by the committee on behalf of the association.
This provision is remarkable and reveals the true intent of the builder’s lobby for inclusion of Section 88 into UCIOA. Subsection (e) of Section 88 reveals that Section 88 in its entirety is intended to give developers the ability to force early inspections and negotiations over common elements long before transition occurs so that the developer can pressure unprepared and financially hampered independent unit owners into settling claims and giving the developer a release. This provision is the developers’ weapon to avoid costly litigation, which to date has been the only true protection for hapless consumers who are damaged by shoddy builders.
This provision actually grants the developer controlled board the power to bind the Association to a settlement agreement releasing the developer from liability for construction defects in common elements. In short, it allows the developer to give itself a release and indemnification from the Association before transition even occurs. Never has there been a clearer conflict of interest. The last sentence is also quite suspect. Why is the legal counsel for the independent unit owner committee only allowed to approve the “form” of the agreement and release as opposed to its content?

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May 14, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 13

This is part 13 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 88, subsection (d)

§88(d) - Within 120 days after the association's receipt of any request for inspection of any phase of the completed common elements or other improvements, the committee shall cause its engineering consultant to inspect the particular completed improvements and render a written evaluation of same to the committee. A copy of the final report, following the committee's review of the initial evaluation, shall be furnished to the declarant within 30 days after the committee's receipt of the report. Thereafter, the committee, or its designated representatives, and the declarant shall conduct one or more joint inspections of the common elements and other improvements covered by the declarant's request and pursue good faith negotiations to resolve any warranty or construction defect claims against the declarant. All fees and related expenses incurred by the committee for engineering and legal consultants shall be paid promptly by the association from available designated funds upon receipt of the committee's written authorization to make such payments.

The language of subsection (d) of Section 88 should greatly concern anyone who has any involvement in
complex construction matters, since persons with such experience know that 120 days is a wholly insufficient time period for a quality engineer or inspector to complete inspections and the preparation of a written report. This is another example of the time pressure written into this statute. Since latent defects may surface years later, it will likely lead to an already financially burdened Association to have to pay for multiple reports on the same issues.
This provision also requires the committee of independent (supposedly) unit owners to provide the developer with the inspection report within 30 days of receiving the report from the engineer. This 30 day period combined with the 120 days for the inspection and preparation of the report means that the developer can force the issue and receive a final report within 150 days of demanding that a common element be evaluated. This short time period gives the developer the ability to time his demands so that each common element that is completed is evaluated before it is exposed to a rainy season, or a freeze/thaw cycle of winter to spring. In other words, the developer can time its demands that common elements be inspected by making the demand during a stretch of good weather, thereby forcing the inspections to be done during the hot summer months when there is little rain fall to expose leaks in, for example, roofs or windows. This, again, appears to be intentional.
The language “the committee, or its designated representatives, and the declarant shall conduct one or more joint inspections of the common elements and other improvements covered by the declarant's request and pursue good faith negotiations to resolve any warranty or construction defect claims against the declarant,” is a perfect example of the one-sided nature of this statute. Here, at the conclusion of the common element inspection process controlled by the developer, the Association is obligated by statute to negotiate the claims “in good faith.” Why was this language included here but not in the process outlined in Section 87 where the developer is obligated to make a settlement proposal after receiving a notice of a claim from the Association?
The language “[a]ll fees and related expenses incurred by the committee for engineering and legal consultants shall be paid promptly by the association from available designated . . .” requires the Association to pay all expenses incurred by the independent (supposedly) committee in dealing with the developer’s demand to inspect and negotiate common element claims. Where, however, is that money going to come from? The developer could institute this process very early in the Association’s existence when it has little money. This is another example of the financial pressure that UCIOA gives to the developer to use as a weapon against the Association.

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May 10, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 12

This is part 12 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 88, subsection (b)


88(b)
- If the committee authorized in subsection a. of this section is established and there has been substantial completion of the common elements and public improvements in any phase of the common interest community which are not covered by the performance or maintenance guarantees posted with any governmental agencies having jurisdiction, the committee shall, at the declarant's request, cause such common elements and improvements to be inspected and evaluated for compliance with the declarant's warranty and construction obligations, with the assistance of qualified independent engineering and legal consultants selected by the committee. The fees for such consultants shall be paid from funds contributed at closing for such purposes by unit owners other than the declarant or by regular or special common expense assessments, or by both; provided, however, that the declarant shall have the option to supplement such funds to the extent that it deems appropriate.

The language of subsection (b) of Section 88 has a number of glaring problems. They are discussed separately below:
If the committee authorized in subsection a. of this section is established and there has been substantial completion of the common elements and public improvements in any phase of the common interest community . . . .

The phrase “substantial completion” is not defined. What is substantial completion? Typically, when dealing with a completed residential structure the date of substantial completion is measured from the date that the governing municipality issues a certificate of occupancy for the structure. Here, UCIOA gives the developer the power to force inspections over each common elements as it is constructed, such as roofs, sidewalks, siding, etc. How, then, will the date of “substantial completion” be determined? The statute offers no guidance.
If the committee authorized in subsection a. of this section is established and there has been substantial completion of the common elements and public improvements in any phase of the common interest community . . . .

The language “in any phase” in this section apparently gives the developer the ability to force the process of inspections and mediations over common elements throughout a condominium project as each one is completed. This means that the developer, presumably, has the ability to force a small number of independent unit owners to go through the expense and burden of this inspection, mediation and arbitration process, multiple times as each of numerous common elements within the project are completed. The burden on the unit owners, and the pressure to resolve each common element matter quickly as new ones arise, will be tremendous. This appears intentional from the statute.
. . . the committee shall, at the declarant's request, cause such common elements and improvements to be inspected and evaluated for compliance with the declarant's warranty and construction obligations, with the assistance of qualified independent engineering and legal consultants selected by the committee. The fees for such consultants shall be paid from funds contributed at closing for such purposes by unit owners other than the declarant or by regular or special common expense assessments, or by both . . . .

This provision provides that the independent unit owners have to pay for the engineers necessary to
conduct inspections of common elements when “requested” by the developer. The problem is there may only be
a few unit owners within the condominium development at the time the developer makes its “request.” That is a
significant financial burden to be placed upon a small number of unit owners who just moved into the
development. The unit owners will have no choice, however, because the institution of the process is controlled
by the developer. The practical result of this provision is that the unit owners will be forced to either hire less
expensive, less qualified engineers and inspectors, or simply cave in and accept whatever the developer if willing
to offer.
The fees for such consultants shall be paid from funds contributed at closing for such purposes by unit owners other than the declarant or by regular or special common expense assessments, or by both; provided, however, that the declarant shall have the option to supplement such funds to the extent that it deems appropriate.

This provision is outrageous. It gives the developer the authority to pay for the engineers or inspectors
hired by the independent unit owners to inspect the common elements. That means that the developer will have
an influence over the choice of engineer or inspector that is used and the outcome of the inspections. This is a
significant conflict of interest. And, since the developer has the ability under this provision to force these
inspections when there are only a few independent unit owners in the development, the unit owners will almost
always be amenable to allowing the developer to pay for the inspections. Again, this is improper influence by
the developer over the outcome of the inspections.

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April 30, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 11

This is part 11 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Hopefully by now this series of blogs on the pending UCIOA legislation in New Jersey explains the reasoning behind my chosen title “UCIOA – A wolf in sheep’s clothing.” Although many of the provisions of UCIOA arguably advance the stated goal of the legislation’s sponsors to protect community association’s rights, Section 87 of this lengthy Act was clearly not added for the benefit of community associations. Rather, Section 87, as well as the subsequent Section 88 discussed in the following parts of this series, were more likely written into the proposed law as concessions to the powerful state lobby of the developers and builders in New Jersey, since these are the only parties that seem to benefit from these sections.

Section 88, subsection (a)

§88(a) - During the period of declarant control after the initial election of unit owner board members other than the declarant, the executive board of the association may, upon the request of any board member, authorize an independent committee of at least five unit owners other than the declarant to evaluate, compromise and enforce by any lawful means as provided in this section any claims involving the common elements or any other improvements in the common interest community which the association is obligated to maintain. Only members of the executive board elected by the unit owners other than the declarant and other unit owners appointed by those independent members shall serve on the committee, and the committee's decisions shall be free of any control by the declarant or any member of the executive board or officer appointed by the declarant. Any vacancies on the committee shall be filled by the independent board members within 30 days, and in the case of any tie votes by such board members, by the vote of the unit owners other than the declarant within 60 days after the vacancy occurs.

The language in subsection (a) of Section 88 that is the most troubling is the first sentence that permits the creation by the Sponsor-controlled Board of an “independent committee” to “evaluate, compromise and enforce by any lawful means as provided in this section any claims involving the common elements or any other improvements in the common interest community which the association is obligated to maintain.” This language essentially gives the developer the power, during the time that it controls the Association and when there are only a few independent unit owners on the Board (as few as two), to force inspections and settlement discussions over the condition of the common elements. Since the “executive board” is controlled by the developer, the developer will be the one deciding if and when to force inspections of the common elements. Since the developer knows that defects may take some time to manifest themselves in construction, it will most certainly use this provision to force inspections of every common element in a condominium project as each one is completed. The developer, moreover, has the ability to do this when there are very few independent unit owners in the development, taking advantage of the fact that they are outnumbered and have possibly not been in the development long enough to realize the severity of the issues.
In addition, this language completely ignores a common reality in the condominium world where developers often sell units in a condominium to friends and family members. These individuals, commonly referred to as insiders, can be appointed to the committee being authorized by subsection (a) of Section 88 and will be in a position to influence the inspection process in favor of the developer, which they will most certainly do as a result of their skewed loyalties. These insiders should not be allowed to influence settlements over common elements with the developer, but under UCIOA they would have the ability to do so.
Section 88(a) also has several troubling ambiguities. First, what exactly does “compromise” mean? Presumably this means settle with the developer any issues. Given the fact that the developer is the one who controls the executive board during this time, the developer can control which issues are “compromised.” This is a considerable conflict of interest. In addition, the language “enforce by any lawful means as provided in this section” is unclear. What “lawful means as provided in this section” are being referenced? Lastly, the reference to evaluating or compromising “any claims involving common elements” is confusing. If the developer is controlling the Board, what “claims” would be made and by who? Is the developer going to make a claim against itself? If so, doesn’t that present a conflict of interest? The Courts will be tied up with litigation for years attempting to straighten out the meaning of these ambiguities.

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April 26, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 10

This is part 10 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 87, subsection (k)

'87(k) - If the association fails to comply with any of the provisions of this section, such failure may be asserted by declarant as a procedural deficiency. Upon a judicial determination that the association failed to comply with the provisions set forth in this section, the association's complaint shall be stayed for an appropriate period of time to permit the association to cure any non﷓compliance.

This provision allows the developer to exploit a technical non-compliance with any of the provisions of Section 87, or use any of the ambiguities previously discussed in parts 1 through 9 of this series, to argue there was non-compliance even though there was none, and file a motion to dismiss a subsequently filed lawsuit by the Association. If successful in that motion, the developer could force the Association to go all the way back to square one and do it all over again.
At a minimum, this section should have been written to require that the Developer assert this procedural deficiency in a pre-Answer motion or be considered to have waived the defense. Otherwise, the Developer can allow the Association to invest considerable resources in the litigation and then bring such a motion which, if granted, could send the Association back to square one, crippling its financial footing and its ability to keep the unit owners united.

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April 12, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 9

This is part 9 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 87, subsection (i)


'87(i)
- The executive board shall, at least 10 days prior to the meeting referenced in subsection h. of this section, distribute to each member of the association the following written materials:

(1) a statement of the association's claim against the declarant, specifying all construction defects and other claims which comprise the cause of action;

(2) a copy of the settlement offer and any other written responses to the claim provided by the declarant;

(3) if the declarant and association participated in an arbitration procedure pursuant to subsection f. of this section, a copy of the arbitrator's findings along with the association's and declarant's response to such findings, if any;

(4) a statement that the recovery of damages through litigation may not result in the receipt of sufficient funds to pay all damages or repair costs as estimated by the association's experts;

(5) an estimate of the minimum and maximum costs to the association to prosecute the litigation and a statement that such costs may not be recovered in the litigation;

(6) a description of the agreement with the attorney whom the association contemplates retaining to prosecute the litigation; and

(7) such other information as the association deems appropriate or as the declarant may have provided to the association in connection with its distribution to its members.

This section could not have been made more burdensome if the drafters tried.
First, the cost to the Association to comply with this provision could be staggering. For a larger condominium, this provision could require thousands of pages of copies that could cost the Association tens of thousands of dollars. Second, the requirements in subsections (i)(4) and (i)(5) are clearly intended to frighten unit owners and influence them not to agree to the litigation. The question arises, why are subsections (i)(4) and (i)(5) in the negative? Why can=t the statements say that the litigation Amay recover sufficient funds to repair all the damages,@ or Athe costs of the litigation may be recovered.@ The only entity that benefits from a negative spin on these statements is the developer.
Subsection (i)(7) is also problematic. This provision allows the developer to disseminate whatever propaganda it wants to the unit owners. In addition, the developer can force the Association to disseminate what information the developer desires. In other words, if the developer gives the Association something it wants disseminated to the unit owners, and the Association refuses to send it out, this provision would allow the developer to move to dismiss a lawsuit later-filed by the Association for the Association=s failure to comply with UCIOA.
The last and most obvious problem with this section is that it takes all control over the litigation decision away from the Board and gives it to the unit owners. It has been a long-standing, well-settled principle in New Jersey that under PREDFDA and the New Jersey Condominium Act, a Board of an Association has a fiduciary duty to act in the best interests of the unit owners. That duty includes the decision of whether or not the Association should pursue litigation. Here, that authority is completely nullified.

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April 2, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 8

This is part 8 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 87, subsection (h)


'87(h)
- If the association does not accept the declarant's settlement offer, or if either the association or the declarant does not accept the arbitrator's determination, then the association may commence any legal action the association deems appropriate, provided that prior to the filing of any complaint commencing a legal action against the declarant, a majority of the association's non﷓declarant members present, in person or by proxy at a meeting of the association where a quorum is present, shall approve the commencement of a lawsuit. The quorum for a meeting of the members of the association for the purposes set forth in this subsection shall be 33 percent of all members of the association qualified to vote, unless the declaration or bylaws shall provide for a lesser quorum requirement. For purposes of determining a quorum, membership interests allocated to declarant units will not be considered in determining a quorum.

The language of subsection (h) of Section 87 has a number of glaring problems. They are discussed separately below:
If the association does not accept the declarant's settlement offer, or if either the association or the declarant does not accept the arbitrator's determination, then the association may commence any legal action the association deems appropriate, provided that prior to the filing of any complaint commencing a legal action against the declarant, a majority of the association's non﷓declarant members present, in person or by proxy at a meeting of the association where a quorum is present, shall approve the commencement of a lawsuit.

This provision effectively takes all decision-making authority away from the Board of the Association, which has a fiduciary duty under PREDFDA, the New Jersey Condominium Act, and common law, and gives it to the unit owners. The obvious benefit to the developer from this provision is that the developer is betting that the Atoo many chefs in the kitchen@ syndrome will control. In other words, the developer knows that it is more difficult to get a large number of people to agree upon an undertaking then just a handful. No matter how strong the merits of the Association=s claims are, and no matter how in the right the Association is, there will always be a number of unit owners that want to bury their heads in the sand and not get involved in a lawsuit. The developers know this. The result is that it will be extremely difficult to educate enough unit owners of the severity of the Association=s claims to get a majority to vote in favor of litigation.

The quorum for a meeting of the members of the association for the purposes set forth in this subsection shall be 33 percent of all members of the association qualified to vote, unless the declaration or bylaws shall provide for a lesser quorum requirement.

The quorum of unit owners necessary to hold a vote on litigation is set here at 33 percent, unless the declaration or bylaws provide a lesser quorum. The developer is the one who drafts the declaration and bylaws, so there will never be a lesser percentage for a quorum. It will likely be very difficult in some instances to get a quorum of 33 percent of unit owners to come to a meeting.
For purposes of determining a quorum, membership interests allocated to declarant units will not be considered in determining a quorum.

This language completely ignores a common reality in the condominium world that our firm experiences on a regular basis. Developers often sell units in a condominium to friends and family members. These individuals may not be employees of the developer, but they always support the developer - usually because the developer sold them their unit on favorable terms. These individuals, commonly referred to as insiders, should not be allowed to influence a vote on whether litigation against the developer should be commenced, but under UCIOA they would have the ability to possibly derail such litigation. This provision does nothing to address this reality.

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March 29, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 7

This is part 7 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 87, subsection (g)

'87(g)
- At any time subsequent to the tolling of the statute of limitations, as set forth in the declarant's reply, the declarant may give written notice terminating the tolling of the statute of limitations. Upon delivery of the termination notice, the association shall be relieved of its obligation to arbitrate under subsection f. of this section, but, provided declarant has satisfied its obligations under subsections b. and d. of this subsection, the association shall be required to satisfy its obligations under subsections h. and I. of this section. The tolling of any applicable statutes of limitation shall terminate 180 days following the commencement of the tolling, unless extended by mutual written agreement.

This provision of Section 87 of UCIOA is troubling. It gives the developer, and only the developer, the control over the tolling of the statutes of limitations. This means that the developer can issue a reply to the Association’s notice of a claim, agree therein to toll the statutes of limitations, then conduct its inspection. Once its inspections are completed, the developer can then terminate the tolling of the statute of limitations, which will relieve the Association of having to arbitrate over its claims, but will not relieve it of having to go through the voting process with its unit owners. This simply allows the developer to limit the tolling of the statute of limitations to the time it takes for the developer to conduct its inspections. The statutes of limitations then begin to run while the Association goes through the burdensome process of getting unit owner approval for a suit. There is no discernible benefit to Associations from this provision.

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March 19, 2007

UCIOA - A Wolf in Sheeps's Clothing - Part 6

This is part 6 of Randy Sawyer's 16 Part series on UCIOA. You can read previous posts here.

Section 87, subsection (f)

'87(f)
- If no settlement of the association's claim, or any part thereof, has been agreed upon, then either the association or the declarant may deliver a written demand within 15 days from the date of the meeting held pursuant to subsection e. of this section for arbitration of the association's claims. The party filing the demand for arbitration shall be responsible for paying any filing fees or escrow deposits related thereto. The arbitration shall be undertaken by and in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect, unless the declarant and the association agree to another form of alternative dispute resolution in lieu of the provisions of this subsection. The arbitration shall be non﷓binding. Arbitration hearings shall be conducted in the county in which the property is located unless the parties agree otherwise. The declarant and the association shall be responsible for their own costs in connection with presenting their respective cases. The cost of the arbitrator shall be equally shared by the parties unless the arbitrator determines otherwise. If neither the declarant nor the association delivers a written demand for arbitration as provided herein, compliance with the terms of this subsection shall not be a precondition to the association's institution of litigation.

The language of subsection (f) of Section 87 of UCIOA has a number of glaring problems
First, who decides when the settlement attempts are completed? If there is no resolution at the end of the meeting required by subsection (e) (see part 5), is the settlement discussion over? Does the Association or the developer say when the settlement discussions are over? Since there is a clock that starts ticking when settlement is over, this issue will likely be disputed since there is no clear direction from the statute.
Second, any attorney who represents condominium associations in construction defect cases knows that the developer will always demand arbitration under this language of Section 87. Arbitration is a very expensive, drawn out process that the developer can use to wear the Association down and force it to waste its limited resources. There is no developer our office has ever dealt with that would ever pass up the opportunity to force an Association, which it knows has limited financial resources, to go through an arbitration process that the developer knows could take years and cost thousands of dollars.
Third, anyone who has represented a client in a complex construction litigation case that was arbitrated under the American Arbitration Rules will tell you that the process is long, cumbersome and extremely expensive. The arbitration rules are intended to be a truncated version of court rules. That means that discovery is severely limited. It is possible that the Association could be denied the opportunity to obtain discovery needed to support its claims. In addition, the arbitration rules call for a panel of one to three arbitrators, who must be paid for every minute they think about the case. In addition, scheduling of hearings and other processes under the rules are at the whim of the panel members= schedules, which means the arbitration could be dragged out for years.
Simply put, although arbitration is touted as a simple, expedited way of resolving disputes, in our experience the exact opposite occurs when arbitration is used in complex construction defect matters.
The language “[t]he cost of the arbitrator shall be equally shared by the parties unless the arbitrator determines otherwise” is very cleverly slipped into Section 87 without an appropriate explanation. Although the provision requires each party to Aequally@ share the cost of the arbitrators, the American Arbitration rules have provisions that allow the panel arbitrators to impose costs on one party if another party refuses to pay. This means that the developer could refuse to pay its share of the arbitration costs and the panel could order that the Association pay those amounts. This should have been more clear in this provision.
In the very short sentence in subsection (f) of Section 87 that reads “[t]he arbitration shall be non﷓binding,” lies the developers= power. It means that even though the Association is obligated to participate in arbitration, and even though that arbitration could last several years and cost the Association hundreds of thousands of dollars in expert fees and lawyer fees and cost, the developer at the end of the day can simply reject the outcome of the arbitration. This means that a developer who is trying to avoid litigation, and who wants to bleed the Association dry of its limited resources, can simply force the Association into the process required by Section 87, drag the Association through years of an arbitration (while the statutes of limitations on the Association=s claims are ticking), then simply reject the outcome of the arbitration and tell the Association to Asue me.@

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November 29, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 5

This is part 5 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1, 2, 3 & 4 here.

Section 87, subsection (e)

Subsection (e) of UCIOA’s Section 87 is further evidence of the vague wording throughout the bill and the hastened procedure created to attempt to deal with what are ordinarily complex issues. Subsection (e) provides:

§87(e) - Within 30 days of receipt of the settlement offer, the association shall notify the declarant of two business dates during the 45-day period following the date of the association's notice, the first of which will not be earlier than 10 days following the date of the association's notice, on which a majority of the executive board will be prepared to meet with the declarant to discuss the association's claims and the settlement offer. The association and the declarant may be represented at the meeting by attorneys and independent consultants.

The first sentence of subsection subsection (e) is poorly worded. This language appears to require the Association to provide two meeting dates within 45 days of its original notice to the developer of the defect claim, which would of course be absurd because by the time the developer’s settlement offer comes, those 45 days would likely have passed.

Also worth noting is that, by the time subsection (e) comes into play, the 180 day tolling period for the applicable statutes of limitation provided under subsection (b) will have run. The timing in subsection (e) above when added to time periods in other subsections will erase the 180 day tolling period. That means that the statutes of limitations on the Associations’ claims will begin to run before the arbitration process required in Section 87 makes any real headway.

In addition, the timing of the procedure up to this point in Section 87 makes no practical sense. Those experienced in construction defect litigation in community properties know that many if not most construction deficiencies in a condominium project develop slowly over a few years and do not become visible until several freeze/thaw cycles have occurred from the changing seasons have taken place. UCIOA’s procedure do not allow sufficient time for the Association to identify all of its claims before requiring negotiation between the Association and the Sponsor/Developer.

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November 27, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 4

This is part 4 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1, 2 and 3 here.

Section 87, subsection (d)

Subsection (d) of UCIOA’s Section 87 is quite troubling. This section requires the developer to submit a written statement setting forth its proposed settlement of the Association’s construction defect claim to the Association within 60 days of the completion of its investigation into the Association’s claims as provided under subsection (c):

§87(d) - Within 60 days after completion of its inspections and testing, the declarant shall submit a written statement to the association setting forth declarant's proposed settlement of the claim, which shall be referred to as the "settlement offer." If the declarant does not deliver the settlement offer within the 60-day period, the association may institute an action without satisfying any other condition of this section.
The glaring problem with subsection (d) is that there is no requirement whatsoever that the settlement offer by the developer must be “reasonable.” In other words, a developer whose only interest is to drag the matter out and bleed the Association of its limited resources could force the Association into the alternative dispute process contained in UCIOA and then offer only $1 to settle the claim. There is no provision that allows the Association to get out of this mandated process in the event the developer reveals its bad faith in this fashion. The Association, after obviously rejecting that offer, would still be obligated to continue on with the arbitration proceedings even with the knowledge that the developer was acting in bad faith.

In addition, it is extremely troubling that the statute makes no effort to include the Sponsor/Developer’s insurance carriers in the settlement process. Given that most Sponsor/Developers are shell companies with no assets that are set up only to handle the specific project in question, a settlement offer from a Sponsor/Developer without support from its insurance carriers is in our experience often meaningless. UCIOA should mandate the involvement of the insurance carriers at the outset of the alternative dispute procedure, since in our opinion this is the only real way of giving the settlement process any hope of succeeding.

Another problem that becomes more clear here is the 180 day tolling of the statute of limitations under subsection (b) of Section 87, discussed in my previous blog post. Under subsections (c) and (d) combined, the developer has had 60 days from the date of its reply to the Association’s notice of a defect claim to conduct its investigation, and then another 60 days from the completion of its investigation to issue a settlement proposal. That is a total of 120 days of the 180 day tolling period already gone.

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November 21, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 3

This is part 3 of Randy Sawyer's 16 Part series on UCIOA. You can read Parts 1 and 2 here.

Section 87, subsection (c)

Subsection (c) of Section 87 of UCIOA gives the Sponsor the right to conduct inspections and destructive testing in connection with any claimed construction defect in the community. The language of this subsection, quoted in full below, has a number of glaring problems:

§87(c) - Upon receipt of the declarant's reply, the association shall, to the extent practicable, make available for inspection and testing by declarant or its agents, all common areas, interiors of applicable individual units and the documents identified in the notice. All inspections and testing, including testing that may cause physical damage to the subject property, shall be at declarant's sole cost and expense, shall be performed during the business week unless the association and declarant agree otherwise, and shall be completed within 60 days from the date of the declarant's reply. The declarant may conduct destructive testing if the association has conducted prior destructive testing related to the defects specified in the association's notice or the parties mutually agree to destructive testing. "Destructive testing" shall mean any act causing substantial physical change in the condition of the premises which would necessitate a repair to restore the premises to the condition that existed prior to the testing. The testing shall be performed to determine the existence, type, extent, or cause of a defect in the design or construction of the development. Acts of repair or maintenance by the association shall not constitute destructive testing. Upon completion of any testing, declarant shall restore the property to the condition that existed immediately prior to the testing.

Problem #1 – The language of subsection (c) is vague - “the association shall, to the extent practicable, make available for inspection and testing by declarant or its agents, all common areas, interiors of applicable individual units and the documents identified in the notice.”

This portion of the provision is sure to cause significant litigation as to its meaning. What exactly does the phrase “to the extent practicable” mean? An Association, despite making every possible effort to allow the developer to inspect those parts of the Association’s property that are the subject of its claims, could find itself being dragged into Court by the Developer for allegedly not making the property available “to the extent practicable.” This could result in costs to the Association that will waste valuable resources.

Problem #2 – Subsection (c) potentially allows the destruction of evidence - “The declarant may conduct destructive testing if the association has conducted prior destructive testing related to the defects specified in the association's notice or the parties mutually agree to destructive testing.”

This language discusses “destructive testing.” Subsection (c), however, completely ignores the effects, if any, of the doctrine of spoliation of evidence. The doctrine of spoliation of evidence generally provides that a party seeking to assert claims against another party cannot destroy or alter the evidence supporting the claim before giving all potentially responsible parties an opportunity to inspect the evidence in order to defend themselves against the claims. Here, the developer is given permission to conduct destructive testing, however there is no provision requiring the developer to place the subcontractors, manufacturers and design professionals it used to build the project on notice of the testing. At this stage, the developer would know the identities of those parties and the Association, more likely than not, would not have that information. Under these procedures, the Association runs the risk of a defense being asserted in later litigation by these parties who will argue that the developer destroyed evidence when it conducted invasive testing, but did not place them on notice so that they could preserve evidence in advance of that testing to defend their interests.

Another major problem arising from the “destructive testing” allowed by the statute is that there is no requirement that the developer place its insurance carrier on notice of the testing activities. In fact, there is no requirement anywhere in the statute that the developer place its insurance carrier on notice of the Association’s claims at all. The same holds true of the developer’s subcontractors’, manufacturers’ or design professionals’ insurance carriers - there is no requirement that the developer place them on notice of any claims or testing either. The developer will have likely been named as an additional insured on some of these parties’ insurance policies. The developer, therefore, will know who the applicable insurance carriers are for the project. If these carriers are not given proper notice, they will likely later disclaim coverage under their policy language, arguing that the developer and the named insureds, such as the developer’s subcontractors, violated the notice requirements of the policy, which typically require that the insured put the carrier on notice of any known claims immediately or within a short time period such as 90 days.

Problem #3 – More vague language - “Upon completion of any testing, declarant shall restore the property to the condition that existed immediately prior to the testing.”

This language is sure to result in significant litigation. Anyone in the construction defect litigation field will admit, and in fact common sense dictates, that once an existing condition on a condominium structure is disturbed, be it the roof, the windows, the siding, etc., it is impossible to restore that part of the structure “to the condition that existed immediately prior to the testing.” This language does nothing more than give the unit owners in a condominium who are unhappy with the appearance of repairs to test cuts and other invasive testing that is necessary for litigation purposes a weapon to pester the Association with demands and even lawsuits over whether the Association failed to ensure that the developer properly repaired invasive testing “to the condition that existed immediately prior to the testing.”

Problem #4 - The Association has no control over repairs by the developer. The language of Subsection (c) of Section 87 provides that the developer must “repair” any invasive testing it conducts. However, the statute gives no control whatsoever to the Association as to what those repairs should be, whether those repairs are sufficient or, once performed, whether the repairs were adequate. The statute provides the Association with no avenue of redress in the event that the developer’s repair is poorly done, or for that matter not done at all.

Problem #5 – More vague language - “Acts of repair or maintenance by the association shall not constitute destructive testing.”

This language of subsection (c) to the extent it talks about “acts of repair or maintenance by the association” is undefined and unclear. What acts would constitute repair or maintenance under this language? What if repairs were necessary to a roof in a condominium and the Association, to ensure the maintenance was done properly, decided to have an expert present to observe the repairs? Does that convert the repairs to destructive testing? What if the expert happens to observe something during the repair that informs the Association of a claim against the Sponsor for the first time. Is the evidence not usable? It is clear that this language will also engender disputes and considerable litigation to flesh out its meaning, litigation that will result in considerable financial burdens to community associations.

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November 1, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 2

This is part 2 of Randy Sawyer's 16 Part series on UCIOA. You can read Part1 here.

Section 87, subsection (b)

Subsection (b) of UCIOA’s Section 87 contains the initial process of the “alternative dispute” procedure imposed upon Associations by the bill. The language is as follows:

§87(b) - Within 30 days of the receipt of the notice from the association, the declarant or its agent may send a written request to investigate the association's claim, which shall be referred to as the "declarant's reply." The declarant's reply shall include a stipulation by the declarant that all statutes of limitation applicable to any claim by the association against the declarant shall be tolled for 180 days or such shorter period of time as set forth in the cancellation notice delivered pursuant to subsection c. of this section. The tolling of the statutes of limitation shall be effective as of the date of the declarant's reply. If the declarant fails to send the declarant's reply within 30 days or fails to stipulate to the required tolling of all applicable statutes of limitation, then the association may institute an action without satisfying any other condition of this section.

Under this subsection, once the developer, called the “declarant,” has received the Association’s notice of a claim for some construction defect in the community, it has the ability to force the Association into the alternative dispute procedures outlined in Section 87 simply by sending a written request to investigate the Association’s claims (called the “declarant’s reply”), so long as the reply includes a stipulation that all applicable statutes of limitations are tolled for 180 days from the date of the reply. The tolling of applicable statutes of limitation was obviously included to create the impression that participation in the process would not jeopardize the Association’s ability to file a lawsuit in the event the process failed. The 180 day time period, however, is wholly inadequate. Anyone who is involved on a regular basis in construction defect claims arising in a community property setting knows that 180 days is far too short a time period to accomplish anything of substance. The statute should have been written to toll the applicable statutes of limitation for the entire life of the alternative dispute procedures that an Association must follow under Section 87.

The 180 time period is one of many examples in the statute that (apparently intentionally) force things to happen quickly before an Association can get its ducks in a row. The old adage “haste makes waste” comes to mind.

Moreover, the tolling provided in the statute only applies to claims against the developer. It does not apply to subcontractors, design professionals, product manufacturers and other potential defendants against whom the Association may have claims. The applicable statute of limitations for these claims would continue to run and could easily run out as to those parties while the Association waits for the alternative dispute procedures required under UCIOA to conclude. Since UCIOA does not require the Sponsor/Developer to disclose to the Association the identities of the various subcontractors, manufacturers, product distributors, design professionals and others involved in the construction of the project who may be liable for defects, the process required by UCIOA is actually very prejudicial to the Association because there is nothing stopping the Sponsor from refusing to disclose the identities of these various parties while the precious time the Association has to pursue those claims runs out during the time it takes for the mandatory procedures under UCIOA to run their course.

If you are interested in more information on this topic or have any questions, please call John Randy Sawyer, Esq. at (609) 895-7349, or email him at jsawyer@stark-stark.com

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October 23, 2006

UCIOA – A Wolf In Sheep's Clothing – Part 1

On February 23, 2006, the Uniform Common Interest Ownership Act (UCIOA) was voted out of the Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. That same day, the bill was received by the Senate and referred to the Senate Community and Urban Affairs Committee. The bill has not yet come out of consideration by the Senate Community and Urban Affairs Committee.

UCIOA has been touted by its supporters as a “first of its kind” that will help protect the rights of homeowners living within a community association, while also helping community associations operate more efficiently. The bill will purportedly consolidate various laws applicable to New Jersey's common interest communities, will provide numerous protections for owners in such communities, and will clarify the powers of community association boards. According to one of the bill’s primary sponsors, Assembly-member Wilfredo Caraballo:

“This bill . . . establishes a consistent set of board powers and limitations that will apply to all associations, thereby ending confusion over the rights of boards. Some of the issues addressed are the ability to borrow money, grant easements over the common property, and adopt rules and regulations governing certain types of negative behavior. Unit owners will benefit from this new-found clarity that addresses the powers and limitations of the homeowner association boards that are elected.

Sounds great, right? So what’s the problem? The problem is that those who live in planned communities, or are considering purchasing a home within such a community in New Jersey, should look past the rhetoric and examine the motivations behind the supporters of the bill. When one considers that organizations such as the New Jersey Association of Home Builders, large developers that build condominium and other community developments in New Jersey, and law firms that represent large developers, are all lining up to sing UCIOA’s praises, a prudent mind should question whether the bill is, in reality, a wolf in sheep’s clothing.

Stark & Stark’s Construction Litigation Department has carefully analyzed UCIOA in light of our experience handling construction litigation cases on behalf of condominium and homeowner associations throughout the State of New Jersey. Contained deep within UCIOA’s pages are two sections, Sections 87 and 88, that greatly restrict a community association’s ability, in fact its very right, to avail itself of the court system of our State to sue the builder of the community for damage caused by construction defects. What follows in this blog and several to come is a line by line analysis of Sections 87 and 88 of UCIOA with our thoughts on the vagaries of the language itself and the overall restrictive effect of these sections of the bill:

Section 87, intro paragraph

The first paragraph of UCIOA’s Section 87 establishes the requirement that the Association go through a lengthy and cumbersome “dispute resolution process,” before filing “any form” of construction defects litigation, with the following language:

§87. (New section) Except for applications for emergent relief, prior to the commencement of any form of construction defects litigation on behalf of an association against a declarant or any members of the executive board appointed by the declarant, the following alternative dispute procedure shall be followed:”

Right out of the gate Section 87 takes away an Association’s choice to file litigation against a developer for “any form of construction defects litigation” without first jumping through the hoop of an alternative dispute procedure. The language used in this intro paragraph, moreover, is apparently intentionally drafted to be as broad as possible. Specifically, the term “any form of construction defects litigation” is not defined and amounts to a significant ambiguity in the statute. Considerable litigation is sure to occur over exactly what types of claims fall within this language. Litigation community associations cannot afford. Obvious cases involving defectively constructed roofs, water penetrating through improperly installed exterior cladding, etc., may clearly fall within the category of “any form of construction defects litigation.” What is not so clear, however, is whether cases involving, for example, a breach of warranty for windows that do not meet required specifications, product liability claims for damage caused by faulty construction components such as defective pipes, roof shingles, etc., or design claims arising from improper structural designs or roof designs, also fall within the category of “any form of construction defects litigation.” Are these types of claims “construction defects” claims, or are they design defect claims, product defect claims, or something else?

If claims such as design defect claims and product defect claims are not “construction defect” claims, what happens in a case that involves both (1) claims that fall within the statute’s category of “any form of construction defects litigation,” and (2) claims that do not fall within that category? Must the Association pay for two separate, ongoing, adversarial procedures – one alternative dispute resolution procedure against the developer under UCIOA and a separate litigation against design professionals and product manufacturers in state court? The statute also makes no reference whatsoever to claims against subcontractors who worked for the developer when the community was built. Would an Association have to file a separate lawsuit against subcontractors while going through the alternative dispute resolution process with the developer outlined in UCIOA?

The expense of these approaches would likely be prohibitive to most Associations. The question is, was this intentional?

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July 9, 2006

UCIOA - Developer Transition and Arbitration

During the time the developer controls the board, it can force a transition and obtain a release through creation and manipulation of a transition committee. The developer can force that committee to do a construction study within only 120 days at the association's expense. It is our view that a comprehensive transition study cannot be done within 120 days since defects and deficiencies often do not surface until after water has had several years to work its way into or out of walls or substrates and often it takes several freeze and thaw cycles for problems to appear. Nevertheless, a release can actually be signed by this transition committee which is arguably binding on the association, before the association is even controlled by the unitowners. The developer can force this committee into mediation with the AAA, and then arguably force the association into more "non-binding" arbitration as described above. As noted above, if the non- binding arbitration is unsuccessful, the association is back to the owner- approval of litigation again. All of these costs are borne by the non-developer owners.

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July 7, 2006

Uniform Common Interest Ownership Act (UCIOA) – New Jersey

The proposed Uniform Common Interest Ownership Act (UCIOA) statute contains restrictions on any community association that wants to be able to sue a developer for construction defects and will have a devastating impact on our construction litigation practice.

On February 23, 2006 the Uniform Common Interest Ownership Act (UCIOA) was voted out of The Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. The bill will now go to the Senate for its consideration.

While the Bill was intended, in part, as a measure that would be helpful to owners of units in condominiums, cooperatives and single family home communities governed by a homeowner's association, the Bill imposes preconditions on community associations needing to bring suit for construction and design deficiencies. In pertinent part, before any association can start an action for construction defects, the association has to provide written notice to the developer of its causes of action. The developer has 30 days to investigate, and 60 days to test to see if it agrees with the association's description of the nature and cause of the deficiency. 60 days after the testing, the developer must provide a settlement offer. Within 30 days, the association has to provide at least 2 dates for a meeting. If there is no settlement, either party can demand arbitration; however, the arbitration is "non-binding". Either party can cut off the arbitration at any time or prolong it (even if it intends to reject the results of the arbitration after forcing the other side to spend tens or hundreds of thousands of dollars on expert fees and counsel fees). The Association still cannot sue unless half of its members vote in favor at a meeting, with a 33% quorum-- unless a lower amount is authorized in the by-laws (which is not typically the case) and unless each owner (even in a 500 unit condominium) gets, via mail, at the Association's cost, a copy of: (1) a statement of claims and defects; (2) the developer's settlement offer; (3) the arbitrator's findings (if any); (4) a statement that the suit may not recover enough money; (5) a statement of the estimated litigation costs; (6) a copy of the lawyer's fee agreement; (7) and anything else the Association thinks is important.

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