CONDOMINIUM BUDGETS AND DEFECT WARRANTY CLAIMS IN THE DISTRICT OF COLUMBIA

Understanding and identifying construction defect warranty claims is an important part of budgeting for the first unit owner-controlled condominium association board of directors. It is “preventative medicine” promoting healthy condo association finances.

Warranty Claims and the Effect on Condominium Association Finances and Budgets

The District of Columbia Condominium Act contains a statutory warranty known as the “warranty against structural defects.” The warranty applies to construction defects in both condominium common elements and each condominium unit. The warranty requires condominium developers to repair “structural defects” and damage caused by the “structural defects.”

If a condominium developer fails to repair a covered structural defect, a condominium association or unit owner may pursue a structural defect warrant claim, either in a court of law or by filing an administrative claim with the Mayor of the District of Columbia.

Understanding construction defect warranty claims is an important part of budgeting for the first unit owner-controlled condominium association board of directors. The initial developer-created budget and reserve fund is calculated on the assumption that condominium facilities are constructed free of defects with a normal life expectancy (e.g., a “25-year roof”). Making such an assumption can be costly. Hidden construction defects in the original construction can cause unanticipated repair and replacement expenses that wreak havoc on in association’s financial condition. Accordingly, funds must be earmarked early on for a comprehensive engineering evaluation to identify construction defect warranty claims so they can be brought to the attention of the condominium developer for repair before warranties expire. This is basic “preventative medicine” for associations finances.

This article provides a general overview of structural defect warranty claims in the District of Columbia.

“Structural Defects” Defined

The warranty applies to “structural defects,” which are very broadly defined. Structural defects are not just construction defects in the supporting structure of the building. Rather, a structural defect can be any condition that:

“(A) Reduces the stability or safety of unit or common elements below standards commonly accepted in the real estate market,” or

(B) Restricts the normally intended use of all or part of the common elements of a unit and which requires repair, renovation, restoration, or replacement to serve the purpose for which it was intended.”

An example of a structural defect would be a roof leak in a newly constructed condominium. This would be a “structural defect” because it restricts the “normally intended use” of a roof which is to keep water out of the building and needs repair “to serve the purpose for which it was intended.”

A structural defect is “presumed” to exist as to any building code violation that is harmful to health or safety of unit owners.

Structural Defect Warranty Period

The warranty period is the time within which a structural defect must exist for the warranty against structural defects to apply. The warranty period for an individual unit is two years from the date the developer conveys the unit to the purchaser. The warranty period for structural defects in the common elements is also two years and will typically run from the later of: (1) the date the developer conveys the first unit in the entire condominium; or (2) the date of the completion of the common element in question.

Statute of Limitations on Structural Defect Warranty Claims

The statute of limitations for bringing a breach of warranty claim in a court of law or in a non-judicial, regulatory, or administrative proceeding is 5-years running from the commencement of the applicable warranty period in question.

Court Enforcement

If the developer refuses to repair a structural defect covered by the warranty, a condominium association or unit owner may file a lawsuit in the Superior Court of the District of Columbia to enforce the warranty and seek a damages award. This would include the cost of repairing the structural defects and resulting damage caused by the structural defects. Additionally, “attorney fees and costs” may be awarded to an association or unit owner who pursues a successful breach of warranty claim in a court of law.

Administrative Enforcement

Condominium Developer’s Warranty Security

The District Of Columbia administers a Warranty Security Program to assure compliance with the warranty against structural defects. Under this program, a condominium developer is required to post a bond, letter of credit or other form of security acceptable to the Mayor of the District of Columbia (“Mayor” or “Mayor’s Office”) that can be drawn upon, if necessary, to satisfy costs that arise from the developer’s failure or inability to fulfill its warranty obligations to repair structural defects (the “warranty security”). The warranty security must be delivered to the Mayor’s Office and must name the Mayor as beneficiary in an amount equal to 10% of the estimated construction or conversion costs.

If the developer fails to correct structural defects in the common elements or individual units, a condominium association or unit owner (“claimant”) can make a structural defect warranty security claim with the Mayor’s Office, asking it to secure and release funds from the developer’s warranty security to be used to pay the cost of repairing the structural defects and other permissible damages.

Bonds & Letters of Credit

Condominium developers typically satisfy their warranty security obligation by purchasing a bond or letter of credit. Generally, a bond is issued by an insurance company and a “letter of credit” is issued by a financial institution. These legal documents require payment to the Mayor or her/his designee if the developer fails to fulfill its obligation to repair covered structural defects. In short, a bond or letter of credit is an alternative, but limited, source of funds backed by an insurance company or financial institution that serves as security for the developer’s fulfillment of its warranty obligations.

Where and How to Make a Claim Against the Developer’s Warranty Security

The Warranty Security Program is administered for the Mayor by the agency known as the Rental Conversion and Sales Division of the District of Columbia Department of Housing and Community Development’s Housing Regulation Administration (“RCSD”). Structural defect claims made against a condominium developer’s warranty security (“warranty security claims”) are filed with and handled by RCSD.

A claimant must give the condominium developer 30 days prior written notice of its intent to file a warranty security claim. During this 30-day period the condominium developer has an “opportunity to respond” to the condominium association or unit owner claimant. If unresolved after 30 days prior notice, a claimant may file its warranty security claim with RCSD.

Mayor’s Decision on Structural Defect Claim

After receiving the warranty security claim and the developer’s response, RCSD, behalf of the Mayor, will decide whether the claimant has satisfied the standards for proving a structural defect claim (a “perfected claim”). If the structural defect claim is determined to be “perfected,” RCSD will determine the amount of money to be paid from the developer’s warranty security to cover the cost to repair or replace the structural defects and any resulting damages.

Second Bite at the Apple to Perfect a Claim

An initial determination by RCSD that a structural defect claim is “not perfected” is not fatal to a structural defect claim. A claimant may refile the warranty security claim “based on additional or different information.”

Reduction of the Developer’s Warranty Security After 2 Years

If a claimant waits too long to pursue a warranty security claim, there may be no funds left to make a claim against. The developer can begin reducing the amount of its warranty security beginning 2-years after it conveys the first condominium unit. However, the developer’s right to reduce and eventually release its warranty security terminates once a structural defect claim has been filed with the Mayor or in a court of law.

Conclusion: Warranty Investigations and Warranty Claims are Preventative Medicine for Association Finances

All condominium associations should have a transition construction defect / deficiency study performed by an engineer or other qualified construction consultant as soon as possible after the unit owners take control of the association. The purpose of the study is to identify, in a written report, construction defects so that they can be brought to the developer’s attention while construction defect warranty claims, and other non-warranty construction defect claims, are still enforceable. This is basic “preventative medicine” for Washington DC condominium association finances because taking timely action to identify “structural defects” forces the developer to make repairs under its warranty or have its warranty security funds released by the Mayor’s Office to cover the cost of those repairs.

NOTE ABOUT AUTHOR:

Nicholas Cowie is a member of the Cowie Law Group, P.C., a firm serving condominium and homeowners associations throughout Washington DC and Maryland. In addition to providing general counsel services, Mr. Cowie is known for handling construction defect warranty claims on behalf community associations. Mr. Cowie has drafted and promoted a significant amount of legislation adopted into law that currently protects the rights of associations in construction defect disputes with developers. Mr. Cowie has also been involved in some of the major legal cases that have shaped the law regarding condominium construction defects, and he established the “construction law” course at the University of Baltimore School of law, which he taught for many years as an adjunct professor of law.

A similar version of this article appeared in the Financial Wellness issue of the October 2023 Quorum, a publication of the Washington Metropolitan Chapter Community Associations Institute. See THE WARRANTY AGAINST STRUCTURAL DEFECTS IN THE DISTRICT OF COLUMBIA, by Nicholas D. Cowie.