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February 2019

Condominium Conversions Defect Actions Under California Law: Not Your Run-of-the-Mill Defect Case

Condominium conversions may present developers and contractors with both additional defenses and potential liability pitfalls when a defect action is subsequently alleged by an HOA. On the plus side for the converter, unlike new residential construction projects, California Civil Code Section 896, which is commonly referred to as “SB 800,” or the “Right to Repair Act,” does not apply. This means that violation of the performance standards for construction components contained in SB 800 is not an independent basis for recovery in a suit brought by the HOA.

Further, statute of limitations defenses are commonly available to developers and contractors in conversion cases where the original construction is more than ten years old. California Code of Civil Procedure Section 337.15 sets forth a ten-year statute of repose limiting claims for latent defects. In many, if not most cases, the converted project will have been used as rental property for several years before its conversion to condominiums. This means that often, while any construction associated with the conversion may only be a couple years old when the HOA sues, the original construction may have been completed more than ten years prior. If the HOA’s claims relate to the ten-plus year old original construction, as opposed to conversion work, they are likely barred.

HOA counsel often try to skirt this statute of limitations defense by alleging that the converting developer should have identified and remedied or disclosed defects in original construction during pre-conversion investigation. Likewise, they argue that contractors who see defects in original construction while performing conversion work have an obligation to point out the defects, not cover them up. However, this requires the HOA to show that the condition actually existed such that it could have been identified at the time of conversion, which is often difficult for the HOA to prove.

On the other hand, conversion cases may pose a hornet’s nest of potential risks for developers, particularly where the developer (or its proxy) maintains control over the HOA board of directors for a period of time following conversion. If a suit for defects related to original construction was actionable during the period when the developer controlled the HOA board, it could be held accountable for failing to take action against the original builder, where the claims have subsequently been barred by the statute of limitations. Likewise, the HOA will commonly allege that defects which would otherwise be barred by the ten-year statute of limitations are actually related to the developer-controlled HOA’s failure to properly maintain the project, or provide adequate reserve budget funding to replace aging components after the conversion. Such claims can create serious insurance coverage concerns for the converter.

This is just the tip of the iceberg when it comes to potential conversion defect claim pitfalls for developers and contractors. HOA claims brought as to condominium conversion projects pose much more complex legal issues than seemingly similar cases related to new construction, even where the two projects may have identical defects. Therefore, it is vital that developers and contractors act with extra vigilance when faced with a claim by the HOA on a conversion project. Failure to do so can result in the developer or contractor facing serious insurance coverage issues, and waiving defenses which might otherwise have been available.