CONDO ASSOCIATIONS AND CONSTRUCTION LIENS

Posted on September 20, 2013September 20, 2013 by Edward Garber

Condominium associations hire contractors for capital improvements and repair / restoration work to common elements (painting, balcony/concrete/stucco restoration or repairs, etc.). When a condominium association hires a contractor to provide labor, services, or materials to the condominium, it needs to understand that nonpayment can lead to the contractor liening–recording a construction lien–the condominium units in the condominium.

Florida Statute s. 718.121(2) maintains: “Labor performed on or materials furnished to the common elements are not the basis for a lien on the common elements, but if authorized by the association, the labor or materials are deemed to be performed or furnished with the express consent of each unit owner and may be the basis for the filing of a lien against all condominium parcels in the proportions for which the owners are liable for common expenses.”

Furthermore, s. 718.121(3) maintains: “If a lien against two or more condominium parcels becomes effective, each owner may relieve his or her condominium parcel of the lien by exercising any of the rights of a property owner under Chapter 713 [Florida’s Lien Law], or by payment of the proportionate amount attributable to his or her condominium parcel. Upon payment, the lienor shall release the lien of record for that condominium parcel.”

Now, what does this mean? First, it means that when an association hires a contractor to perform construction-related work, the work is deemed authorized by all unit owners. Second, it means that because all unit owners are deemed to consent to the work, the contractor, if unpaid, can lien each condominium parcel / unit. Third, it means that the lien against each unit will be in the proportionate amount that the owner is liable for common expenses. And, last, it means that each owner has options to discharge the lien from his/her condominium unit- the owner can pay his/her proportionate share to discharge the lien or the owner can transfer the lien to a bond or other security.

If a contractor is not paid by the association and elects to lien and move forward with a lien foreclosure lawsuit, the contractor is not required to sue each individual owner. Rather, the contractor can simply sue the association since the association is deemed to represent the unit owners’ interests. See Trintec Construction, Inc. v. Countryside Village Condominium Association, Inc., 992 So.2d 277 (Fla. 3d DCA 2008) (finding that unpaid roofing contractor that filed lien foreclosure action against association was not required to join all of the unit owners in the action); Four Jay’s Construction, Inc. v. Marina at the Bluffs Condominium Association, Inc., 846 So.2d 555 (Fla. 4th DCA 2003) (finding that balcony contractor properly sued the association in breach of contract action as a class representative on behalf of the owners).

Contractors that are hired by associations need to understand their lien rights in the event of nonpayment. And, associations that hire contractors need to understand their options in the event they are involved in a payment dispute with a contractor so that owners can be best advised.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

PROPERTY (INCLUDING ALL-RISK) INSURANCE POLICIES AND THE EFFICIENT PROXIMATE CAUSE DOCTRINE

Posted on September 19, 2013September 19, 2013 by Edward Garber

An important new insurance coverage case came out dealing with “all risk” property insurance policies (such as homeowners or builders risk policies). The case, American Home Assurance Co. v. Sebo, 38 Fla. L. Weekly D1982a (2d DCA 2013), discusses when coverage applies when both excluded and covered perils contribute to a loss / damage. The case also discusses the application of anti-concurrent cause language in the policy. These are both important insurance coverage issues.

In this case, an owner purchased a four-year old home in 2005 and obtained an “all risk” homeowner’s property insurance policy. The policy was not a standard form policy but a manuscript policy specifically created for purposes of the house. Almost immediately after the purchase, rainwater started to intrude in numerous locations throughout the house. Then, Hurricane Wilma struck causing further damage to the house. The damage to the house was so extensive that it could not be repaired and the house had to be demolished.

The owner submitted an insurance claim to its carrier, but the carrier denied coverage except for tendering $50,000 based on language in the policy that provided for $50,000 worth of coverage for ensuing (resulting) damages caused by fungi, wet or dry rot, or bacteria. (This is often referred to as the mold exclusion and some policies allow for ensuing damages caused by mold up to a specified amount.)

The owner sued the sellers, the contractor, and the architect (arguing defective construction) and settled with each of them. The owner also sued its property insurance carrier in a declaratory action for insurance coverage.

An all risk policy, such as the policy in this case, starts out covering all risks except the numerous risks or perils that are excluded. As the Court explained:

“Property insurance is a contract between the insured and the insurer to cover property losses that are either caused by certain perils that are specifically named in the policy or are caused by “all perils” except for those specifically excluded from coverage. These perils are usually physical forces such as fire, rain, and wind.” Sebo, supra.

In this policy (like most property insurance policies), there was a faulty workmanship / design exclusion where the policy did not cover loss caused by faulty, inadequate, or defective planning, design, specifications, workmanship, repair, construction, etc.

The coverage issue in the case centered on the undisputed fact that more than one cause (excluded and covered) contributed to the owner’s loss or damage, such as faulty construction, rain, and wind. When this occurs, what legal doctrine applies to determine whether the loss is covered?

The owners wanted the legal doctrine known as the concurrent cause doctrine to apply. Under this doctrine, insurance coverage applies “when multiple perils act in concert to cause a loss, and at least one of the perils is insured and is a concurrent cause of the loss, even if not the prime or the efficient cause.” Sebo, supra. In other words, if faulty workmanship (not covered) and rain (likely covered) concurrently contribute to a loss, the loss would be covered under the concurred cause doctrine.

The insurance carrier wanted the legal doctrine known as the efficient proximate cause doctrine to apply. Under this doctrine, “the finder of fact, usually the jury, determines which peril was the most substantial or responsible factor in the loss. If the policy insures against that peril, coverage is provided. If the policy excludes that peril, there is no coverage.” Sebo, supra. In other words, if faulty workmanship (not covered) is the most substantial factor in the loss, the loss would not be covered.

The trial court applied the concurrent cause doctrine. However, on appeal, the Second District reversed finding that the efficient proximate cause doctrine should apply to determine whether coverage exists. (For more on the application of the efficient proximate cause doctrine to all-risk property insurance policies, check out this article and this article.)

The Court additionally discussed what is known as anti-concurrent cause language that exists in many insurance policies. An example of this language in the policy would be under the pollution exclusion which provided that the policy did not “cover any loss, directly or indirectly, and regardless of any cause or event contributing concurrently or in any sequence to the loss” caused by pollutants / contamination. Sebo, supra. Thus, based on this language, the concurrent cause and efficient proximate cause doctrines would be moot based on this anti-concurrent cause language. The Court dismissed this argument because the anti-concurrent cause language was not specifically incorporated into the faulty workmanship exclusion whereas it was specifically incorporated in other exclusions such as the pollution exclusion. (Importantly, other states have found this language to be unenforceable so there may be an argument as to the enforceability down the road that the Court did not delve into but noted.)

All-risk property insurance policies and named-peril policies are complicated. When a loss occurs, it is important to understand your property insurance policies in order to present claims and arguments for coverage. The Sebo case’s application of the efficient proximate cause doctrine is an important case because it is not uncommon that both weather-related issues and defective workmanship / design related issues contribute to the loss. This raises the “what came first, the chicken or the egg argument” because when this issue is tried by a jury, the insurer will likely argue that the weather-events would not have contributed to the loss if not for the defective workmanship / design so the defective workmanship / design must have been the substantial factor. Conversely, the owner will likely argue that he purchased a four-year old home and the defect issues did not surface until severe weather-related events, so the weather-related events must have been the substantial factor.

A SURETY’S RIGHT TO DEMAND COLLATERAL SECURITY

Posted on September 17, 2013September 17, 2013 by Edward Garber

Before payment and performance bonds are issued by a surety, the bond principal-contractor is required to execute an indemnity agreement with the surety that is often personally guaranteed. The indemnity agreement is naturally written in favor of and for the benefit of the surety that is issuing bonds that are typically in the amount of the contracts that are awarded to the contractor. Contractors that execute indemnity agreements need to understand what the surety’s rights and remedies are in the event performance and/or payment bond claims are made that raise a concern to the surety. Not understanding these rights could put the contractor in a losing situation with the surety.

The recent Southern District of Florida opinion in Developers Surety and Indemnity Co. v. Bi-Tech Construction, Inc., 2013 WL 4563657 (S.D.Fla. 2013), exemplifies a surety’s options against its bond principal-contractor. In this case, the contractor was awarded a contract by a public owner to install a new generator system. The contractor was required to obtain public performance and payment bonds. Shortly after construction commenced, a payment dispute arose between the contractor and the public owner. The public owner refused to pay the first full payment application amount because it originally over-estimated the amount of trenching that the contract would require. The contractor contended that it bid its work on its own assessment of the trenching and needed to be paid in full to cover project costs. The contractor further argued that it could not complete the project without full payment; the public entity therefore elected to terminate the contractor from the project.

The public owner and the contractor’s surety entered into discussions as the public owner must have submitted a performance bond claim to the surety. They agreed that the public owner would pay the contractor in full and the contractor would be reinstated to complete the work. The surety then issued the contractor a memorandum of understanding that outlined the terms of its agreement with the public owner and needed the contractor to sign off on the memorandum of understanding. The contractor, however, refused because it objected to certain provisions in the memorandum of understanding that would have, among other things, required the public owner’s payments to the contractor to be held in a third party trust account until the surety authorized the disbursement of the funds.

Meanwhile, subcontractors to the contractor remained unpaid. The electrical subcontractor was owed approximately $172,000 and filed a suit against the contractor’s payment bond. Additionally, another subcontractor was owed approximately $8,000. The surety decided to create a reserve account and deposited $205,000 into that account. The surety demanded that the contractor also deposit $205,000 into the reserve account as collateral security. The contractor refused prompting the surety to file suit against the contractor.

While the surety’s lawsuit against the contractor was pending, the surety immediately moved for a preliminary injunction asking the Court to order the contractor to provide the surety $205,000 as collateral security to be deposited into the reserve account.
“In order to obtain a preliminary injunction, the plaintiff [surety] must establish [the following elements:] (1) a substantial likelihood that it will prevail on the merits of the underlying cause of action; (2) a substantial threat that it will suffer irreparable injury if the injunction is not granted; (3) that the threatened injury to the plaintiff outweighs the threatened harm the injunction may have on the defendant; and (4) that the public interest will not be adversely affected by granting the preliminary injunction.” Bi-Tech, 2013 WL at *3. If the Court decides that an injunction is appropriate, it has the discretion to determine the amount of the bond the plaintiff (in this case, the surety) will have to post as security to cover damages in the event the injunction is wrongfully issued. Id. at *5 quoting Fed.R.Civ.P. 65.
The Court, in determining whether the elements for injunctive relief were satisfied, analyzed the terms of the indemnity agreement. (The Court would also do this when determining whether the contractor breached the terms of the indemnity agreement.) The indemnity agreement contained few applicable provisions:

“-Indemnitor [contractor and guarantors]…shall indemnify and hold harmless Surety from and against any and all liability…which Surety may sustain or incur by reason of or in consequence of the execution and delivery by Surety of any Bond on behalf of Principal [contractor].
-Indemnitor shall, immediately upon demand and whether or not Surety shall have made any payment therefor, deposit with Surety a sum of money equal to such reserve account and any increase thereof as collateral security on such Bond…If Indemnitor shall fail, neglect or refuse to deposit with Surety the collateral demanded by Surety, Surety may seek a mandatory injunction to compel the deposit of such collateral together with any other remedy at law or in equity the Surety may have.
-Principal and Indemnitor…agree to hold all money and all other proceeds for the Obligation, however received, in trust for the benefit of Surety and to use such money and other proceeds for the purposes of performing the Obligation and for discharging the obligations under the Bond, and for no other purpose until the liability of the Surety under the Bond is completely exonerated.”
Bi-Tech Construction, 2013 WL at *1.

Based on these provisions, the Court maintained that the surety has the contractual right to create the reserve account and demand for the contractor to post collateral security in the reserve account equal to the amount deposited by the surety. This contractual right exists irrespective of whether the contractor disputes the legitimacy of claims made against the surety’s bond. Once the Court recognized this contractual right, it recognized that the surety could suffer irreparable injury because it would be unsecured against claims (hence, the reason why the indemnity agreement allows the surety to request collateral security). Finally, finding that an injunction was appropriate, the Court did not require the surety to post a bond.

Indemnity agreements with sureties contain very similar provisions as the ones referenced above. The provisions applicable for purposes of the preliminary injunction are contained in many indemnity agreements which, among other things, give the surety the right to request collateral security. It is important to understand rights and remedies in connection with the indemnity agreement to hopefully avoid any situation or dispute where the surety pursues recourse against the bond principal-contractor and the guarantors that executed the indemnity agreement.

“ACTUAL DAMAGES” UNDER FLORIDA’S DECEPTIVE AND UNFAIR TRADE PRACTICES ACT

Posted on September 13, 2013September 13, 2013 by Edward Garber

Under Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”), a party can only recover in principal what the statute refers to as “actual damages.” See Fla. Stat. s. 501.211(2) (“In any action brought by a person who has suffered a loss as a result of a violation of this part, such person may recover actual damages, plus attorney’s fees and court costs….”) However, the statute does not define the term actual damages and, thus, parties need to analyze Florida caselaw to understand the meaning of actual damages. This is important so parties know the damages covered under FDUTPA. A claim under FDUTPA is sometimes asserted in a construction-related dispute. Sometimes, it is asserted if a party is seeking an avenue to potentially recover attorneys’ fees.

Florida courts (or federal courts interpreting Florida law) have maintained that “actual damages” refer to the “difference in the market value of the product or service in the condition it was delivered and its market value in the condition in which it should have been delivered according to the contract of the parties. A notable exception to the rule may exist when the product is rendered valueless as a result of the defect-then the purchase price is the appropriate measure of damages.” Rollins, Inc. v. Butland, 951 So.2d 860, 869 (Fla. 2d DCA 2006) quoting Rollins, Inc. v. Heller, 454 So.2d 580, 585 (Fla. 3d DCA 1984).

This is similar to benefit of the bargain damages – the market value of the product represented minus the market value of the product delivered. See Gastaldi v. Sunvest Resort Communities, LC, 709 F. Supp. 2d 1299, 1304 (S.D.Fla. 2010).
Based on the way Florida cases define actual damages under FDUTPA, a party needs to prove its damages in accordance with this definition by analyzing the market value of the product represented versus the market value of the product actually received / delivered.

Examples of cases discussing the measure of actual damages under FDUTPA are as follows:

– Rollins v. Heller, 454 So.2d 580, 585 (Fla. 3d DCA 1984) – measure of damages would be the market value of the alarm system and the services alarm company agreed to provide [as represented] minus the market value of the alarm system and services actually provided [as delivered];

–Ft. Lauderdale Lincoln Mercury, Inc. v. Corgnati, 715 So.2d 311, 315 (Fla. 4th DCA 1998) –measure of damages would be the market value of the used BMW that was never in an accident and with a remote infrared opener [as represented] minus the market value of the BMW which had been in an accident and without remote infrared opener [as delivered];

– H&J Paving of Fla., Inc. v. Nextel, Inc., 849 So.2d 1099, 1102 (Fla. 3d DCA 2003) –measure of damages “would be the value of the product at the time of the sale based upon a useful life of approximately eight years [as represented] and [minus] the value of the product which would become obsolete within a few years [as delivered];”

– Gastaldi v. Sunvest Resort Communities, LC, 709 F. Supp. 2d 1299, 1307 (S.D.Fla. 2010)– measure of damages would be the difference in the market value of the condominium units with the condominium having a luxury sports club in 2009 [as represented] minus the market value of the condominium units without the condominium having a luxury sports club in 2009 [as delivered].

Notably, actual damages under FDUTPA does not include consequential-type damages (or damages other than those established by the measure provided above). See Dorestin v. Hollywood Imports, Inc., 45 So.3d 819, 824-25 (Fla. 4th DCA 2010) (FDUTPA does not allow for consequential damages or any other damages outside of actual damages); Orkin Exterminating Co., Inc. v. DelGuidice, 790 So.2d 1158, 1162 (Fla. 5th 2001) (actual damages do not include actual consequential damages). For example, lost profits or interest on payments would not be a recoverable consequential damage. See Rodriguez v. Recovery Performance & Marine, LLC, 38 So.3d 178 (Fla. 3d DCA 2010) and Siever v. BWGaskets, Inc., 669 F.Supp.2d 1286, 1294 (M.D.Fla. 2009).

Understanding actual damages in a FDUTPA claim is important prior to asserting a claim so that a party knows what is recoverable and what is not recoverable under FDUTPA. It is also important so that a party knows how to prove actual damages.

For more information on FDUTPA, please see:

https://floridaconstru.wpengine.com/attorneys-fees-under-a-floridas-deceptive-and-unfair-trade-practices-act-and-b-offers-of-judgment/

CGL POLICIES AND THE “YOUR PRODUCT” EXCLUSION

Posted on September 10, 2013September 10, 2013 by Edward Garber

Understanding exclusions in insurance policies is important to understand what is and what is not covered under the policy. The recent case of Liberty Mutual Fire Insurance Co. v. MI Windows & Doors, 38 Fla. L. Weekly, D1890a (Fla. 2nd DCA 2013), discusses the “your product” exclusion that is found in CGL policies.

In this case, MI is a manufacturer of sliding glass doors. It sold its doors to All Seasons which installed the sliding glass doors in condominium projects. In some of the condominiums, All Seasons manufactured and installed transoms along the top of the sliding glass doors. Condominium associations sued MI and All Seasons when the condominiums experienced damage from tropical storms and hurricanes. MI settled the lawsuits. It then sued its CGL carrier to recover consequential damages and for the costs of replacing defective sliding glass doors in the condominiums.
The CGL carrier argued at the trial level that the “your product” exclusion barred coverage for MI’s damages to its products, i.e., sliding glass doors. The trial court found that the “your product” exclusion did not apply to the doors with transoms because adding the transoms to the top of the sliding glass doors significantly changed the doors. Thus, the doors were no longer MI’s product.

The “your product” exclusion in MI’s CGL policy provided that the insurance did not apply to:

“Damage to Your Product. ‘Property Damage’ to ‘your product’ arising out of it or any part of it.”

On appeal, the Second District reversed finding that “[t]he addition of transoms to the sliding glass doors did not fundamentally change the nature and function of those doors.” MI Windows & Doors, supra. In other words, because the sliding glass doors continued to operate as sliding glass doors even with the addition of the transoms, the doors remained MI’s product. For this reason, the Second District held that the “your product” exclusion applied to bar damages to replace the doors.

In MI Windows & Doors, the Court found that if alchemy alters the original product, then the “your product” exclusion may not apply based on cases outside of Florida that discuss this exclusion. Importantly, however, the Court footnoted Auto-Owners Ins. Co. v. American Building Materials, Inc., 820 F.Supp.2d 1265, 1272 (M.D.Fla. 2011), where the Middle District of Florida also discussed this exclusion. The Middle District in this case maintained that drywall that was incorporated into a house was not barred by the “your product” exclusion based on the language of the exclusion because the drywall, once incorporated, became real property and the exclusion did not apply to real property. Because this case or issue was not framed on appeal in MI Windows & Doors, the Court did not apply this case to the facts.

The “your product” exclusion can be found in CGL policies to bar coverage. Understanding the exclusion as written in the policy (as well as other exclusions) is important so that coverage is understood before or when a dispute arises.

CARVING OUT EXCEPTIONS IN RELEASES

Posted on August 16, 2013August 16, 2013 by Edward Garber

Releases in consideration for progress payments are a routine occurrence in the construction industry. The release language will typically include a release of lien and bond rights through a certain date and it may be broad enough to include a release of other rights through that date, such as a release of any and all claims, damages, costs, fees, amounts, etc. that are known about or incurred through the date of the release.

Contractors and subcontractors that have pending or disputed additional / extra work items and/or pending or disputed claims (whether for additional / extra work, delay, lost productivity or inefficiency, acceleration, etc.) need to be sure to carve out the subject matter of the pending items from the release language. It is ok if the specific amount of the carve-out for the additional / extra work or claim is not known as long as the carve-out clearly reflects that the entity is not releasing the amounts associated with the item.

If an owner (in the case of a contractor) or a contractor (in the case of a subcontractor) refuse to pay the progress payment after it receives the release with items carved out, there is really not much the entity can do because it needs the progress payment. However, to preserve its rights, it should absolutely save the release that was not accepted with the carve-out language and should follow-up with an e-mail or other letter that the owner or contractor, whatever the case may be, refused to pay the entity with the items carved out in the release. This way, if a dispute arises down the road, the entity has done what it can to preserve these items and prevent the opposing party from arguing that the entity waived and released its rights by virtue of the releases it executed in consideration of payment.

THE REALITY WHEN THE CONSTRUCTION LENDER FORECLOSES

Posted on August 15, 2013August 15, 2013 by Edward Garber

Sometimes, projects go bad and the developer’s (owner) lender forecloses on the real property, whether at some point during construction or after. When this happens, there are often unpaid contractors which may be named in the lender’s lawsuit so that their inferior interests to the property are foreclosed. Hopefully, the general contractor has a pay-when-paid provision in its subccontracts so that it is not responsible to pay subcontractors until it receives payment from the developer for the subcontractor’s work. While both the general contractor and subcontractors have lien rights (if the rights were preserved under Florida’s Lien Law), when the developer’s lender forecloses it more often than not means that the general contractor and its subcontractor’s liens are worthless since there will not be a surplus of funds after a foreclosure sale.

The recent case of CMH Homes, Inc. v. LSFC Company, LLC, 38 Fla. L. Weekly D1712a (Fla. 1st DCA 2013), illustrates a creative argument a general contractor tried to argue when the construction lender moved to foreclose on the construction loan and named the general contractor to foreclose its inferior interest to the property. In this case, a developer took out loans to finance a residential development. The lender recorded a mortgage.

Thereafter, the developer entered into a contract with a contractor. The contract provided that the contractor would construct a model home and would be paid for the model home when the model home was sold, but the model home could not be sold until other homes in the development were first built. (Also, in the contract, the contractor agreed that the developer possessed title to the lot in which the model home was built free and clear of all encumbrances except for the developer’s lender’s mortgage.)

The notes the developer executed and the mortgage were assigned to a new entity. The new entity filed a lawsuit to foreclose the mortgage and named the contractor as a defendant (in order to foreclose any interest the contractor may have relating to the real property). In defense, the contractor argued an unjust enrichment theory, that being it would be inequitable for the lender / new entity to take ownership of the model home without paying the reasonable value for the model home. The trial court rejected the contractor’s unjust enrichment defense. The First District Court of Appeal affirmed the trial court maintaining that the contractor conferred no benefit upon the new entity (or original lender) because the decision to loan money to the developer was made prior to the construction of the model home and prior to the developer defaulting on the loan. (Besides, the contractor contractually agreed that its interests in the real property the model home was built was inferior to the security interest of the lender’s mortgage.)

DEFERENCE GIVEN TO ARBITRATION PROVISIONS

Posted on August 12, 2013August 12, 2013 by Edward Garber

The recent case of Pulte Home Corp. v. Bay at Cypress Creek Homeowner’s Association, Inc., 38 Fla. L. Weekly D1705a (Fla. 2d DCA 2012) involves a dispute by a homeowner’s association against its developer / homebuilder. In this case, the association sued the developer / homebuilder for building code violations under Florida Statute s. 553.84. The association did this in order to try to circumvent an arbitration provision in the developer / homebuilder’s limited warranty given in favor of initial purchasers. The developer / homebuilder moved to compel arbitration which was denied by the trial court. On appeal, the Second District Court of appeals reversed the trial court finding that statutory claims were covered by the arbitration provision.

The issue to remember is that deference is given to arbitration provisions and that statutory claims, breach of contract claims, warranty claims, and tort claims are all claims that may be submitted to arbitration pursuant to an arbitration provision. In Pulte Home, the association, for strategic reasons, did not want to arbitrate and tried to pursue a claim that did not subject it to arbitration. Although the Second District did not recite the arbitration provision in the opinion, the Court maintained that the agreement to arbitrate in the limited warranty given to initial purchasers covered statutory claims.

OWNERS: UNDERSTAND AND APPRECIATE THE STATUTE OF LIMITATIONS FOR CONSTRUCTION DEFECTS

Posted on June 12, 2013June 12, 2013 by Edward Garber

Having an understanding of the statute of limitations when an owner notices a construction defect with their property is essential to ensure that legal actions are timely filed. Not having this appreciation could have a devastating impact. It could result in an owner being legally barred from pursuing an action for debiltating construction defects or damages. This should never be the case.

The statute of limitations for construction disputes is primarily governed by Florida Statute §95.11(3)(c). This section provides that there is a four year statute of limitations for:

“An action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.”

Now, what exactly does all of this mean? To begin with, this means that the statute of limitations for construction disputes commences on the latest of: i) the owner’s possession of the property, ii) the issuance of the certificate of occupancy by the governing building department, iii) the date construction was abandoned if the project was not completed, or iv) the date the contract was terminated (which would also typically be the case if the project was not completed).

For a completed construction project, the dates I like to focus on are the temporary and/or permanent certificates of occupancy dates because these signify the dates the owner is entitled to occupy their property in whole or in part. These are also hard dates that can be confirmed through the building department and the closing of the building permit. The owner has four years to initiate a lawsuit from this date.

However, when an owner discovers a construction defect or damage to their property (i.e., water intrusion or leak, mold, cracked or spalling stucco, etc.), it is frequently a discovery that occurs many years AFTER completion and occupancy. When this occurs, the statute of limitations becomes less clear.

The discovery of a defect or damage after completion is referred to as latent defect because the defect or damage was not patently visible during construction (or reasonably discovered with the exercise of due diligence prior to the owner’s acceptance and occupancy of the property). In this circumstance, the statute of limitations commences on the date the latent defect was discovered. But, under the law, in no event can the cause of action be pursued more than ten years after the factors referenced above (project completion). This cap on when an action can be filed with respect to a given construction dispute is referred to as the statute of repose.

For example, let’s assume a project was completed on December 31, 2010. Many years later, on December 31, 2017, the owner discovers serious latent defects. This discovery starts the running of the statute of limitations. But, the owner would not have four years to sue on these latent defects because if he waited the four years until December 31, 2021, his suit would be barred by the statute of repose, which would cap suits relating to the project ten years from completion on December 31, 2020.

Understanding when the statute of limitations would commence and when actions would be barred under the law is important and, many times, factually complicated. Recently, the Third District Court of Appeal in Hochberg v. Thomas Carter Painting, Inc., 36 Fla. L. Weekly D1200f (3d DCA 2011), analyzed the running of the statute of limitations in a construction dispute. In this case, owners hired a contractor to build their beautiful new home. After the home was completed in 2003 and the owners moved in, they discovered mold and water intrusion damage. The owners immediately hired an engineer to analyze their discovery and the root of the defects. The expert produced a preliminary report in 2004 addressing the cause of the defects.

In 2008, the owners sued the subcontractors responsible for the defects for negligence and violation of Florida’s building code. Subcontractors argued that the owners filed their lawsuit outside of the statute of limitations because they discovered the defects in 2003 but waited until 2008 to file their lawsuit. The owners argued that the statute of limitations should be tolled until they discovered the exact nature of the defects or magnitude of the underlying problem and which trade subcontractors the defects could be attributed to.

The appellate court held that, “Florida law is clear that ‘where there is an obvious manifestation of a defect, notice will be inferred at the time of manifestation [discovery] regardless of whether the plaintiff has knowledge of the exact nature of the defect.’” Hochberg quoting Performing Arts Center Auth. v. Clark Constr. Grp., Inc., 789 So.2d 392, 394 (Fla. 4th DCA 2001). In other words, even though the owners did not understand the magnitude of the defects or what specifically was causing the water intrusion into their home, the court maintained that their initial discovery of water intrusion and related damage (i.e, mold, wet carpeting) triggered the commencement of the statute of limitations.

This holding is important because when an owner discovers construction defects and damage, they do not discover or appreciate the magnitude of the discovery. For instance, an owner may discover wet interior finishes, smell or discover mold, discover cracks in their exterior finishes, or a roof leak, but will not typically know the specific defects causing these problems. They also typically will not have an appreciation as to the overall significance of the problem. Owners hire expert consultants to analyze these issues to not only determine the root and significance of the problem, but the method to fix the problems. The owners in this case tried to cleverly argue that the statute of limitations for latent defects should be tolled until an owner discovers the precise nature and cause of the defects, which would often correspond with the date the owners receive an opinion from their expert consultants. However, the court focused on the actual discovery of the defects or damage by the owners, rather than when the owner learned the magnitude of the problem.

Owners that discover a defect or damage with their home or property should absolutely not ignore the problem. Ignoring the problem could only exacerbate the underlying problems while potentially putting the owner in a situation where he is outside of the statute of limitations or repose and can no longer pursue an action against the parties responsible for the problems. Again, this should never be the case.

For more information on the statute of limitations and the statute of repose, please see: https://floridaconstru.wpengine.com/watering-down-the-10-year-statute-of-repose-period-for-construction-disputes/

PRESERVING CONSTRUCTION LIEN RIGHTS BY SERVING A NOTICE TO OWNER

Posted on April 23, 2013April 23, 2013 by Edward Garber

Entities such as subcontractors and suppliers that are not in privity of contract with the owner are required to serve a notice to owner in order to perfect their construction lien rights. See Fla. Stat. 713.06. Not timely serving a notice to owner can be fatal to a lien foreclosure action by an entity that is not in privity of contract with an owner.

The case of Marble Unlimited, Inc. v. Weston Real Estate Investment Corp., 38 Fla. L. Weekly D686b (4th DCA 2013) discusses notices to owners. In this case, a marble contractor contracted directly with the owner to install granite countertops in condominium units. (Due to the privity of contract, a notice to owner was not required.) The owner, at some point during construction, transferred its ownership of condominium units to a related entity. The issue was whether the marble contractor should have served a notice to owner on the “new” owner of the condominium units. The Fourth District said NO!, i.e., this would simply “allow corporate owners to play a shell game with ownership and frustrate the valid claims of contractors who complete work on real property.” Marble Unlimited.

Importantly, the Fourth District discussed cases when there is common ownership between the owner and the contractor. For example, let’s assume an owner and contractor, although maintain separate corporate names, have a common identity. The contractor then hires a subcontractor. In this situation, there is an argument that the subcontractor does not need to serve a notice to owner on the owner because no prejudice would exist to the owner that should be aware of the subcontractor based on its common identify with the entity that hired the subcontractor. See Marble Unlimited discussing Aetna Cas. & Surety Co. v. Buck, 594 So.2d 280 (Fla. 1992) and Boux v. East Hillsborough Apartments, Inc., 218 So.2d 202 (Fla. 2d DCA 1969).

In an abundance of caution, an entity not in privity with an owner should serve a notice to owner to preserve its lien rights as a matter of course, even when the owner and general contractor share a common identity / ownership. The entity should know prior to performing work whether they will have payment bond or lien rights in the event of nonpayment, and undertake actions to ensure they are preserving their rights from the get-go.

For more information on Notice to Owner, please see: https://floridaconstru.wpengine.com/contractors-and-suppliers-do-not-neglect-the-notice-requirements-in-floridas-lien-law/