Construction Law in the Condominium Context Part 2 (Video)

 

Construction Law in the Condominium Context Part 1(Video)

 

New Energy Efficiency Laws & Regulations for Massachusetts Condominiums (Video)

 

Where Does Your Garden Grow? In a Condo Community, Where the Board Says it Can Grow

 Justin Magsarili

It’s spring. The snow is gone.  Birds are singing and the green thumbs of condominium residents are itching to plant the flowers of which they’ve been dreaming all winter.  However, they need the board’s

permission before they start digging anywhere.

That is true not just in common areas, where, with rare exceptions, owners should not be allowed to plant anything, but in limited common areas designated for an owner’s exclusive use, where boards can and should control what gets planted and where.    

Pretty roses adjacent to the owner’s fence  shouldn’t pose any problems, but bamboo, which  can pop up several feet from where it is planted (in the yard next door, for example);  English ivy, which spreads quickly, both horizontally and vertically and tends to attract rodents; and poison ivy, which poses other obvious problems, are likely to prove unpopular with the neighbors. 

Maintenance – or the lack of it – is another potential concern.  An owner’s springtime enthusiasm may fade in the summer, leaving untended flowers to die, allowing weeds to overrun the garden and provoking complaints about the unsightly results.

Licensing/Exclusive Use Easement Agreements

To avoid these problems, boards should require owners to sign a licensing or exclusive use easement specifying that:

·       The board must approve what the owners plant;

·       The owners must maintain it; and,

·    The board has the authority to revoke permission and order the removal of plantings at the owners’ expense if they fail to comply with the licensing terms.

The agreement should also require owners to sign a waiver relieving the association of liability for damages related to their gardening efforts.  There isn’t a lot of risk here, but nothing is completely risk-free.

Avid gardeners sometimes want to help with – or even take over – landscaping chores in their community.  This is not typically a good idea.  Liability and safety are the primary concerns.  You don’t want volunteers, however skilled they think they are, climbing trees with chain saws to cut branches. But even less dangerous tasks like planting flowers may be problematic, given the likelihood that some owners will almost certainly object to almost anything your volunteer landscapers do.

Boards should encourage these volunteers not by handing them shovels but by putting them on an advisory committee – with the emphasis firmly on ‘advisory.’ The committee can suggest landscaping projects and propose ideas for improving the look of common areas, but the board needs to have the final say on any of these ideas, and it should hire an experienced, appropriately licensed and insured company to do the work. 

Community Gardens

Some communities may consider designating space for a common area vegetable garden.  This conjures images of happy residents companionably tending neat rows of corn, tomatoes and zucchini.  The reality is likely to be angry residents at odds over what gets planted, who is or isn’t doing their share of the maintenance work and how the bounty should be divided.  

Generally, community gardens for all to use aren’t worth the headaches and hassles they create.  But boards that want to create one should develop strong and clear rules and policies for its use, affirming the board’s authority to approve what is planted, to revoke permission for the garden if owners violate the rules, and to remove the garden if owners fail to maintain it. Boards should also require participating owners to sign liability waivers and should ensure that the association has adequate insurance to cover potential liability claims. 

The board’s authority to control what is planted in common areas and limited common areas is clear, but owners don’t always obey association rules. How should the board deal with an owner who decides to ask forgiveness for the garden he has created rather than seek permission for the one he would like to create? 

 

Enforcing the Rules

The board has the authority to remove the garden – or order the owner to remove it – and restore the area to its original condition.  That may not be necessary, however.  Unless the owner has installed quicksand or the garden equivalent of a boa constrictor – that strangles passersby – you probably aren’t dealing with a health and safety risk. 

The primary issues are protecting the board’s authority to establish rules and its need to enforce them consistently.  The board can achieve both goals by requiring the owner to obtain retroactive permission for the garden (provided the work done meets the board’s standards for aesthetics and content) and to sign a licensing or exclusive use area agreement governing it.  The board can also fine the owner for violating the rules.

Consistent enforcement is essential.  If the board allows this owner to skate by without getting permission for his garden, others will undoubtedly follow; and owners who have signed licensing agreements will see little reason to abide by their terms. 

Selective enforcement can create other problems.  If the board rejects a type of shrub proposed by one owner that other owners have been allowed to plant, the rejected owner may challenge the board’s authority to enforce the rule against anyone.  And if the owner is a member of a protected class under the law, the board may find itself defending a Fair Housing discrimination suit. 

Consistent enforcement requires vigilance.  Boards should inspect their properties periodically to identify landscaping violations and respond quickly to them.  If the board initiates an enforcement action now, as it is contemplating, the owner can ask reasonably why a garden that wasn’t a problem 18 months ago is a problem now.  The board can argue correctly that the owner failed to obtain permission for it.  But if this case goes to court, the optics won’t be good for the association. 

Justin in an Associate at the Braintree-based firm of Marcus Errico Emmer & Brooks, P.C.  His practice includes supporting clients regarding interpretation of governing documents, condominium operations and governance issues, unit owner responsibilities and rule enforcement, drafting and amending of condominium documents, and lien enforcement. He can be contacted at jmagsarili@meeb.com

 

 

 

Snow and Ice Issues for Condominium Association Boards

 William F. Thompson

The Problem:  An owner sent the board a letter complaining about the association’s snow-removal contractor.  He says the contractor waits too long before beginning to

plow and doesn’t do an adequate job of clearing the snow and treating the ice.  The letter says the owner is putting the board on notice that if anyone slips and falls, the association will be sued for negligence.  This is the only complaint about snow removal the board has received.  How should the Board respond?

The Solution: A timely question, given the amount of snow we’ve had and continue to have in New England this winter.  The board shouldn’t immediately fire your contractor, but shouldn’t ignore the complaint either.  As a first step, it should assess the contractor’s performance after a snow event, which it should be doing anyway.  Is there any cause for the owner’s concern?  Does the contractor comply with the terms of your contract, which should specify: The expected response time, how much snowfall requires removal, the equipment and de-icing materials to be used, the areas to be plowed and where the snow will be deposited, among other details.

Even if the contractor does everything the contract requires, a resident or visitor who slips and falls might still sue the association for negligence.  If so, a court will consider not just whether the contractor has done what the contract requires, but whether the association’s requirements were reasonable – that is, would they reasonably be expected to reduce the risk of slip and fall injuries. 

Reasonableness, like beauty, is in the eye of the beholder – it is subjective.  It is also a legal standard for determining negligence established by the SJC in a 2010 decision, Papadopoulos v. Target Corporation. Neither that decision nor the many that have followed it have specified what snow-clearing measures would be deemed “reasonable.” But they have provided enough guidance to suggest that common sense and an adherence to “best practices” are probably your best guides.

Courts considering negligence claims will consider whether the association’s response was reasonable given the circumstances, recognizing that different conditions will require a different response. If the snowfall ends at noon, waiting until the next day before beginning to plow probably would not be deemed reasonable; waiting for a blizzard to subside probably would be.

 If a heavy snowfall is expected to begin after midnight on a weekday, having a snow removal crew ready to respond before people leave for work in the morning would be reasonable.  Waiting until the day before this storm before trying to find a snow removal company, on the other hand, would likely put the association on the wrong side of a negligence claim. 

Courts will consider not just what the association did or didn’t do, but what it knew or reasonably should have known.  If an owner slips in an isolated and rarely utilized area that has never been plowed in the past, the association will have a strong argument – not necessarily a winning one, but a strong one – that there was no reasonable expectation that the area would be plowed this time.  But if five people have complained about an icy area in the parking lot and the board hasn’t responded, the resident who slips and falls in that area will have a good chance of winning a negligence claim. 

There are no actions the board can take, no prayers it can recite, that will prevent the association from being sued. But there are some measures that will reduce its liability risks.

Adopt a snow resolution delineating clearly where the association’s snow removal responsibilities begin and end.   The association is clearly responsible for common areas, but the responsibility for limited common areas – balconies, decks, patios and sometimes walkways and stairways that are used exclusively by individual owners -- isn’t always clear.  A snow resolution, which boards typically have the authority to enact without owner approval, can specify that the owners who use these areas are responsible for clearing snow and ice from them.

Snow resolutions won’t completely eliminate liability risks and they won’t prevent owners who are injured themselves or who are sued by others from suing the association.  But they will make it more difficult for plaintiffs to win a negligence claim against the association when the board can demonstrate that the owners themselves were negligent.

Keep a log describing the association’s response to a snow event.  The log should note the contractors the board called (or the response time required under an existing contract) and when the contractor arrived.  The board should also require contractors to maintain their own logs noting when they provided service to your community, how many times the snow plows went through, how much sand or salt and de-icing chemicals they applied and where they applied it.   There is no such thing as too much detail when you are trying to demonstrate that the measures taken by the association and its contractor were “reasonable.”

Keep a separate log recording all complaints about snow removal or post-snow ground conditions and how the board responded to them.  This log can help board members rebut allegations that they knew or should have known about a slip-and-fall hazard.

Adopt a rule requiring owners to park their cars in areas that won’t impede snow-clearing efforts.  Enforce the rule consistently and document the enforcement efforts.

Require the snow removal contractor to indemnify the association for damages resulting from anything the contractor does or fails to do.  Ideally, the indemnification should also cover the attorneys’ fees and legal costs the association incurs in a law suit.

Require the snow removal contractor to have “adequate” commercial general liability insurance.” The experts suggest a minimum of $1 million to $2 million, plus an umbrella policy providing additional protection above that.  The board should also insist that the contractor’s policy name the association as an “additional insured.” This would allow the board to file a claim directly against the contractor’s insurance policy, possibly avoiding a claim against the association’s master policy.

Monitor the contractor’s work to make sure snow removal crews are doing what they are required to do.  Also, inspect walkways and roadways to identify unsafe conditions, respond to them and document your response.  As long as ‘reasonable care’ remains a subjective standard, associations should try to make sure their efforts are more than reasonable.

Will is a partner in the Braintree-based law firm of Marcus Errico Emmer & Brooks, PC and concentrates his practice on general condominium law as well as rule and lien enforcement. Will can be contacted by email at wthompson@meeb.com.

Appeals Court Rules Condominium Trust an Indispensable Derivative Action Party

David M. Rogers 

A derivative suit is one that is typically brought when a condominium board has failed or refused to redress a wrong

committed against the association.  These lawsuits allow for a unit owner to step into the shoes of a condominium board and take legal action when the board is otherwise unwilling to advance a claim.  In the past, it may not have been common practice to name the condominium board as a defendant in a derivative claim lawsuit.  This was likely based on the thinking that it was counterintuitive to bring an action “on behalf of the board” and against the board as a defendant.  However, a recent appellate decision has caused condominium law attorneys to take note that the association is a necessary party.

In an unpublished decision, the Appeals Court determined that a condominium trust is an indispensable party to a derivative action. In Hyman v. Conway, 105 Mass. App. Ct. 1118 (2025), the Court’s ruling provides that a failure to name a condominium trust as a party to such a lawsuit provides grounds for dismissal.

The plaintiff, Marita Hyman, owned a condominium unit at the Westport Point Condominium – a residential community consisting of seven “cottage style” units.   The defendants, Christine and John Conway, built an addition onto their condominium unit at Westport Point that extended into the Condominium’s common area.  The defendants did not seek Ms. Hyman’s approval for the addition – apparently in contravention of the Condominium’s governing documents as well as G.L. c. 183A, § 5.

Ms. Hyman filed suit in Bristol Superior Court claiming that the Conways improperly built an addition onto their unit – and into the Condominium’s common area – without seeking approval from all of the unit owners.  She brought two claims for declaratory judgment, seeking an order for the removal of a porch and stairs attached to the Conways’ unit, as well as declarations that such construction encroaches on a common area and violated the plaintiff’s “lawful right to review the proposed building plans” under the condominium bylaws.  The Conways moved to dismiss the complaint – arguing that Ms. Hyman lacked standing to advance a claim concerning the common area of the Condominium.  The common area of the Condominium, the Conways contended, was within the purview of the condominium trust – not the individual unit owners.  The Conways further argued that Ms. Hyman failed to join the condominium trust as a necessary party to the lawsuit.

The trial court (Sullivan, J.) ruled in favor of the Conways.  The Court construed Ms. Hyman’s complaint as a derivative action, as she had made written correspondence to the board of trustees and attempted to discuss the subject porch at an annual meeting in an apparent attempt to meet the pleading requirements of Rule 23.1 of the Massachusetts Rules of Civil Procedure.  The court then reasoned as follows: 

In a derivative action seeking to compel the action of an association which has failed to redress a wrong committed against the trust, the trust is both an entity which would be affected by the declaration and also one of the parties which would have had to answer to a judgment in the plaintiff’s favor to effect complete relief.  Thus, the trust is an indispensable party to this action.  (Internal quotations and citations omitted).

The court allowed the Conways’ motion to dismiss – finding that Ms. Hyman failed to join the condominium trust as a necessary party.  Ms. Hyman appealed the trial court’s decision.  Before reviewing the Appeals Court’s decision, it helps to have a general understanding of a properly pled derivative action.

A Derivative Action

A proper derivative action is a lawsuit brought by one or more unit owners to enforce a right of the association.  The derivative claim is an effective device in two primary circumstances: (1) to advance breach of fiduciary duty claims against sitting board members, and (2) to advance claims against a declarant or declarant-controlled entities while the declarant controls the board or when the declarant, as unit owner, still controls enough of the percentage interest in the condominium to elect its own slate of board members.

Procedural Requirements

The proper maintenance of a derivative claim requires strict compliance with certain conditions precedent as follows:

• Demand on the Board

Demand must be made on the board, requesting that it take action (i.e., institute suit against individual board members and/or the declarant) unless futile.

• Demand on the Unit Owners

Demand must be made on the unit owners to take action to compel the board to act or to otherwise secure the desired course of action (e.g., removal of the board) unless such request would prove futile (e.g., declarant owns or controls 90 percent of the beneficial interest) or too burdensome. 

In most circumstances, it is advisable to make the demand to avoid any claim that demand was not futile.  Counsel may have to take a calculated risk when there is a concern that such demand may telegraph an intention to file suit and cause the declarant to secret or convey assets.

Pleading Requirements

A complaint for a derivative action shall:

• be verified by oath,
• allege unit ownership at the relevant time or purchase from an owner who owned at the relevant time,
• allege efforts made to obtain action from the board,
• allege efforts made to obtain action from the unit owners, and
• allege reasons no such efforts were made.

In addition, in order for a derivative action to be maintained, it must appear that the plaintiff fairly and adequately represents the interests of the unit owners similarly situated.  Finally, the action cannot be dismissed or settled without (1) court approval, and (2) notice to the unit owners of same as directed by the court.

Common Pleading Deficiencies in Derivative Suits

The derivative suit is often misused or misapplied by unit owners.  There are several rules of thumb that can be employed in analyzing the appropriateness of derivative claims.  A derivate claim is deficient and subject to a motion to dismiss in the following circumstances:

1. The Claim Is Brought by Someone Other than a Unit OwnerThis criterion needs         no further elaboration.

2. The Wrong Complained of Was Committed Against Individual Unit Owners,         Not the Association

A wrong committed against a unit owner or unit owners may be brought by those individuals in their own name.  Owners who have suffered an injury have standing to bring claims in their own name (e.g., damage to unit interior, improper assessments, etc.).  Such claims are not properly brought as derivative claims.

3. The Recovery Is Sought for the Unit Owner(s) Alone

A unit owner’s request for recovery in a proper derivative action is made on behalf of the board.  When the recovery and/or relief requested is for, or on behalf of, the unit owners in their individual capacities, the claim cannot be properly brought as a derivative action.

4. The Claim Is for a Breach of Fiduciary Duty Owed to a Unit Owner

This claim is flawed for two reasons.  First, the board does not owe a unit owner any fiduciary duty.  Second, such claim clearly purports to advance (albeit otherwise flawed) a claim possessed by an individual owner, not the association.

5. The Lawsuit Is Advanced Without Naming the Association

We can now add another pleading deficiency to the list – failing to name the condominium trust as an indispensable party to the derivative action.  The Appeals Court affirmed the trial court's dismissal of Ms. Hyman’s lawsuit, reasoning that “[i]n such an action, the association must be joined as a party because the claim is alleged to be one that the association should be pursuing on its own behalf – here, a claim of unlawful expansion onto common elements.”  While unpublished (meaning that, although the case can be cited for its persuasive value, it does not constitute binding precedent), the Hyman decision provides a clear indication of how a court is likely to rule on this issue going forward.  A failure to name a condominium board as a party to a derivative lawsuit going forward would be a mistake.

Derivative claims present difficulties for even the most seasoned condominium law practitioners.  Although the trial court in this Hyman case was rather liberal in construing her lawsuit as a derivative claim, the procedural requirements of Rule 23.1, described above, actually prescribe fairly cumbersome prerequisites for filing a derivative action.  Care must be taken in order to avoid having such a lawsuit dismissed on a technicality, such as failing to name the condominium trust as a necessary party. 

A principal in the Quincy and Boston based firm of Moriarty, Bielan & Malloy LLP, Dave has been specializing in complex civil litigation at both the trial and appellate levels. He has extensive experience in the area of construction litigation. Dave’s practice is focused on construction, real estate, and condominium matters. His clients include condominium associations, real estate developers, general contractors, subcontractors, and individuals.  Dave can be contacted at brogers@mbmllc.com.

Do Condominiums Have the Right to Restrict Signs?

 

Gary Daddario

Q:  Our condominium association has a rule barring the display of signs in common areas or in locations visible from common areas. Some board members say we are required to make an exception for political signs. Is that true?

A:  The key question is whether condominium boards have the authority to restrict the right to freedom of speech, guaranteed by the Constitution. A decade

or so ago, we would have said unequivocally that the answer was yes. The courts had consistently recognized that only governmental entities are required to protect constitutional rights. Because condominiums are private property, not public spaces, because associations are not governmental entities, and because owners choose to live in their communities voluntarily, the courts had reasoned, condo associations could restrict Constitutional freedoms in ways that governmental entities cannot.

That legal consensus has shifted over time, however, and the courts have become more inclined to view condo associations as quasi-governmental actors, required to recognize, at least to some degree, the constitutional rights of their residents, particularly if the condominium relies on state law to support its claims or a portion of them.

Also worth noting, a Massachusetts Superior Court has held that residents of a condominium have free speech rights related to the state’s constitution. In addition, the Massachusetts Appeals Court has found that condominium associations may, in fact, be viewed as “government actors” in some cases. Specifically, the Massachusetts Appeals Court held that where a condominium seeks to use the state condominium statute to support its claim to recover legal fees against an owner accused of violating a sign prohibition, the condominium’s policy will be subjected to First Amendment scrutiny. And the New Jersey Supreme Court has ruled significantly that a condo association’s ban on all signs was unconstitutional because it prohibited the display of political signs, impinging on political speech which, the court noted, “lies at the core of our Constitutional speech protection…[which] is fundamental to democratic society.”

In considering a policy governing political signs, your board should consider these decisions, the judicial reasoning behind them, and what appears to be clear trend toward curbing the authority of condominium boards to govern their communities. The board should also consider the reaction of owners, many of whom may want to express their political views by displaying political signs. Some owners are likely to challenge a policy banning signs and there is a better than even chance that the courts will side with them.

But “reasonable” restrictions similar to those the courts have accepted for the display of flags are likely to pass muster with both owners and the courts. Following those guidelines, owners could display political signs but the board could restrict the “time, place and manner” of the displays.

That means you can dictate the size of the signs and where owners place them – on their own property, for example, and not in common areas, or, if in common areas, not on sidewalks or streets where they would create a safety hazard. You can also specify a period before and after an election when the signs can be posted. And you can restrict the “manner” of the display, prohibiting signs with flashing neon lights or loud noises that would constitute a nuisance to residents.

Any restrictions you impose must be content neutral, however. That is, you can’t dictate what signs can and cannot say, you can’t permit signs supporting one candidate or one position but not others, and enforcement must be consistent and even-handed.

Some owners may challenge any restrictions the board imposes, but reasonable restrictions on signs are less likely to anger owners and more likely to survive a challenge than a policy banning them entirely.

Gary Daddario is a partner in the Braintree firm of Marcus Errico Emmer & Brooks. P.C.  concentrating his practice in the field of community association law since 2003.  In addition to assisting Massachusetts clients, Gary also assists New Hampshire clients and manages the firm’s new location in Merrimack, New Hampshire. Gary’s email address is gdaddario@meeb.com.

A Condominium Association Roadmap for Handling Construction Defects

Seth Barnett

Construction defects range in severity, and when and how they are noticed. Some problems can be obvious, like a leaking roof, or subtle,

like cracking caused by soil problems that develop years after construction. Some problems may be easily fixed while others are potentially catastrophic. But in condominiums, the one element that is always true is the association will be responsible for repairing any defects in the common areas unless another responsible party can be held accountable.

When construction fails to deliver protection against damage and instead allows roofs to leak, walls to crack, plumbing to break or mold to grow, the construction may be considered defective and may be actionable.  Often, the ease of repair and the severity of the problem will influence whether or not the builder or contractor will make repairs absent the threat and force of litigation by an association.

With new construction, developers and contractors will frequently respond to the first complaints of a serious problem to address the issue. Of course, the hope is that effort proves successful and everyone is satisfied. When that satisfaction is short-lived, however, as it often is, and subsequent attempts to persuade the builder to correct the defect fail, it is time for the board and manager to seek answers from qualified professionals.

Construction defect scenarios are always fact-based; no one-size litigation advice will apply to all of them. But for boards and managers considering construction defect litigation, the following general guidelines highlight some of the issues that should be considered and the most important steps that should be taken:

1.  Commission an engineering study to identify the scope and source of the construction defects and deficiencies and the estimated cost of repairs.  An engineering study should be commissioned as soon as construction defects and/or deficiencies are discovered or suspected, or immediately upon the transition from developer control, whichever happens first. As to the latter point, even if there is no evidence of construction flaws at the time, the study can identify latent problems and it can provide documentation to support a future construction defect suit. If problems are identified pre-transition, when the developer still controls the board and access to association funds, owners may want to consider commissioning the study at their own expense, because the developer will have little incentive to identify problems he or she may be required to correct. Owners who foot the bill for the study may be able to recover the cost from the association after the transition. More importantly, is to be aware that the engineering study is often preliminary in nature, and should be kept confidential and protected against disclosure to anyone outside of the board (or unit owner committee) and its counsel.

 

2.   Pay attention to construction litigation deadlines.   There are two that are critical: 

 

·   The statute of limitations requires plaintiffs to file suit within three years of when they discover a defect or reasonably should have discovered it. If the board discovers widespread leaks but ignores them for four years, the litigation window will be closed, along with the possibility of requiring the developer to pay for the repairs.

 

· The statute of repose sets a flat six-year limit on construction defect suits. That clock starts running when buildings or improvements are “put into use” (usually when the certificate of occupancy is issued) or when they are “substantially completed,” whichever occurs first.

Buildings in a phased development may be subject to different statutory deadlines and the board will have to carefully track all of them.

If problems are identified before the transition, and if the developer control period is likely to extend past either of the statutory deadlines, owners may have to sue the developer on the association’s behalf, because the developer is unlikely to sue himself. This “derivative action” is hardly ideal, because owners would have to pay the legal expenses from their own funds. But it may be necessary to preserve the association’s future rights to recover damages from the developer.

3.   Evaluate the pros and cons of filing suit.  This cost-benefits analysis, which boards should undertake with the association’s attorney, should consider: the extent of the problems, the cost of repairing them, the likelihood the litigation will be successful and the prospects of recovering damages from the developer. As a general rule, the costlier the repairs and the stronger the association’s legal arguments, the more appealing the litigation option will be. The reverse is also true. Even if the claim is strong and the prospects of litigation success are high, it may make more sense for the association to pay for relatively modest repairs rather than incurring the legal costs and emotional strains that are byproducts of any litigation. In evaluating the litigation pros and cons, it is important for boards to remember that the goal is not to punish the developer, however justifiable or satisfying that may seem; the goal, rather, is to correct the problems while reducing as much as possible the association’s out-of-pocket costs.

Even under the most favorable circumstances, the association is unlikely to be made completely “whole.” For one thing, plaintiffs can’t recover legal costs in a construction litigation claim. Further, the damages a court awards may not entirely cover the cost of correcting the problems. The board’s cost-benefits analysis should consider those limitations. Also possibly arguing against a legal fight: pending litigation could make it difficult for owners to sell their units or refinance them.

4. Consult a lawyer as soon as the board identifies or suspects suspect construction defects.  Making the litigation decision and planning the litigation strategy early can reduce the association’s legal costs and improve its chances of litigation success.

5.   Review the association’s governing documents and relevant state laws.  Either or both could limit the association’s ability to sue the developer. For example, some documents require boards to obtain prior owner approval or to attempt arbitration before initiating a suit. Statutes in some states (Massachusetts isn’t one) require plaintiffs to give developers a chance to correct problems before filing suit against them.

6.   Limit the damage.  The developer may be responsible for the faulty roof, but he won’t be required to repair the water damage to units and common area that occurred while the board was deciding whether to sue. The board must take reasonable steps to mitigate the damage. The association may be able to recover the cost of essential repairs if it successfully sues the developer, but the board should notify the parties being sued that the repairs are being made and document them.

7. Don’t expect insurance to cover construction defect damage.  Most policies specifically exclude this coverage

8. Negotiate before filing suit.  Litigation may be essential but it is rarely the first choice. Allow contractors or developers to make necessary repairs if they are willing and able to do so. But have an outside expert (the firm that did the engineering study, for example) dictate the scope of the repairs required, monitor the work and verify that the repairs have resolved the construction defects. The board should sign an agreement releasing the developer from liability only after the repairs have been completed and approved by the association’s expert, and it should be reviewed by the association’s counsel before it is signed. Also, the release should apply only to the specified defects and the repairs addressing them. The association should not release the developer from additional defects it may discover in the future.

Seth is a partner of the Braintree firm of Marcus Errico Emmer & brooks, P.C.   He represents clients in a robust range of civil litigation and regulatory matters, including in the areas of construction, land use and zoning, condominium law, employment law, contract matters, and disputes involving state and local governmental entities. He has practiced before state and federal courts and state agencies in Massachusetts and has successfully represented clients at trials and in appeals. Seth’s email address is sbarnett@meeb.com.

 

Significant New Fannie Mae and Freddie Mac Lender Requirements

 Ryan R. Severance

In September, the Fannie Mae and Freddie Mac condominium and cooperative project eligibility standards were updated. Fannie Mae, otherwise known as the Federal National Mortgage Association, and

Freddie Mac, otherwise known as the Federal Home Loan Mortgage Corporation, are government-created entities that buy mortgages on the secondary market and back others, including mortgages granted by private lending institutions large and small. As a result, Fannie Mae and Freddie Mac have a considerable influence over the national mortgage lending market. Importantly for condominiums and cooperatives, they require a project eligibility review in order to approve unit mortgages for their programs. This project eligibility review, which is only for condominiums and cooperatives with five or more units, covers a wide range of subjects: ownership structure and composition, reserve funds, litigation, insurance, and – importantly and the subject of the changed standards – the repair status of any condominium or cooperative building.

The repair status of condominium and cooperative buildings found itself in the spotlight after the tragic collapse of the Champlain South Tower in Surfside, Florida in June 2021. In January 2022, in response to that tragedy, Fannie Mae and Freddie Mac issued temporary revised project eligibility requirements as to projects with potentially unsafe conditions.  Fannie Mae and Freddie Mac have now finalized their project eligibility requirements as to the condition of condominiums and cooperative buildings (See Fannie Mae Selling Guide Announcement SEL-2023-06: here (https://singlefamily.fanniemae.com/media/36376/display and Freddie Mac Guide Bulletin 2023-15: here (https://guide.freddiemac.com/app/guide/bulletin/2023-15).

These updated and clarified standards for eligibility of condominium and cooperative buildings include the difference between critical repairs and routine repairs, the role special assessments play in review of maintenance concerns, the role of any inspections and reports received, and the documentation that lenders may need to collect to confirm maintenance status. While these finalized requirements are not dramatically different than the previous temporary requirements, they do provide additional context beyond those of the temporary requirements as to what lenders will be seeking as they review mortgagee questionnaires for eligibility. For that reason, in addition to the continued requirement that board members act to properly maintain, repair, and replace their project elements, boards and property managers will need to be sure to provide appropriate information on those mortgagee questionnaires, to ensure their condominium or cooperative project remains eligible for loans to be bought or backed by Fannie Mae and Freddie Mac.

The Importance of Eligibility

Eligibility is important for a condominium or cooperative to maintain. In the event that a condominium or cooperative is deemed to be “ineligible,” loans on its units will be rendered ineligible for purchase or securitization by Fannie Mae and Freddie Mac. Practically, this will mean that unit owners and prospective unit purchasers will not have the same number of options for banks at which to obtain or refinance mortgages. While some small lenders may continue to lend despite eligibility concerns, most lenders will be unable to do so. For this reason, unit owners who are selling their units may find sales terminated due to the inability of prospective buyers to obtain mortgages from their preferred lender or may find that they cannot refinance with their chosen lender. For these reasons, the concept of Fannie Mae and Freddie Mac eligibility is important for the marketability and value of a condominium or cooperative project’s units.

Routine Repairs versus Critical Repairs

With the updated lender requirements, Fannie Mae and Freddie Mac have provided a definition of routine repairs versus critical repairs that are performed to project elements. Examples of elements that Fannie Mae and Freddie Mac are concerned about are “sea walls, elevators, waterproofing, stairwells, balconies, foundation, electrical systems, parking structures or other load-bearing structures.”

“Routine repairs” are defined by Fannie Mae and Freddie Mac as those that are not considered critical and include work that is:

·       preventative in nature or part of normal capital replacements (for example, focused on keeping the project fully functioning and serviceable); and

 

·       accomplished within the project’s normal operating budget or through special assessments that are within guidelines.

“Critical repairs” are defined as those “repairs or replacements that significantly impact the safety, soundness, structural integrity or habitability of the project’s building, or the financial viability or marketability of the project.” These critical repairs include, but are not limited to:

1.   Material deficiencies, which, if left uncorrected, have the potential to result in, or contribute to, critical element or system failure within one year;

 

2.   Any mold, water intrusions, or potentially damaging leaks to the project’s building(s);

 

3.   Advanced physical deterioration;

 

4.   Any project that failed to pass state, county, or other jurisdictional mandatory inspections or certifications specific to structural safety, soundness, and habitability; or

 

5.   Any unfunded repair of more than $10,000 per unit that should be undertaken within the next 12 months (this does not include repairs made by the unit owner or repairs funded through a special assessment).

While these definitions are helpful, the interpretation of any repair will be up to the lender representative reviewing the information provided on a mortgagee questionnaire.

In addition, there is a carve out for deferred maintenance or damage that is “isolated to one or a few units that does not affect the safety, soundness, structural integrity, or habitability of the project.”

Special Assessments

Fannie Mae and Freddie Mac have also updated their requirements for eligibility based on the review of special assessment records. Boards and property managers will now be expected to provide extensive records of special assessments to lenders to ensure eligibility of the condominium or cooperative project, regardless of whether the special assessment is planned or currently being collected. Lenders are expected to collect the following information:

1.   The purpose of the special assessment;

 

2.   The date the special assessment was approved;

 

3.   Whether the special assessment is planned or being collected;

 

4.   The amount of the special assessment and how much remains to be collected; and

 

5.   The expected date that the special assessment will be paid in full.

Any special assessment associated with a critical repair, which has not yet remediated the critical repair issue, will deem the condominium or cooperative project ineligible. It is important for boards and property managers to provide complete information as to special assessments to lender representatives to maintain eligibility.

Inspection Reports

The eligibility standards have also been updated to specify in more detail the inspection records that boards and property managers will need to provide, which includes any structural or mechanical inspection report or reports related to the condominium or cooperative project provided by any vendor, federal, state, or local authority within the last three years prior to the review date. Any statement in such records that indicates that critical repairs are needed, an evacuation order is in effect, and/or regulatory action is required will deem a condominium or cooperative project to be ineligible. If any report states that critical repairs are needed, the project will be deemed ineligible until such time as an engineer’s report or “substantially similar document” confirms that the concerns have been resolved. Unfortunately, Fannie Mae and Freddie Mac have not offered any further definition of what “inspection report” means and, thus, board members and property managers will need to engage in a case-by-case review of any form or information received from vendors, federal, state, or local authorities to confirm whether it qualifies as a “structural or mechanical inspection report.”

Documentation Requirements

Fannie Mae and Freddie Mac now have more expansive documentation requirements for lenders to review in order to confirm that condominium or cooperative project conditions do not require critical repairs. The documentation requirement is relatively open ended, which may result in lender representatives seeking documentation well beyond what has traditionally been expected. Fannie Mae and Freddie Mac guidelines provide the following examples of documentation that boards and property managers should be prepared to provide:

1.   Board meeting minutes;

 

2.   Engineer reports;

 

3.   Structural and/or mechanical inspection reports;

 

4.   Reserve studies;

 

5.   A list of necessary repairs provided by the board or its management company; and/or

 

6.   A list of special assessments provided by the board or its management company.

To any extent that a lender is requesting documentation that may be unreasonable or – most importantly – protected by privilege, boards and property managers should seek counsel.

Approach to the New Requirements

We would expect mortgagee questionnaires to be updated by lenders in the face of these new requirements. There is rarely a singular approach to completing all lender questionnaires, and each questionnaire will likely need to be reviewed on a case-by-case basis. This is particularly the case where lender representatives are given some leeway as to the materials to review to determine eligibility under the new guidelines. Most importantly, as boards and property managers review updated mortgagee questionnaires in light of these new requirements, they should consult with experienced condominium counsel to craft the appropriate response as to critical repairs. We expect to work closely with boards and property managers as lenders revise their form mortgagee questionnaires and may have further updates as we see additional issues raised.

An associate in the real estate department of Moriarty Bielan & Malloy LLC, Ryan’s practice focusses on the general representation of condominium associations, including condominium document interpretation, drafting, enforcement, and collections. Ryan’e email address at MBM is rseverance@mbmllc.com.