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Edmund Allcock
The Massachusetts Supreme Judicial Court (SJC) has ruled that condominium developers can’t unreasonably restrict the ability of owners to file suits against them. The court rejected a “poison pill” provision developers often use to insulate themselves from liability for construction defects, design flaws and other claims condominium owners might pursue against the developers of their communities.
The litigation back story is straightforward. The trustees of Cambridgepoint Condominium Trust, whom I represented, filed a $2 million construction defect suit against the developer. The developer argued that the suit should be dismissed because 80 percent of the owners had not approved the litigation, which the governing documents required. A Superior Court sided with the developer and dismissed the suit; the Supreme Judicial Court reversed that decision, finding the 80 percent approval requirement “overreaching,” because it made recovery from the developer “a practical impossibility” for owners. (Trustees of the Cambridge Point Condominium Trust vs. Cambridge Point, LLC, et als.)
The court agreed with our primary argument: That a provision effectively barring recovery for construction defects is contrary to Massachusetts public policy, which clearly supports a “warranty of habitability” for homeowners – the assurance that the homes they buy will be built safely and will comply with applicable building code requirements. A provision that makes it impossible for condominium owners to hold developers accountable for construction and design defects clearly violates this policy, the court concluded.
A Step Too Far
Although the SJC embraced our argument that the bylaw was contrary to public policy, it did not agree with our other major argument: That the provision also violated the state condominium statute. We argued that because the statute grants condominium trustees the exclusive authority to seek compensation for construction flaws affecting common areas, a provision that requires owners to approve litigation violates the law. The fact that the statute does not specifically require owner consent for litigation, as it does for other decisions, we suggested, indicates that the legislature did not intend to dilute the authority of trustees in this area. The court wasn’t willing to go that far. “Such an inference would require a clearer indication of legislative intent than mere negative implication,” the court said.
We’re hoping the Legislature will provide that “clearer indication,” by approving pending legislation clarifying that trustees can initiate construction defect litigation on their own authority, without obtaining the approval of owners.
Even with the SJC’s demurer on this point, the decision represents a huge victory for condominium associations and condominium owners, and not just in Massachusetts. Developers in many other states are inserting poison pill provisions like the one the SJC rejected here. Recognizing the national implications, and the possibility that courts in other jurisdictions might adopt the logic the SJC used in this decision, the Community Associations Institute submitted an amicus brief supporting the trustees.
Not a Home Run
There is no understating the significance of this victory, but there is also no ignoring the fact that it was not a home run for condo associations. While the SJC rejected this bylaw, it left open the possibility that others, drafted more narrowly, more equitably, and with less toxic impacts on owners, might be acceptable. There’s no predicting what language the courts might accept, but provisions designed solely to protect the interests of developers, while ignoring the interests of owners, won’t come anywhere close.
The SJC decision provides some guidance on the limits of “poison pill” provisions, but it doesn’t address the critical question they raise: How to balance the interests of condominium developers and the owners who purchases units in the communities they create.
Developers have a legitimate interest in protecting the sizable investments they make and the risks, financial and otherwise, that they take; condominium buyers have an equally legitimate interest in ensuring that developers don’t unfairly and unreasonably impede their ability to govern what are supposed to be self-governing communities.
Finding Balance
A discussion of how to balance the disparate and often competing interests of developers and owners begins most constructively by identifying the interests they share. And avoiding litigation is clearly one of them. Protracted, expensive litigation is rarely the best solution for anyone involved in it.
The best way to avoid litigation is to avoid the construction defects that give rise to it. This seems obvious and a little silly, but it is neither. Most developers do not intentionally create defective buildings. Defects typically result from errors, oversights, or shoddy construction work of which the developer is unaware. An association pursuing a construction defect claim will typically hire an engineering firm to identify structural problems. It makes more sense for the developer to retain an engineering firm up front to supervise the construction and identify problems before they have been baked into the finished building, when they can be corrected easily and inexpensively, without tearing the structure apart and without litigating the issue.
Even with the best intentions and the best practices, litigation is sometimes unavoidable. Given that fact of modern life, I tell condo owners that the most important thing they can do to protect their interests is to read the declaration and the bylaws before they buy, which few if any buyers actually do. I don’t represent developers, but if they asked the same question – how to protect their interests – my advice would be: Make sure you’re adequately insured.
Marcus Errico Emmer & Brooks, P.C. specializes in condominium law, representing clients in Massachusetts, Rhode Island and New Hampshire. Ed Allcock, a partner in the firm, heads its litigation department. He can be reached at eallcock@meeb.com.
