DEFECT LAWS - CONDOMINIUM CONVERSIONS

Neither the legislature nor the courts have clearly defined a converter's liability for construction defects.  There is no doubt that condo conversion buyers suffer from construction defects.

Why developers convert to condominiums?

• Avoid liability under SB 800 or California Civil Code Section 1375.
• Try to avert claims for strict liability.
• Require HOA's to jump through additional hoops.
• Market conditions are not ripe for sales.

What is a conversion?

• A conversion is defined as a change of a residential dwelling to a condominium, cooperative or similar form of ownership. 

Converters are subject to:

• Subdivision Map Act
• Davis Sterling Act
• Department of Real Estate, Subdivided Lands Act
• Local Government:  county or municipal codes
• California Statutes of Repose, Sections 337.1, 337.15,

California Civil Code Section 1134

• CC 1134 (a): obligates the converter to deliver to a prospective purchaser a written statement listing all substantial defects or malfunctions in the major systems of the property, or provide a written statement disclaiming knowledge of any substantial defects.
• CC 1134(c)(1): "Major systems" includes but is not limited to
  • Roofs
  • Walls
  • Floors
  • Heating
  • Air conditioning
  • Plumbing
  • Electrical systems
  • Other components of similar or comparable nature
  • Recreational facilities
• CC 1134(d): "Any person who willfully fails to carry out the requirements of this section shall be liable in the amount of actual damages suffered by the buyer."

Legal Theories:

• While this area of law is undecided, associations have been successful in construction defect claims under the following legal theories:
• Negligence - developers and contractors are liable for their own acts and omissions and the acts an commissions of those they hire or supervise.  Look to see:  did the converter patch or replace components, were repairs performed negligently?
• Negligence Per Se - if the converter violates local county or municipal ordinances or statutes, then they are liable.  This would now apply with violations of any building standards identified in SB 800.
• Negligent Misrepresentation - a converter cannot turn a blind eye to the condition of the building.  If there are obvious problems they are on notice.
• Strict Liability/Implied Warranty have not yet been extended to converters by California courts.
• Fraud - failure of a seller to fulfill the duty of disclosure constitutes actual fraud.  An "as-is" provision does not relieve the seller of liability.
• If Express Warranty in marketing documents is provided this may be another theory.
• Breach of Fiduciary Duty - if the converter fails to properly determine operating costs and fund a maintenance reserve account.

Insurance coverage:

• All of these cases are driven by insurance.   Insurance policies do not cover claims for fraud & misrepresentation.  Careful review of available insurance and builder entities are vital to a successful recovery.