2019 Condominium Warranty Reforms and WUCIOA Clarifications

The Washington Legislature wrapped up its 2019 session by enacting much-anticipated reform to the condominium implied construction warranties. The warranty reform bill also included important clarifications of the application of WUCIOA to existing projects that straddled the effective date of WUCIOA. These reforms are contained in SB 5334, which becomes effective on July 28, 2019.

WARRANTY REFORM

Director Immunity

The Legislature took action to stop condominium defect lawyers from using the threat of personal liability to frighten association boards into filing a warranty claim. Some condominium defect lawyers advise association board members that they can be personally liable to the owners if they don’t uncover latent defects and bring suit against the developer for those defects.

SB 5334 states that a director or officer is not liable to the corporation or its members for conduct as a director or officer, except for acts or omissions that involve intentional misconduct or a knowing violation of the law, or that involve a transaction from which the director or officer will personally receive a benefit in money, property, or services to which the director or officer is not legally entitled. It will now be difficult for a condominium defect lawyer to raise the specter of personal liability when trying to convince a board to hunt for unknown defects and file a defect suit.

Changes to Implied Warranties

Developers know that many condominium defect claims have been based on expert testimony that is nothing more than subjective opinion. The Legislature took two actions to prevent such claims. First, it eliminated the warranty of compliance with all applicable law. Second, it changed the warranty of construction “in accordance with sound engineering and construction standards” to a warranty of construction in accordance with engineering and construction standards generally accepted in the state of Washington at the time of construction. It will no longer be sufficient for an expert to offer an opinion based on his or her education, experience or knowledge. The purchaser will need to show that the construction violated standards generally accepted by the engineering and construction industry in Washington. Failure to comply with building code can still be a basis for a claim, but such claims cannot be based on subjective or unusual interpretations of the building code.

Many condominium developers have been subject to warranty claims based on merely technical defects. Prior law required that an alleged breach “adversely affect” performance of the building and required that an “adverse effect” must be “more than technical” and “significant to a reasonable person”. This wasn’t much of a standard to begin with, but the statute also stated that purchaser was not required to prove that the alleged breach rendered the building uninhabitable or unfit for its intended purpose. To address this problem, the legislature added the requirement that to show an “adverse effect”, the purchaser must show that the alleged defect:

• has caused or will cause physical damage to the unit or common elements;
• has materially impaired the performance of mechanical, electrical, plumbing, elevator, or similar building equipment; or
• presents an actual, unreasonable safety risk to the occupants of the condominium. These new requirements are intended to limit claims to real and serious defects.

Looking at the details: the legislature used the words “will cause” instead of “likely to cause”; the legislature used the word “has” in regard to impairment; impairment only relates to “equipment”, not relate to materials, components or systems; and a safety risk must be actual and unreasonable safety risk, not likely or minor.

APPLICATION TO PROJECTS IN THE MARKET

No Requirement for a Second Public Offering Statement

In 2017 and 2018 there were a number of buyers who received a public offering statement and executed pre-sale unit purchase agreements under the Condominium Act. When WUCIOA was enacted, some attorneys for remorseful buyers asserted that their clients were entitled to terminate because they had not received a new public offering statement under WUCIOA. To end this line of argument, SB 5334 states that a developer who first delivered a public offering statement to a purchaser pursuant to the Condominium Act prior to the effective date of WUCIOA is not required to deliver a new public offering statement under WUCIOA, and that such a purchaser is not entitled to a new rescission period under WUCIOA.

Form 17 Not Required

Washington statutes require a seller of real property to deliver a seller disclosure statement (also known as a Form 17) to a buyer, and they give the buyer a three-day rescission period after receipt of the statement. A Form 17 is not, however, required in the sale of a residential condominium unit subject to the public offering statement requirement. When WUCIOA was enacted, the Form 17 statute was not updated to refer to WUCIOA. Consequently, some attorneys representing remorseful WUCIOA buyers argued that, despite having received a public offering statement under the WUCIOA, their clients were entitled to rescind because they did not receive a Form 17. SB 5334 eliminates that argument by stating that developers who delivered a public offering statement under WUCIOA had no obligation to deliver a Form 17.

Annexation of New Phases to Existing Communities

The requirements of WUCIOA are in many cases (including such items as quorums, voting, meetings, notices, reserves and special declarant rights) different than the requirements of the Condominium Act or the Homeowners Association Act. Developers of pre-WUCIOA multi-phase communities asked which statute would apply to post-WUCIOA phases to those communities. SB 5334 clarifies that WUCIOA does not apply to a community phase created after the effective date of the act if (i) the community is made part of a pre-existing community pursuant to a right expressly set forth in the declaration of the pre-existing community, and (ii) the declaration of the new community expressly subjects the new community to the declaration of the pre-existing community. This allows the entire pre-WUCIOA community to be governed by a single, consistent set of governing documents.

CONCLUSION

The changes to the condominium construction warranties should bring needed relief to the housing market by eliminating flimsy warranty claims. The proof will, however, be in the pudding. If these changes are not effective over time to limit trivial, frivolous, scanty and nonessential condominium warranty claims, the Legislature will be called to make additional changes to bring balance to the condominium warranties and relief to the home ownership housing markets.