Condominium Comeback? Bullish-Developers Must Consider the Liabilities Associated with the Resurgence of Condominium Developments

The condominium embodies a missing price point in Seattle’s real estate market. Both first-time home buyers and empty-nesters looking to downsize are faced with fierce competition as they search for units priced $400,000-$600,000 in the greater Seattle area. As a result, we have noticed an uptick in the number of developers seeking legal advice regarding the potential risks associated with condominiums. This article provides an update on Washington’s condominium laws, a summary of the potential liabilities arising from the Washington Condominium Act (“WCA”), and a review of the risk management tools that can be implemented to mitigate them.

Condominiums were not always in short supply. The “sharp teeth” – the express and implied warranties – of the WCA coupled with the Great Recession of 2009 discouraged developers from constructing condominiums, resulting in a 75 percent decline in the number of condominiums built in the Seattle metropolitan area after the Great Recession. Ergo, developers ignored the Growth Management Act’s affordable homeownership goals and responded to the lack of land supply, escalating construction costs, and tail liabilities associated with condominium developments by constructing for-rent apartments.

Earlier this year, the Washington State Legislature considered three bills that attempted to address the decline in condominium development: HB 2475, HB 2831, and SB 6523. None were successful. Separately, in March 2018, the Washington Uniform Common Interest Ownership Act (“WUCIOA”) was signed into law, which will become effective on July 1, 2018. The WUCIOA will govern the formation, management, and termination of condominiums, cooperatives, and planned communities – all of which are governed by homeowners’ associations. Notably, the “sharp teeth” of the WCA remain unchanged.

Veteran condominium developers – much like their amateur counterparts – can’t resist the temptation to compete in Seattle’s condominium market given the extraordinary imbalance between supply and demand. The question for all developers is whether the risk is worth the reward under the current statutory scheme. Developers must evaluate the risks associated with developing condominiums and put the proper risk management mechanisms in place to hedge against their high-risk, high-reward bets.

The WCA’s mandatory pre-litigation process is both a sword and shield for construction professionals. RCW 64.50, et seq. demands that homeowners provide written notice to construction professionals before a lawsuit is filed. The notice must contain a statement that the claimant is asserting a construction defect claim and a reasonable description of the alleged defect(s). The pre-litigation process is a shield because the notice can be tendered to insurance carriers to trigger coverage, and it provides the parties an opportunity to negotiate a pre-litigation settlement. However, absent a cost-effective repair or motivation to protect a business relationship, the practicalities of the WCA’s mandatory pre-litigation process ultimately cost the parties more time and money, making the extended dispute resolution process more analogous to a sword than a shield.

Relatedly, attorneys’ fees are both a major liability to factor into an initial risk assessment and a driving force behind the litigation of condominium-based claims. RCW 64.34.455 provides that the court may award reasonable attorneys’ fees to the prevailing party. Developers should assume litigation will occur because it is nearly impossible to build a large-scale condominium project without defects, and plaintiffs’ attorneys representing homeowners on a contingent fee basis are incentivized to litigate condominium claims because there is no cap on fees. Consequently, condominium litigation is a lucrative cottage industry for many licensed professionals.

Ostensibly the most significant threat of the WCA to developers is the substantial warranty rights provided to condominium purchasers. RCW 64.34.443 supplies four express warranties. Put simply, these express warranties include that a condominium conform: (1) to the facts and promises relating to the unit, its use, or rights appurtenant thereto; (2) to the model or description of the unit at the time of sale; (3) to the description of the real property comprising the unit; and (4) to a specified use that is lawful. Likewise, RCW 64.34.445 supplies certain implied warranties ensuring that the condominium is constructed in a workmanlike manner, in compliance with all applicable standards and laws, and free from defective materials.

Fortunately for developers eager to meet the market’s demand for condominiums, there are a plethora of risk management tools that can considerably lessen some of the potential liabilities associated with the WCA. Early in the development process, developers should consult with their attorney about the formation of a project-specific business entity, drafting construction contracts with carefully crafted scope of work and indemnity provisions, and obtaining the right insurance coverages and limits based on the scope of their prospective condominium project. Obtaining the correct coverages is critical, because many policies providing coverage for trades exclude coverage for condominiums. When used correctly, these risk management tools can protect developers from the seemingly inevitable losses resulting from future claims.

Eventually, the increasing demand for condominiums will tip the scales in the risk-reward analysis. It appears the leading developers in our region are keen to this fact, and are beginning to consider projects that meet the demand.

Originally published as “OP-ED: Bullish developers must consider liabilities tied to condos” on June 14, 2018, by the Daily Journal of Commerce.