Amanda Barritt

 

                                                                                                                    Amanda K. Barritt
 
 
Supreme Court to Decide on Developer Warranty Issue
October 2011
 
 In a case of interest to developers and homeowners' associations, the Supreme Court of Florida will soon determine whether common law implied warranties extend to the construction of common areas and facilities of a residential subdivision.  The case is Maronda Homes, Inc. of Florida, et al, v. Lakeview Reserve Homeowners Association, Inc..

The Facts: A developer, Maronda Homes, developed a residential subdivision in Florida called Lakeview Reserve.  The developer incorporated Lakeview Reserve Homeowners Association, Inc., to operate and maintain the common areas of the subdivision.  The developer ultimately turned over control of the subdivision and Association to the lot owners.  After the turnover, the community experienced drainage problems and retained an engineer to inspect the common areas.  The engineer's report confirmed defects exist as to the paved streets, retention ponds, underground drainage pipes and grading of the site and lots.  As a result of such defects, the Association claims that multiple lot owners have experienced stagnant water, sinkholes, loss of grass, and erosion on their lots.

The Association brought action against Maronda Homes for breach of implied warranties of fitness for a particular purpose, merchantability, and habitability arising out of the alleged defective construction of the common area improvements.  The Orange County Circuit Court awarded a summary judgment to the developer.  The Association appealed to the Fifth District Court of Appeal.  The Fifth District analyzed the two major cases relied on by the developer, Conklin v. Hurley and Port Sewall Harbor & Tennis Club Owners Association, Inc. v. First Federal Savings and Loan Association of Martin County and overturned the trial court by holding that implied warranties of fitness for a particular purpose, habitability, and merchantability do apply to structures in common areas of a subdivision that immediately support the residence "in the form of essential services".

The Fifth District Analysis: In Conklin, the Florida Supreme Court held that implied warranties of fitness and merchantability do not extend to first purchasers of residential real estate for improvements to land, other than the construction of a home and other improvements "immediately supporting the residence thereon, such as water wells and septic tanks."

The Fifth District distinguished Conklin from Lakeview Reserve by pointing out that the buyers in the Conklin case were investors, whereas the homebuyers represented by the Association in Lakeview Reserve were generally individuals who purchased the homes mainly for their own residential purposes.  The Fifth District concluded that as permitting, construction and development have become more complex, and in this case includes underground improvements, a homebuyer is no longer on an equal footing with the developer to inspect a new home and related improvements for construction defects.  The court opined that the developer is in a much more capable position to detect flaws and correct them during construction then the average homebuyer and the homebuyers are thus entitled to benefit from a public policy of consumer protection.

Nevertheless, the Fifth District then applied the Conklin language to the facts of Lakeview Reserve, and came to a different holding than the Fourth District, which had already declined to extend the implied warranties to defects of roads and drainage areas in the Port Sewall case.  In Port Sewall, the Fourth District held that common area roads and drainage in the subdivision failed to meet the Conklin test because such improvements did not pertain to the construction of homes and did not immediately support the residences.

The Fifth District announced a new test to determine what improvements immediately support the residence and thus are protected by an implied warranty.  The new Fifth District test provides that if an improvement is providing a "service essential to the habitability of the home", then implied warranties apply.  The Fifth District held that roads, drainage systems, retention ponds and underground pipes are essential to the habitability of the home and thus implied warranties apply.  The Fifth District provided an illustrative list of examples of non-essential services, such as landscaping, sprinkler systems, recreational facilities, or a security system.  The court 

stated that a defect in such non-essential items "may be ugly, inconvenient, or uncomfortable, but do not render a home unfit for its intended purpose, i.e., habitability.'  The Fifth District certified its conflict with the decision of the Fourth District in Port Sewall, thereby seeking guidance from the Florida Supreme Court to resolve the conflict.

The Arguments Before the Supreme Court On its assertion that the Fourth District in Port Sewall and the Fifth District in Lakeview Reserve gave conflicting answers to an identical question based on substantially similar facts, Maronda Homes petitioned the Florida Supreme Court to answer the certified question: "Does the implied warranty of habitability apply to roadways and drainage structures in a residential subdivision?".  The Supreme Court has accepted jurisdiction and initial briefs from both parties have been filed.

Maronda Homes argues that the Fifth District's holding created policy decisions that should be made only by the Florida Legislature.  Maronda Homes asserts that while homeowners' associations are already extensively regulated, the legislature has chosen not to extend implied warranties to the common areas of homeowners' associations, as it has done for condominiums.  The developer argues that there is no need to improperly extend the implied warranty of habitability to common facilities when homeowners' associations and owners have adequate remedies such as express warranties, negligence, or statutory warranties, when applicable.  Further, the developer argues that the Association has no right to claim the benefit of implied warranties designed for the purpose of protecting the homeowners from damage to their homes.

The Association argues that the case should be dismissed because the Fifth District's decision does not directly conflict with the Fourth District's decision in Port Sewall.  The Association says the two cases can be distinguished because the Fourth District applied the Conklin rule but found that the plaintiff in Port Sewall did not properly allege that defective roads and drainage immediately support the homes, whereas the Fifth District found that the plaintiff in Lakeview Reserve did properly allege that the defective roads and drainage immediately support the homes.  The Association also argues that the Fifth District properly concluded that homeowners' associations have authority to sue for defects in common areas because of public policy to promote judicial economy and to provide a remedy for homeowners' associations who are obligated to accept ownership of common areas, but who do not have any opportunity to bargain with the developer with regard to the property transfer.  The Association also argues that the Fifth District got it right in furthering consumer protection by expanding implied warranties, as is a favorable trend in courts throughout the country.  The Association asserts that it is appropriate for the Court to expand the Conklin rule to apply to common area facilities even though the Legislature has not adopted implied warranties for homeowners' associations. 

It is now up to the Supreme Court to determine whether common law implied warranties should be expanded to apply to certain common area facilities, thereby potentially imposing increased risk to developers, while providing Associations and homeowners with additional remedies for defective subdivision improvements.

Practical Application: It is important for developers to note that parties may disclaim items from the implied warranty of habitability with properly drafted specific, clear, and unambiguous written disclaimers.  However, such disclaimers must be carefully drafted and may not always be accepted by the court (the trial court in Lakeview Reserve apparently was not satisfied with the warranty disclaimers Maronda Homes included in the Lakeview Reserve Restrictions).  Promotion of customer satisfaction and open communication with buyers and new homeowners can likely help avoid or limit construction defect claims.  Homeowners should also be aware that there may be some opportunity to protect themselves and their homeowners' associations by actively participating and communicating with the developer at and prior to turnover and by forming a homeowner committee to perform due diligence as early as possible in the turnover process.  If defects are discovered and addressed earlier than later, perhaps further damage and litigation may be avoided.

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Distressed Real Estate Developments and the "Successor Developer"

July 2011

One of the first questions often posed to attorneys by their investor clients who are contemplating investing in a distressed real estate project is whether they will be deemed a "successor developer."  There is a tendency for investors to want to avoid the designation because of the potential liabilities that will likely flow to a successor developer of a distressed project; but, there may also be potential benefits, often in the nature of developer reserved rights, that may even be necessary for the investor to obtain in order to complete the construction and sale of the project.

Note that this article does not address successor developers of condominium projects, which is specifically governed by the Florida Condominium Act and the relevant administrative rules promulgated pursuant thereto, the Condominium Act and Rules contain specific provisions addressing developer issues which apply only to condominiums.  Further, Senate Bill 1196 (2010) has been passed by the Legislature and signed into law by Governor Christ.  This new law, added as Part VII to Chapter 718, Florida Statutes, provides successor purchasers of bulk condominium units relief from certain provisions of the Condominium Act.

The specific circumstances and the specific permits or governmental approvals, agreements, contracts, and other legal instruments already in place at the time of the purchase of a given project, may dictate, in whole or in part, whether the investor becomes, or can become, a successor developer when purchasing the unfinished and/or unsold property in a development and also will help the investor determine whether it is desirable to assume the role of successor developer in that instance.  The investor needs to utilize the due diligence period efficiently to carefully review each of the existing documents, contracts, construction status, developer representations, and entitlements to make the determination of whether the necessary or desired developer rights can be or will be transferred and, in turn, what developer liabilities will be assumed.  The investor may be able to assume some developer rights and liabilities under one document or entitlement, and still avoid developer liabilities (and rights) under other documents or entitlements.

What Defines a "Developer" The definition of developer will depend on how it is defined in a particular document, entitlement or law.  Chapter 720, Florida Statutes, which governs residential homeowners' associations, a developer is defined as a person or entity that creates the community served by the homeowners' association or succeeds to the rights and liabilities of the person or entity that created the community served by the association, provided that such is evidenced in writing.  Accordingly, in order to assume developer liabilities under Chapter 720, Florida Statutes, (which liabilities include, but are not limited to the funding of reserves and assessment deficits under a developer guarantee and the requirement for turnover of control of the association and association documents to non-developer members), a successor developer would have to obtain an assignment of developer rights from the original developer. 

With regard to rights and liabilities under a declaration of restrictions, covenants, easements, or other agreements, the particular definitions and provisions provided in such document will determine whether the successor purchaser assumes the rights and/or obligations of the developer.  Some documents will specifically require an actual written assignment of developer rights, while others will provide that a successor developer automatically succeeds to the interests of the original developer upon the purchase of a certain proportion of the overall property, or other similar provisions. 

Developer Rights that May be Needed Developers typically reserve rights in the governing documents to allow the developer to complete the construction and market and sell the property, where non-developer owners are restricted from conducting some of the same activities.  The developer may also be able to control the Board of Directors of the governing association (if turnover has not already been triggered)  and make unilateral amendments to the governing documents.  If the investor obtains an assignment of developer rights, however, it will likely also be incurring the developer liabilities.  The status of completion of the project and whether or not the investor is able to cultivate a positive relationship with the existing owners and association (if it has been turned over) will influence the investor's decision as to whether it will be beneficial to assume the rights, and thereby possibly the  risk, as successor developer.  Assuming the investor is not taking an assignment of developer rights, the investor will want to ensure that none of the governing documents of the homeowners or property owners association or any other areas where it might be beneficial to assume the rights of the developer include include avoidance of working capital contributions paid by non-developer owners and taking advantage of a  developer guarantee to fund the deficits rather than pay regular assessments on each of the investor's lots or units (which may or may not be an advantage in this economy).  The investor will likely need assignment of construction and architectural plans, permits and development orders.  It may be necessary to work with the third parties involved, including engineers, architects, and government agencies, to ensure that such rights are assignable.  That being said, if the infrastructure and recreational or other common facilities promised by the developer have not been completed, the more such work is taken on by the investor, the more likely the investor will begin to look like a successor developer and will likely take on more potential liability for claims at least as to the portions of the project the investor completed. 

Available Developer Rights If the project includes a property owners' association that has already been turned over by the original developer to the non-developer owners, the governing documents may provide that some or all of the developer rights are terminated.  It may be necessary to work with the association to agree to complete certain amenities or infrastructure in exchange for the rights necessary to do so.  Some specific rights the investor may need are easements over the common areas if owned by the Association, the rights to erect marketing signs, maintain sales offices and models, and maintain construction trailers.  If the association has been turned over from the developer, however, and the investor is purchasing a substantial amount of units in the project, the investor may be able to accomplish its goals and obtain necessary rights or eliminate restrictions through the exercise the investors rights as a major, or majority vote holder in the association.  Generally, it is mutually beneficial for the investor, owners, and associations to work cooperatively to achieve a common goal of completing a sustainable community as originally intended by all of the parties. 

Where the project in consideration has been obtained by a mortgagee in a foreclosure, it is important to review the Certificate of Title to determine what developer rights the mortgagee obtained from the original developer.  Presumably, the investor purchasing from the foreclosing mortgagee cannot receive more rights than the foreclosing mortgagee received in the foreclosure.

Successor Developer Liabilities Particularly where an investor takes over the completion of construction of infrastructure and common facilities, an investor potentially incurs developer liabilities which may include warranties, construction defect claims, and possible claims for non-compliance with permits and governmental approvals.  An investor must also consider past due association and community development district assessments, if applicable, and the proper funding of association reserves and capital contributions.  If the investor is deemed to be a successor developer, the other owners, the association, the community development district, and/or the applicable governmental 

agency may look to the investor to satisfy the shortfalls, and the investor, depending on the particular set of facts, may be obligated to do so.  Accordingly, the investor should be aware and develop a good understanding of all financial obligations of the developer with respect to the particular project and the financial obligations the investor may assume merely be taking title to the particular property as a non-developer owner.  It is also generally beneficial that an investor attempt to foster a positive relationship with the existing owners and property owners association as their cooperation will be beneficial in completing and selling the project. 

This article highlights some potential considerations for an investor considering investing in a distressed residential or commercial development who is concerned about assuming developer rights and obligations.  It is highly recommended that an investor compile and consult with a team of legal counselors and appropriate engineers and consultants for a comprehensive analysis of a particular project. 

Disclosure:The contents of this article do not constitute legal advice, nor do they create an attorney-client relationship.  Should you have any legal questions you should consult with your attorney.  The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.  

 -Amanda K. Barritt is an associate with the law firm of Henderson, Franklin P.A., in Fort Myers.  She focuses her practice in real estate and more specifically, in community association law.

 
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