Why Does Defect Litigation Target Multi-Family Residential Construction?
I have been in the construction industry, building science envelope game and defect litigation long enough to gain a pretty good handle on the “how, why, when and who.” I recently read an article about defect litigation that explained the reason that multi-family projects were prime targets. The claim was it is the convenience of having things neatly bundled up. To some extent this is true but it goes much deeper and covers more ground. I am not an attorney and my editorial is simply my opinion of what I have observed over the last few decades.
Multi-family residential construction is indeed a prime target for defect litigation. The first reason I heard of was given back in the 1990s. I was told it was because multi-family developers were notoriously cheap and developers would cut cost everywhere possible in order to make more money. Problems were made worse by the repetitive detailing. Making the same mistake over and over is definitely a problem.
The ’80s were a boom time for multi-family projects and the details and flashings were indeed bad or non-existent. Over time, the laws got tougher and industry practices generally improved. For a while now the multi-family projects could almost be a stellar example of enhanced details and scrutinized construction practices—and yet the lawsuits still continue. When asked to review plans or details on a multi-family project, I often state something like, “I think what you’re doing is fine, but you might consider doing this to protect yourself in the event of litigation.” The response is universally the same: “It is not if we get sued but when.”
So why are multi-family projects more prone to defect litigation? I believe it has more to do with the bundling of people and availability of financial reserves. To explain my thought, the first step in defect litigation is usually a noticeable problem is discovered or someone points out the statute of limitations is about to run out. In either case, an attorney gets involved and offers their services on a contingency basis. This makes sense as they collect a percentage on only what they recover from litigation. The next group to jump in is the experts to do a building analysis. This requires site reviews, intrusive investigations and using various lab testing and often other agencies. These people must be paid up front. It is not legal for them to work on a contingency basis. This means a substantial amount of up-front cash is needed to proceed. Associations have the money in dues and fees from the members. The other factor is what I call pack mentality. Assume you have 12 people on the homeowner’s board and they are presented a proposed case to proceed with litigation. While most people are more interested in moving along with their lives, there are always one or two that need to assert their authority and expert opinion and the others tend to just fold.
The Defect List
The worst part of all is that many of these cases turn out terrible, in particular for the property unit owners. It starts with the concept that the plaintiff experts need to throw everything from real to imaginary defects into the mix. They are well aware that like any negotiation, you start high and will likely settle for less. The over inflated defect list has issues at a later date. Once a settlement is reached the attorney takes his percentage cut. After reduced awards, this often leaves unit owners with only enough to fix just the sum of listed defects. That original defect list comes back to haunt the owners when they go to sell their home. Real estate law requires them to disclose the lawsuit, the defects and what was done to fix them. The new buyer has no idea of what went on and justifiably becomes nervous. Some walk away, other purchase at reduced rates and substantial discounts. In some cases, owners opted to secure additional loans to fix everything claimed. Others have been upside down on their unit and may ultimately have to file bankruptcy.
I have always felt bad for the honest developers and contractors who get stung and even worse for the unit owners. How do they know who to trust? Some of these plaintiff experts are honest and fair, many are not. Today many unit owners are promised a big payday, some get greedy; others just get swept up in the fever to attack, because every contractor is crooked. The truth in the complex litigation cases is not easy or simple. Unit owners should be aware that most contractors will step up and make repairs when presented damages that are real and a repair plan that is fair and reasonable. Compounding the problem is that contractors are often advised to stay out of any negotiations for a myriad of reasons. It is a tangled web we have woven.