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Drawbacks of the Boom Liability in New Construction

In case you haven’t noticed, there is currently a building boom taking place in New York City. With so many scaffolds and cranes dotting the skyline, it seems like everyone wants to get into the real estate game and be a developer.

Most of the new construction work in the city is being done by very experienced developers—but a lot of it is being done by relative newcomers, sometimes with less-than-optimal results.

Recent events in New York City with the crane collapse and the marked increase in construction accidents only underline the importance of having good contracts which cover the risks and relationships on the project and having counsel from attorneys knowledgeable in this area of the law. The standards governing injuries to contractors are stricter than the standards for common law negligence and potential liability can be greater.

Some developers report having problems with the work being done by their contractors, and the people buying apartments in these brand-new buildings are also finding problems upon moving in.

As more closings occur in new buildings and neighbors start to talk to one another, disgruntled new owners are increasingly seeking legal advice about what to do with construction-related problems in their brand-new apartments—particularly when the developers do not respond to their concerns. This trend is not just a problem for developers, however. Poor construction becomes a problem for the boards of these new buildings as well, since once an apartment sale has closed, the board—as well as the sponsor—is likely to be named in any lawsuits involving a new unit. It is also a potential problem for the other residents of the building as well, since the expense of such lawsuits is an expense for the entire building community.

Not Built Yet—But Already Bought

Many people are signing up to buy apartments in condominium buildings that are not even built yet. Sometimes the problem is that when it is completed, the finished product does not look the way the buyer thought it would look. Amenities may have been changed in the course of construction. Other times, people close on units before the units are really ready for occupancy. Even though they are technically ready to move into, there may be many important finish items that are not quite done yet. Sometimes there are literally pages of such items.

The most common reason for such a situation usually has something to do with a combination of pressure from the developer to close and the financing commitment for the purchase being ready to expire. When the developer is ready to close, under the terms of the typical contract, he can just send a notice of the closing date. Even if he is willing to extend the date—which he may not be—the purchaser’s mortgage commitment may be about to expire, and either cannot be extended, or will be expensive to extend. This all-too-common situation can cause people to close on an apartment too soon.

My advice to both developers and buyers is to try to wait as long as is reasonable to close in order to allow most of the “punch-list” work to be completed. The term “punch-list” traditionally refers to minor items that need touch-ups here and there. There may be holes in the wall, or paint needs to be touched up—things of that nature.

Lately however, the use of this term has been expanded to include anything and everything under the sun that still needs to be addressed after the buyers move in. Thus, it is no longer a true “punch-list,” but rather is a list of incomplete work that can be done while the buyers live there—albeit uncomfortably. Having a non-working toilet in the second bathroom and no stove for a few weeks is more than what belongs on a “punch-list” in the truest sense of the term, but that is the way it is often handled.

Waiting longer to close lessens the likelihood of litigation against the developer down the road. When this happens, the closing attorneys should prepare an agreement with a punch-list of the work to be completed after the closing and a timetable. Ideally, there should be some money held in escrow to assure prompt completion and keep the developer motivated to finish quickly.

Acting Too Quickly?

When these safeguards are not put in place, people frequently close, then seek legal advice from someone other than their closing attorney. They complain that many months have passed since the closing and the punch-list is still not complete. They say they are being put off when they call the developer’s office.

All too often developers do not take these situations as seriously as they should and do not seek their own legal advice. The developer may be working on punch-lists for upcoming closings and put the punch-lists for units that closed a while ago on the back burner. As time passes and people get friendly with their neighbors, they start talking and find that they all have the same types of issues and complaints. This may result in an association being formed so that an attorney can be retained for the group. The developer may have certain warranty obligations, both as a matter of law and in the offering plan. In other words, developers should not take this situation lightly.

Bigger Issues

Punch-list problems are one thing, but then there are the rarer situations where there are massive problems with the construction of the building itself.

In one townhouse condominium, the basement flooded every time it rained. There were also code violations with vents installed in the wrong places, and too close to bedroom windows. All of the work had been self-certified, so that it was never inspected by the Department of Buildings. The problem was that none of the possible solutions were easy and all of them were potentially very expensive—to such a degree that the developer would have had to buy back the unit. Unfortunately, the developer did not have the funds to do so. In this type of situation, litigation may be inevitable.

In another building there were allegedly problems with heat and ventilation throughout the building, and the unit owners tried to sue the developer and every architect and engineer who ever had anything to do with the building. These lawsuits are very expensive to pursue, take a long time and often have disappointing, anti-climactic outcomes.

Truth in Advertising

Another category of grievances has to do with alleged misrepresentations about the property. It may concern the amenities in the building, such as having a luxurious private club. It could also concern an issue such as having a “view,” when it turns out that the new building next door suddenly blocks the view a new owner thought they would have—and were paying for. It takes a lot of time, effort and expense to dig into who knew what and when they knew it.

While the Attorney General’s office oversees offering plans, it does not really have an enforcement unit. It can be helpful to the extent that they can call parties together for meetings to try to gently “ nudge” people into resolving disputes, but there is not enough manpower to address all of the complaints in the many new buildings plagued with construction and finishing problems. Thus, people usually wind up in lawyers’ offices talking about private litigation.

Developers would be well-advised to consult knowledgeable legal counsel before these situations blow up. Shareholders or condominium unit owners for their part would be well-advised to talk to their neighbors and compare notes, then to seek legal counsel familiar with these kinds of issues. Anyone thinking of buying into a shiny new building should think about how these issues may affect their future occupancy in the building. Counsel for both the developer and the apartment owners should be well-versed in building construction law, as well as co-op and condominium law. Some developers just call a “friend” for advice. If there is litigation, there will need to be expert witnesses and there will be lots of construction documents to review. If possible, efforts should be made to exhaust settlement discussions before commencing a lawsuit. These lawsuits can be very complex with many parties.

C. Jaye Berger, Esq., is a principal of the Law Offices C. Jaye Berger, and a real estate attorney that specializes in construction-related litigation and issues pertaining to co-ops and condos.

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