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Apartments to Condos: Peeling the Onion of Legal & Insurance Issues for This New Breed of Cases

During the recent fluctuations in the residential housing markets across the country there have been numerous residential development projects which may have been initially operated as apartments and later converted to condominium units.  This trend will be most prevalent for the projects built around 2007 which may have initially been intended for sale but were placed on the rental market as an alternative during the economic downturn.  Conversely, as the demand for condominium units increased beyond the available inventory, some older apartment complexes also have been converted to condominiums to meet the housing demand in certain areas which are more densely populated.  All projects which began as apartments and are converted later to condominiums have a unique project history raising various challenges when addressing defect claims in subsequent litigation.

Most states as well as local municipalities impose strict regulations on condominium conversions.  The courts consistently have treated condominium conversion regulation as a proper exercise of local police power.  The regulations are upheld so long as “reasonably related” to the legitimate governmental purpose of maintaining a “healthy rental housing inventory.” (See, Griffin Development Co. v. City of Oxnard (1985) 39 Cal.3d 256, 264-266).

In addition to complying with local requirements for existing renters, condominium conversions are subject to approval requirements imposed by state law.  In California, there are several steps which are simultaneous with the tenant notice requirements especially if an owner intends to create five or more condominium units.  The typical procedures require the filing of several documents with the Bureau of Real Estate, formerly the Department of Real Estate.  An application for a tentative tract map approval must be filed with the applicable jurisdiction.  The local planning agency reviews the application, holds a public hearing, and grants approval.  Appeals may be filed and heard within each jurisdiction.  The Developer then files a public report and complies with all conditions of the tentative tract map to receive a final map.

The legal issues for developers which create a basis for conversion liability are significant and include several theories of liability for recovery including negligence, negligent misrepresentation, failure to disclose conditions, breach of warranty and fraud.  Most cases filed also will include a claim for strict liability for the converter, but this would likely be limited to the areas of new work, rather than the entire project, depending on the facts.  The Title VII/SB 800 Right to Repair Statute in California expressly states that it does not apply to condominium conversions (CA Civil Code 896).  However, the Calderon Act for Common Interest Development (CA Civil Code 6000) still applies to the newly formed homeowner associations.  Relevant statutes also require disclosure (CA Civil Code 1134) and penalize failure to disclose “substantial defects or malfunctions” of what are considered to be “major systems” including (but of course not limited to) roof, walls floors, heating, air conditioning, plumbing and electrical systems.

Overall, these cases involve a much deeper level of investigation and also greater complexity in coordination, discovery and resolution efforts — often conducted on a tiered level — that can best be handled by grouping the original contractors, the conversion contractors and/or applicable repair contractors to reach a resolution of the entire action.

 

Blog by: Lisa Cappelluti, Partner, San Francisco, Los Angeles.

Lisa will be speaking at the West Coast Casualty Construction Conference in May. Click here for more details

 

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