Condominium development in Nebraska was booming in the 2000s. This came to a screeching halt with the advent of the Great Recession in about 2008 or 2009. Single-family home development also came to a halt at that time.
But starting about 2012, single-family home development took off again and has been very robust since. But condominium development never bounced back. In the five-year period prior to 2010, more than 60 condominiums were developed in Omaha. However, in the previous five years, that is 2015 through 2019, less than 20 condominiums were developed in Omaha.
Why is that?
The prevailing belief is that this limited condominium development had little to do with the economy, which was, of course, very good, but rather, the influx of construction defect litigation. Those who know this cottage industry of litigation know what this is about: litigation commenced by condominium owners and condominium associations, often with minor or meritless construction defect complaints, where the attorneys’ fees and other costs are excessive.
These are much like class-action lawsuits. Instead of facing one lawsuit brought by one owner of a house, a developer is faced with lawsuits brought by 50 condominium owners. Related to this, the cost of insurance coverage for construction defects skyrocketed. As a result, developers became shy about spending money on quality projects.
Will pending changes to the law bring relief?
Proposed changes to the condominium law in Nebraska may help to cure this problem. This is pursuant to LB 808, which is currently being considered by the Nebraska legislature. Here is what the bill covers:
a. Statute of Limitations.
The first change is to the statute of limitations for claims made by condominium owners or condominium associations against the developer (a condominium association manages the condominium on behalf of the owners). As it stands now, there is a four-year statute of limitations. This amendment would reduce the statute of limitations to two years. Further, the tolling period is amended so that the action must in all events be commenced within one year from the date of discovery of the defect. This tolling period is currently two years.
Further, when selling a condominium, the developer and buyer can agree to reduce the statute of limitations to one year.
More importantly, the “statute of repose” has been reduced from 10 years to five years. The statute of repose describes the final date a lawsuit can be brought, regardless of discovery of the event. Therefore, no lawsuit of any kind may be brought five years after construction is complete.
b. A condominium association must maintain and adhere to preventative maintenance plans.
The Declaration is the document that creates a condominium. This amendment states that any new Declaration must contain language that a preventative maintenance plan must be prepared for the maintenance of the condominium and all common elements. This includes a reserve analysis, an annually updated five-year capital plan and minimum financial reserves based on the reserve analysis.
The purpose of this is to limit a developer’s litigation risk if the condominium association doesn’t prepare and comply with the preventative maintenance plan. A preventative maintenance plan, called a reserve plan in the industry, is very important for all condominiums.
c. Pre-litigation notice and cure period.
Before commencing litigation against a developer, the condominium owner must provide written notice of the proposed litigation to the developer, and the developer is given three months to cure the alleged defect. If the defect is such that it can’t be cured within three months, the cure period will be extended for as long as the developer is diligently proceeding with repairs. Any proceeding commenced without strict compliance with these requirements is subject to dismissal for noncompliance. As a result, a developer can cure a legitimate construction defect without the expense of litigation.
d. Limit on a condominium association’s ability to commence litigation against a developer.
A couple of proposed changes to the law would restrict the ability of the condominium association to commence litigation against a developer for construction defects. Language would be added to the law saying that the Declaration may not provide the condominium association with the power to institute litigation (other than enforcing covenants against the owners). This litigation may only be instituted by the unit owners themselves. The association could institute litigation but only upon the affirmative vote of at least 80 percent of the votes in the condominium association.
e. Limit on developer liability for litigation expense.
The condominium developer is currently liable to the condominium association for litigation expenses, including reasonable attorney’s fees. We all understand that there’s no such thing as reasonable attorney’s fees. This liability would be removed by the new law.
Further, the condominium developer’s liability to a condominium association would not be for just any wrongful act, but only for the negligent acts of the developer. The negligence standard is a higher standard to meet for a plaintiff.
What else can be done?
Beyond the proposed legislation as currently written, there can be some additional protection for the developer that should be built into the Nebraska condominium statute. Hopefully, these additional changes can be made next year.
A recent Minnesota statute is helpful here. In Minnesota, a condominium association must follow a reserve plan, and if the association fails to do so, the developer doesn’t have any liability for damage caused by the failure of the association to comply with the reserve plan. This goes a step further than the proposed Nebraska change, which only requires the association to prepare a reserve plan. But there is nothing in the proposed statute that explicitly protects the developer from liability for damages caused by the association’s failure to follow this reserve plan.
In Nebraska, the developer is liable for any construction defects of any kind under any theory. In Minnesota, claims can only be made for “construction defects.” These claims are limited to those claims caused by a defect in the design or construction of the improvement. More importantly, the Minnesota statute describes what is not a construction defect. A construction defect claim does not include claims related to subsequent maintenance.
The state of Washington is also instructive here. In Washington, the condominium law was recently changed concerning the definition of construction defect. Previously, the condominium developer had to comply with all laws. Under the new Washington law, the plaintiff would have to prove not just that the defect exists but that it is more than just technical, is significant and has caused physical damage to the unit or common elements.
In Nebraska, there is no protection for a board of directors of a condominium association when it doesn’t bring a claim for construction defects against the developer. The only thing the board of directors can do to protect itself is to file a lawsuit. As a result, a condominium association board is inclined to file lawsuits just to protect themselves from claims brought by other condominium owners for failure to file the lawsuit.
Washington state in 2019 amended its statute to reduce the personal liability of condominium association directors by granting them immunity for discretionary decisions. A condominium association director in Washington now has more leeway to make a decision to not bring a construction defect suit.
What happens next
If the law as currently written passes, it will take effect three months after passage. That likely means fall of 2020. This would open the floodgates to condominium development, in Omaha, particularly, and Nebraska overall, floodgates that have been shut since the Great Recession.
Robert Dailey is an attorney with Omaha, Nebraska-based McGrath North. He specializes in condominium development, including condominiums for residential, commercial and multi-use. He can be reached at firstname.lastname@example.org.