Top Risk Management Issues for Florida Condo Developers: Part II

Robert Alfert, Jr.  Image courtesy of Nelson Mullins Broad and Cassel

The liability assumed by condominium developers in Florida is both significant in breadth and in duration. Under Florida’s Condominium Act Warranty Law, developers are as equally liable as the contractor to unit owners, successor owners and the association for “fitness and merchantability for the purposes or uses intended.” Fla. Stat. 718.203. This broad warranty covers all improvements, specifically including structure, building envelope, mechanical, electrical and even some personalty associated with the condominium. The period of liability can extend up to 10 years under Florida’s very liberal statutes of limitation and period of repose. Contrary to the interpretation of many developers, and even their lawyers, the warranties running for three to five years do not end the exposure. The limitations periods, under Florida case law, are then tacked onto these warranty periods.

Not surprisingly, Florida’s Condominium Act has spawned a cottage industry of contingency fee lawyers targeting associations as clients. They aggressively market to associations and property management companies, and along with their go-to consultants, offer their services often at no charge to the association or unit owners unless a recovery is obtained. The association itself has the power to sue on behalf of all unit owners for matters of common interest. Fla. Stat. 718.111(3).

Liability cannot fully be avoided or delegated. It can only be managed. A comprehensive, customized management plan, however, can assist in limiting risk. This two-part series highlights 10 key risk management measures, in no particular order, that developers can implement to lessen and manage risk on their condominium projects. These measures, coupled with sound design, construction, operations and maintenance protocols, can go a long way to combatting the enhanced liability on condominium projects.

Customize Design, Construction Contracts

While this point may seem axiomatic, many developers use standard AIA contracts with little-to-no modification, not even to comport with Florida law on key issues like indemnity. The definition of the project scope in the base contract should clearly identify that the project is a Florida condominium, referencing if possible the declaration of condominium. The intent is to lock in the bonding companies and potentially the subcontractors and their carriers, to liability under Florida’s Condominium Act. The intended beneficiaries of the project – the unit owners and the association―should be referenced. Indeed, the warranty sections should explicitly reference the Florida Condominium Act Warranty set forth in Section 718.203. The contract indemnity sections should also clearly cover the “Work itself,” which is an actual exclusion to the standard AIA indemnity clause.

Disallow Damages Limitations, Waivers by Architect and Contractor

During this robust period of construction activity in the Florida market, it has become standard fare for architects and contractors to demand caps on their damages exposure and waivers of consequential damages (i.e., lost profits, loss of financing, loss of revenue). Even the standard AIA contracts have a mutual waiver of consequential damages provision. Any caps or waivers are, simply stated, bad for a developer. It means the developer will own (self-insure) that exposure. Developers should pick top-flight companies that will perform their work in a high-quality manner and stand behind it should problems arise.

Admittedly, this is a heated negotiation point in many project contracts, so often some concessions may be necessary. Any damages caps should be commensurate with the actual risk on the project. Caps should exclude personal injury and death and only apply to property damage and defects. The damages caps should also never be below the insurance limits under the project policies, or the developer is essentially paying for coverage that it can never tap. If the developer is doing business with a company that still will not agree to contract without a lower cap, at least carve out from the liability cap, “except for damages covered by any insurance policies applicable to the project.” While not a perfect result—indeed, it is debatable under Florida law whether CGL policies even cover consequential damages—it is better than a total cap and waiver.

Require Push-Down of Key Contract Provisions to Subcontractors

The construction contract should require that the subcontractor assume certain duties and obligations in its subcontract that correspond to the performance standards and key terms set forth in the prime contract. As the developer does not contract with the subcontractors, and generally has little say in the negotiation of the subcontract itself, setting forth basic push-down requirements in the prime agreement provides some degree of control in that respect. The key terms related to indemnity, insurance, damages caps and waivers, for example, should be consistent with what the developer required of the contractor. While the contractor is always on the hook for all of the work, in any ensuing litigation, the subcontractors are invariably joined in the suit, and it is immensely helpful in the settlement process, and pooling together sufficient money to settle unit owner or association claims, if the subcontractor carries an appropriate level of insurance and its contract has no onerous damages limitations or waivers.

Require Architect Hire Building Envelope Consultant

Florida weather, especially South Florida’s climate, is brutal on buildings. The vast majority of condominium defect claims—arguably one could make this same statement on almost all forms of construction in Florida—arise from building envelope failures. Not all architects, a profession of generalists to be candid, are also experts in building envelopes and weather protection; and many large-scale or iconic design projects use architects from out of state that simply are not familiar with Florida’s wind-driven rains, hurricanes, heat and humidity.

There are, however, consulting firms that specialize exclusively on building envelopes, and indeed, some South Florida counties/cities are now requiring the design team to have a building envelope specialist sign off on the plans for permit review. The key here is who contracts for the specialist. Some developers have as a matter of course hired building envelope specialists for their own use, to peer review the architect’s plans. This is a major mistake. If the building envelope specialist recommends a design change that the developer chooses not to implement, say by way of example for cost reasons, overcoming that issue is exceedingly difficult in claims brought by the unit owners. The specialist should be retained by, and work with, the architect, to develop a cost-efficient design that works. Incidentally, requiring a building envelope consultant also adds another professional liability policy to the coverage matrix.

Consider Hiring Contractor for Pre-Construction Services

This last point is rather nuanced; it serves a salutary benefit for the project, but is also a trick to undermine the Spearin Doctrine and put the contractor on the hook for possible design issues. Regarding the project benefit, having a local contractor work with the architect during design development, to address basic questions of cost and schedule at each stage of design, and to perform design reviews, constructability reviews and perhaps even BIM clash detection, adds significant practical value to the project.

Most major contractors, especially those that also perform construction management at risk services, have architects and engineers on staff to perform preconstruction, and their construction crew to provide the practical review. The value in the risk equation is that the contractor now will have difficulty raising unforeseen conditions or conflicts as a claim, since it was fully involved in the development of the design, as opposed to just providing a hard bid on a completed set of plans. Moreover, if a design defect arises, it is more difficult for the contractor to claim against the developer.

While under the Spearin Doctrine an owner warrants to the contractor that the design plans are constructible, if the contractor was involved during the design development process, it is more difficult to rely on this Doctrine as a defense. Significantly, if the design defect is one that a skilled contractor should have identified during design development, then the contractor is now exposed to the developer for the damages. The contractor cannot be held to the same standard of care as the architect or engineer, but if it involves an issue that the contractor should have caught—say for example, a clash between structure and mechanical systems that should have been detected on the BIM model—the contractor is exposed to a claim, as is the design team.

Robert Alfert, Jr., is a partner in the construction law and litigation practice of Nelson Mullins Broad and Cassel.