As far as court decisions go, this has been a good season for Massachusetts homeowners generally and for condominium owners in particular. Earlier this year, the Supreme Judicial Court (SJC) held that home buyers can rely on an implied warranty of habitability in the purchase of new homes. Lower courts have hinted broadly at that conclusion in past decisions, and the implied warranty for new homes is well-established in most other jurisdictions. But this is the first time Massachusetts’ high court has embraced this consumer protection principle in this context, establishing it here as a matter of law.

The court didn’t stop there. Following closely on the heels of that widely anticipated decision (Albrecht v. Clifford), the SJC went on to rule in a companion case that the warranty of habitability it had established for the purchasers of detached homes applied equally and for the same reasons to the purchasers of condominium units.

"The policy reasons that led us to adopt an implied warranty of habitability in the purchase of a new home apply equally to the purchase of a new condominium unit,” the court ruled in Berish v. Bornstein. “The legal differences between the purchase and ownership of a condominium and the purchase and ownership of a house are inconsequential when compared with the similarity of purpose underlying both transactions, i.e., the acquisition of a habitable home,” the court said.

Association’s Warranty

That decision, while certainly welcome, was not entirely unexpected. Once the court had established the underlying principle, that a warranty existed for detached single-family homes, its extension to condominium units looked like a foregone conclusion. Less certain, but crucial for condominium owners, was the court’s conclusion that the implied warranty also applies to community associations.

The key argument here, which we made in an amicus brief for the Community Associations Institute in support of the community association, was that unit owners have an opportunity to inspect their individual units before purchasing them, but they cannot realistically inspect all the common areas in which they hold a partial ownership interest. Moreover, the authority to maintain and repair common areas rests entirely with the community association, which is not involved in the construction process, has no contractual relationship with the builder/developer, and has no opportunity to negotiate the express warranties that individual unit owners, arguably, could negotiate for the units they purchase. If a common area defect affects the habitability of individual units, owners would have no recourse against the builder, save the recourse created by recognizing an implied warranty running to the community association. The SJC agreed.

The association’s “exclusive right” to seek remedies for defects in common areas, “combined with the unit owner’s virtually nonexistent control over the common areas,” the court noted, “may result in an incomplete remedy for unit owners against a builder whose improper design, material, or workmanship is responsible for a defect in a common areas that causes units to be uninhabitable or unsafe.”

Standards for Claims

The court established essentially the same standards for community associations, unit owners, and owners of detached homes seeking to assert an implied warranty claim, with two crucial exceptions for community associations:

Apart from those distinctions, an implied warranty claim in the condominium setting, as for a detached home, requires a showing that the property has a latent defect caused by “improper design, material, or workmanship,” and that the defect created a “substantial question of safety” or made one or more units “uninhabitable.’’

Cautions for Developers

For unit owners and community associations, this decision provides an avenue for pursuing claims for construction defects that did not exist before. However, for condominium developers, the decision potentially increases the liability risks for defects caused by the third party professionals—engineers, architects, contractors, and builders — on whom developers often rely. To limit those risks, developers should be particularly careful in negotiating contracts with these professionals, and should consider including the following provisions:

Additionally, developers may want to consider inserting mandatory arbitration provisions in purchase and sale contracts and limited warranties for individual unit owners, as well as in the condominium documents. Developers who use outside builders should also consider incorporating the builder’s warranty as part of the owner’s purchase and sale agreement, with a provision specifying that all claims relating to construction are against the builder and not the developer.

Economic Loss Rule Is Still With Us

Although Berish focused on the implied warranty of habitability, it involved an interesting, though peripheral, argument about the “economic loss rule” that is also worth mentioning. This long-standing rule holds that in a “tort” action (distinguished from a breach of contract claim) plaintiffs can recover damages only for actual property damage or personal injury; they may not recover damages for a purely economic loss.

In the condominium arena, this means, a community association that discovers the roof is defective can’t directly sue the developer for the cost of repairing it; however, if the roof collapses and damages the lobby and several units, the association could recover, at a minimum the cost of repairing the damage caused by the defective roof.

The legal theory behind this rule is that the party contracting to have the roof constructed had an opportunity to negotiate an express warranty guaranteeing its performance. If the individual failed to exercise that right, the court has said, “We won’t provide a second bite of the tort apple by allowing him/her to sue the contractor if the roof fails.”

We argued in Berish that the court should reject the economic loss rule for condominium associations for the same reason that it should recognize an implied warranty for them – because the association has no ability to negotiate an express warranty covering the common areas. The SJC accepted that argument for the implied warranty but declined to apply the same logic to the economic loss rule.

As a practical matter, plaintiffs’ attorneys get around the rule by establishing a loss for which they can recover, beyond the cost of repairing a defective item. The SJC followed that circuitous path in Berish and in a case decided a few weeks before — Aldrich, et. al. v. ADD, Inc. — involving a condominium association seeking to recover damages resulting from an architectural firm’s allegedly defective design. The court applied the economic loss rule in both cases, but also found damages other than those precluded by the rule, for which the plaintiffs might recover.

The decision leaves several questions unanswered:

These questions, and others, will have to wait for another day.

We had hoped the court would eliminate the economic loss rule altogether, at least as it applies to condominium associations. But given that the SJC has reached the same adverse conclusion in two consecutive decisions, it seems clear that this theory is going to stand, at least for the foreseeable future. This won’t bar recovery for damages in cases such as Aldrich and Berish, but it will continue to require creative and sometimes convoluted arguments to achieve that goal.

Legal Briefs

Landlord’s Liability. Employers have a clear obligation to prevent harassment in the workplace and can be held liable if they fail to do so. But it seems landlords may have a similar duty to prevent their tenants from harassing other residents. That, at least, is how a Massachusetts Housing Court judge ruled recently in a case (Gillot v. Fischer, et al.) involving tenants residing in two condominium units. The plaintiff/tenant, claiming that she was the victim of a “hostile housing environment” created by the actions of the tenant residing in the other unit, sued the owner of that unit, charging that he was aware of his tenant’s behavior and did nothing to control it. Judge Dina Fein agreed that the owner had a duty “to ensure that his tenant…not engage in ‘misconduct’ in violation of the condominium [rules and regulations]….”

The plaintiff submitted evidence that she had complained repeatedly about the tenant’s conduct to her own landlord, who in turn had complained to the condominium management company and the trustees. The plaintiff called the police several times and the management company forwarded copies of the police reports to the offending tenant’s landlord. But aside from asking his tenant about the reports and obtaining copies from the police department, the landlord took no other actions. Judge Fein said he should have done much more.

“[The] facts permit only one reasonable conclusion,” she said. “The defendant should have known that [his tenant’s] harassment of the plaintiff was so severe and pervasive as to alter her living conditions, and he was therefore obligated to take effectual action.”

Judge Fein rejected the owner’s contention that the single-family home liability exemption in the Fair Housing Act applied to him; a condominium, she ruled, does not qualify as a single-family home, as defined in that federal statute.

Springfield attorney Joel Feldman, who represented the plaintiff, says the decision illustrates a growing recognition of the “hostile housing environment theory” (a version of the hostile work environment theory in employment discrimination cases) in fair housing litigation. The suit also should put landlords on notice that they may be held liable for the abusive behavior of their tenants, Feldman told Lawyer’s Weekly.

But Barbara Sweeney, the attorney for the condominium owner/defendant, says the case sets “an unfortunate precedent” for smaller landlords, who are less likely than more sophisticated owners to be represented by management companies. “The lesson from this unfortunate decision,” she told Lawyer’s Weekly, “is that, although there is no direct relationship between the condominium owner and neighboring tenants, the owner may be responsible for his tenant’s [misdeeds].”

This case also contains a message for condominium management companies and trustees. Although the evidence indicated that the management company communicated with the defendant owner repeatedly, and the condominium association eventually evicted the tenant, the plaintiff tenant sued both entities. The trustees paid $5,000 and the management company paid $10,000 to settle the matter.



RESPA Redux Among the many RESPA (Real Estate Settlement Procedures Act) issues desperately in need of clarification, one question in particular looms large: Does the statute permits service providers to mark-up the cost of services they provide. Two U.S. courts of appeal (the Fourth and the Seventh) have flatly rejected HUD’s position that RESPA’s section (8), prohibiting kickbacks and referral fees, also bars these “upcharges.” The most recent ruling, from the Fourth Circuit (Boulware v. Crossland Mortgage Corporation), was a particularly direct slap at HUD, which had submitted a friend-of-the-court brief defending its argument that RESPA bars all up-charges, not just those in which two or more providers share the markup.

But according to the Fourth Circuit, “The plain language of sec. 8(b) makes clear that it does not apply to every overcharge for a real estate settlement service and that sec. 8(b) is not a broad price-control provision. [The statute] only prohibits overcharges when a ‘portion’ or ‘percentage’ of the overcharge is kicked back to or ‘split’ with a third party,” the unanimous three-judge panel ruled. The court also rejected what it called “HUD’s broader interpretation of the provision,” which essentially boils down to HUD’s contention that a single service provider may be liable under section 8(b) for charging a fee that exceeds the reasonable value of the goods, facilities, or services provided.

That amounts to the imposition of broad price controls, which, the court argued, Congress rejected explicitly in drafting RESPA. “If we were to read Sec. 8(b) in the way Boulware suggests,” the court said, “every settlement fee would be the subject of potential litigation and discovery, leading perhaps to increased costs for real estate settlement services in the long run. Though the regulation of charging practices would not be beyond the purview of Congress, this was not Congress’ intent in enacting RESPA…. RESPA was meant to address certain practices, not enact broad price controls. Congress chose to leave markups and the price of real estate settlement services to the free market by ‘consider[ing] and explicitly reject[ing] a system of price control for fees.’ ”


Arbitration Resistance. Arbitration has long been recognized as a timesaving and cost-effective alternative to litigation as a means of resolving many disputes. But consumer advocates and legislators in some states are beginning to question the fairness of the mandatory arbitration provisions that have become a common feature in consumer contracts of all kinds, including those linked to loans, credit cards, and new home construction.

Although the courts have generally upheld the legality of these provisions, a California court recently went the other way. Rejecting a request by Household Finance to compel plaintiffs in a class action suit to submit their complaints individually to binding arbitration, a federal district court ruled that Household’s arbitration provision was “one-sided” and unenforceable. ‘The interlocking nature of these hindrances indicates that the purpose of the arbitration agreement is not to transfer claims to a more expeditious forum, but to deter Defendants’ customers from bringing claims,” Judge Claudia Wilken ruled in a class action suit the community advocacy group ACORN has filed against Household.

Financial institutions contend that the arbitration requirements are both reasonable and necessary, to prevent consumers from clogging the courts with relatively minor disputes and to ensure that consumers win speedy resolution of their complaints. “The only winners in a court battle are the attorneys who take outlandish contingency fees and awards,” William Dallas, former chairman of First Franklin Financial Corp., told The American Banker, an industry trade paper. “Consumers deserve quick, efficient, and fair treatment.”

But consumer advocates say it is lenders, not consumers, who benefit most from arbitration, because damage awards typically are capped and consumers often must pay large fees to exercise their arbitration rights. “Arbitration is a great idea when you have two parties of equal position,” said Jeffrey Kodroff, a Washington attorney who represents plaintiffs in class action suits, quoted in the American Banker article. “But in a consumer transaction with a large entity like a bank, it is inherently unfair.”