New Hurdles for Defect Claims by Condo Associations in Texas

DEFECT.1There are two new sections in the Texas Property Code which will provide protection for developers and their design professionals from actions brought by condominium associations for construction defect or design claims. The impetus for this change grew out of concerns by developers and design professionals that as constituted, the Texas Residential Construction Act (“RCLA”) did not provide sufficient protection from questionable lawsuits brought by condominium associations that had not obtained approval and consent of the individual unit owners to prosecute the lawsuit.

The new provisions are codified in Sections 82.119 and 82.120 of the Texas Property Code. These sections generally require a condominium association to present an independent third-party report from a licensed professional engineer which identifies defective elements in the common areas before it can file a lawsuit against developers or design professionals. Upon presentation of the report, the developer and design professionals will be afforded an opportunity to inspect and cure any deficiencies that are raised in the report. In addition, the provision provides a mechanism by which the unit owners must meet and approve the filing of any legal action related to construction or design defect claims. The approval before filing any legal action must be obtained from those owners holding more than 50 percent of the total votes allocated under the condominium declarations. At least 30 days prior to such a meeting, the unit owners must be provided with basic information regarding the potential legal action including a general description of the claim, what damages are being requested, how long prosecution of the lawsuit may take, and the chances of success. This notice to the unit owners must include a number of items including (a) a copy of the engineer’s report; (b) any attorney fee contract for counsel representing the association; (c) a description of all efforts to resolve the claim; (d) a disclosure that filing the lawsuit or initiating arbitration may affect the market value, marketability, or financing of the units while the claim is pending; and (e) how the association will fund the litigation. Curiously, this disclosure notice cannot be prepared by the law firm proposed to represent the association. To account for these new procedural hurdles, the limitations period for filing suit or arbitration is now tolled until one year after the date that these procedures are initiated by the association (provided that the procedures are initiated during the final year of the applicable statute of limitations).

Section 82.120 now authorizes condominium associations to mandate binding arbitration in its declarations for construction defect and design claims. This provision further limits the ability of unit owners to amend the declarations to modify any mandatory arbitration requirement if the applicable claims is based on acts or omissions that occurred prior to the amendment.

Both of these provisions merit close review by claims professionals handling construction defect or design claims for condominium associations and/or its subrogated insurers in Texas.

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