A recent decision from the state’s Supreme Judicial Court (SJC) has lifted certainrestrictions on damage awards when it comes to condominium construction, changing the calculus for condo boards when deciding whether to pursue a developer over faulty construction.

“This is a major decision for condominium associations seeking redress for defective construction,” said Diane Rubin, a partner at Prince Lobel Tyre LLP who specializes in condominium law.

The case, Wyman v. Ayers, centered around the “economic loss doctrine,” a legal principle that decrees that if a product is defective and the owner must pay to repair or replace it – that is, they suffer an “economic loss” – they must turn to the contract or warranties in order to seek restitution from the manufacturer. Only if a defective product causes injury to a person or damage to other property may the property owner sue for damages. The rule is intended to prevent unhappy customers from clogging up the court system with lawsuits every time a product doesn’t meet their expectations.

The doctrine has caused some consternation to condo boards, however, due to their unique ownership structure. As a rule, when a certain percentage of the units in a building are sold off, this automatically triggers the creation of the condo board and the transfer of ownership in the building’s common areas to it. Since the board doesn’t exist as an independent entity until that point, there’s no contractual relationship between it and the developer.

That means that if shoddy workmanship later develops into costly problems, individual unit owners might have grounds to sue, but the board itself may not be able to recover for large-scale repairs to common areas like the roof, grounds and outbuildings.

“There are whole categories of claims that had been blocked by the economic loss rule,” said Tom Moriarty, past president of the Real Estate Bar Association and a partner at Marco Errico Emmer & Brooks. He represented the condo board in the Ayer case.

For example, Moriarty said, if an asphalt roof is installed without a proper felt underlayer, the roof will wear out much more quickly. In such a case, a condo association “incurs real economic harm because of having to replace [the roof] that much sooner,” Moriarty pointed out. “But since it’s not causing damage to other property, they had no grounds to sue.”

Common Areas Fair Game

Other common problems affected by the ruling include developers who walk away from the project leaving work incomplete – failing to pave an access road, for example – or without installing promised features.

In the Ayer case, for example, defects in exterior rehab work by developer Ayer Properties LLC on an old mill building in Lowell caused some of the building’s windows to leak and brickwork to crumble. Courts at all levels agrees that the unit owners were entitled to damages to repair the windows, but the lower courts had disallowed claims for the repairs to exterior brickwork because of the economic loss rule. The new decision from the SJC reverses that, allowing for boards to sue over defects to common areas.

Rubin hailed the decision as important and sensible. “Developers have used the economic loss doctrine as a procedural shield to avoid responsibility for their shoddy workmanship,” she said. “As the court noted, the economic loss rule sometimes required a court to leave a wronged association with no remedy,” an obvious unfairness.

The decision also gives boards a lot more clarity on exactly what damages they may be entitled to under the law, an important factor when deciding whether to pursue a claim, Moriarty said. In a case where a construction defect had caused damage to other property, it had previously been unclear exactly how much the board could hope to recover – if a leaky roof had damaged the building’s insulation, was the board able to recover only for the cost of replacing the insulation, or for the whole cost of replacing the roof?

“There was all this uncertainty percolating through these cases. This decision clears that all up and eliminates that uncertainty,” he said.

Email: csullivan@thewarrengroup.com