In the current adverse sales environment, many developers are electing to complete their condominium projects but rent the units as apartments until the market improves. This strategy raises a significant question about the effect of California’s 10-year statute of repose for latent construction defects: does the statute commence to run upon substantial completion of the project or from the date of sale of the units?
A recent decision of the California Court of Appeal provides some comfort to developers confronting the often-complex application of the statute of repose for construction defect claims.
In Gundogdu vs. King Mai, Inc., the appellate court affirmed summary judgment in favor of King Mai, the developer of a single family home, based upon expiration of the 10-year statute of repose. The court concluded that the 10-year statute commenced to run upon substantial completion of the home, despite the fact that the developer owned the home for more than 16 months after recording the notice of completion but before selling the home to the plaintiffs.
The court rejected the plaintiffs’ argument that because the developer continued to own the home, the 10-year statute was tolled (stopped from running). The court stated:
“Plaintiffs’ argument, for which they cite no authority, is contrary both to the plain language of the statute and substantial case law.”
The court reiterated the legislative purpose behind the statue of repose. “[T]he purpose of section 337.15 is to protect contractors and other professionals and tradespeople in the construction industry from perpetual exposure to liability for their work.”
The court observed:
“Plaintiffs do not allege that King Mai’s work after completion of the home caused their damages. The defects they allege caused their damages occurred during construction of the building. Thus, the question is whether King Mai’s passive ownership of the property prior to its sale precludes King Mai from asserting the limitation defense. We conclude that such an interpretation of section 337.15 subdivision (e) would be contrary to the purpose of the statute.”
The time for seeking review of the decision by the California Supreme Court has not yet expired. Regardless, residential developers must implement robust construction defect risk management strategies, including appropriate products-completed operations liability insurance, alternative dispute resolution provisions in consumer sales documents and CCRs, and effective long term customer service. By applying a comprehensive and integrated insurance and risk management approach, developers can position themselves for success when the market recovers.
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