Successfully transitioning control of a condominium or common interest community association from the developer to the owners is critical to the long-term success of any Illinois community association. When a developer exits a project, it is common for a negotiation to occur in which the developer requests a release to repair construction defects or to resolve outstanding construction defect issues through litigation.
An experienced Illinois developer has an inherent advantage in negotiating a release with a community association, as most volunteer board members have never been through the process. Unfortunately, in many cases, this allows a developer to shift the burden of repair costs for construction defects onto the owners. Those costs do not disappear when the release is signed. They reappear as a special assessment that the owners pay in the future.
However, Illinois law gives community associations meaningful leverage, provided the board understands where to look and acts before the applicable deadlines expire. Below are eight things that every Illinois condominium association and common interest community association should understand before negotiating with a developer over construction defects.
1. Be Aware of When the Statute of Limitations Begins to Run
Illinois community associations should evaluate potential construction defect claims promptly after the owners take control of the board. Under 765 ILCS 605/18.2(f) of the Condominium Property Act, the statute of limitations for actions that a condominium association may bring does not begin to run until the unit owners have elected a majority of the board of managers. The Common Interest Community Association Act contains a similar provision in 765 ILCS 160/1-50(f). These provisions give an owner-controlled board an opportunity to investigate potential claims that may have arisen while the developer controlled the association.
However, turnover does not eliminate other deadlines that may apply to construction defect claims. Under 735 ILCS 5/13-214, claims against persons arising from acts or omissions involving the design, planning, supervision, observation, management, or construction of an improvement to real property generally must be brought within four years after the claimant knew or reasonably should have known of the act or omission. The statute also contains a ten-year statute of repose measured from the defendant’s construction-related act or omission. The statute includes qualifications and exceptions that can affect these deadlines, including provisions addressing claims discovered near the end of the repose period and claims involving fraudulent misrepresentation or fraudulent concealment.
Fraudulent concealment may also affect the time available to bring certain claims. Illinois courts generally require affirmative acts or representations intended to prevent a claimant from discovering a cause of action or to induce the claimant to delay filing suit. Orlak v. Loyola University Health System, 228 Ill. 2d 1, 885 N.E.2d 999 (2007). Because the applicable deadline can depend on the nature of the claim, the defendant, when the defect was discovered, and when the underlying work was performed, a board should have legal counsel evaluate potential deadlines as soon as possible after turnover.
As a practical matter, a lengthy settlement negotiation should not be allowed to consume a community association’s time to pursue its claims. If a developer requests several months to review an engineer’s report or evaluate a settlement proposal or continually delays a response, the association should consider requiring a written tolling agreement that preserves applicable claims while negotiations continue. A board should not assume that ongoing negotiations, promises to make repairs, or settlement discussions automatically stop a statute of limitations or statute of repose from running.
2. Hire a Professional to Identify the Construction Defects
A community association should have a licensed engineer or other qualified construction professional inspect all common elements to identify construction defects in new-construction condominium projects. The engineer or construction professional should prepare a report outlining each construction defect, its cause, a proposed fix, whether any of the problems are covered by warranty, and the estimated cost to fix them. This report will assist the board and the association’s attorney in evaluating the scope of the problems and determining the best course of action.
Examples of common construction defects in new construction condominiums include collapsing retaining walls; cracking in the foundation or drywall caused by foundation issues; improperly installed electrical wiring; flooding or drainage issues, heaving, cracking, or pre-maturely deteriorating concrete in porches, driveways, or sidewalks; leaks, mold, and other water-related issues caused by improperly installed roofing, siding, flashing, or windows; noise related to insufficient insulation and poor sound protection; burst pipes resulting from a failure to insulate common element pipes; and missing or improperly installed trusses that compromise the structural integrity of the building.
In some cases, the same company may be able to perform a reserve study and an inspection to search for construction defects. However, not all reserve study specialists are willing or able to serve as experts in construction defect litigation, and not all construction defect experts are qualified to prepare reserve studies. Accordingly, the board should clearly define the scope of work and ensure that an appropriately qualified professional performs each task.
3. Make Sure the Developer’s Settlement Offer Is Fair
A developer’s settlement offer should be evaluated against the actual cost of the repairs, after obtaining repair quotes from qualified contractors, and compared to the engineer’s estimate and to the amount the developer has offered. The board should then model the shortfall. If the repair costs $1,200,000 and the developer offers $700,000, the board is not simply accepting a settlement. It is deciding to charge the owners the remaining $500,000 through a special assessment or a community association loan, and the board should be prepared to explain the decisions to owners. While outcomes in litigation are not certain, the board needs to make informed decisions after evaluating the repair costs, the odds of success in litigation, and potential litigation expenses when exercising its business judgment to settle a construction defect matter.
The board should also evaluate whether the developer has adequately funded the reserve fund. Illinois courts have consistently held that a developer owes a fiduciary duty to fund the reserves for a condominium association, and that the duty begins when the declaration is recorded. Maercker Point Villas Condominium Ass’n v. Szymski, 275 Ill. App. 3d 481, 655 N.E.2d 1192 (2d Dist. 1995); Board of Managers of Weathersfield Condominium Ass’n v. Schaumburg Ltd. Partnership, 307 Ill. App. 3d 614, 717 N.E.2d 429 (1999). In Henderson Square Condominium Ass’n v. LAB Townhomes, L.L.C., 2014 IL App (1st) 130764, the court held that where a developer allegedly knew at turnover that the project contained significant latent defects requiring extensive future repairs, whether it provided reasonable reserve funds was a question of fact. Accordingly, if the developer has underfunded reserves due to construction defects, a community has a claim and should consider this when determining an appropriate settlement.
4. Require the Developer to Provide Important Documents to the Association
765 ILCS 605/18.2(d) of the Condominium Property Act and 765 ILCS 160/1-50(d) of the Common Interest Community Association Act require that the developer, within 60 days of the election of the first unit owner board, turn over all original documents as recorded or filed pertaining to the property, a detailed accounting, all association funds, a schedule of all real or personal property, equipment, and fixtures belonging to the association, including warranties, deeds, title insurance policies, and all tax bills, and a list of all litigation, administrative actions, and arbitrations involving the association. If these documents are not provided, the board must send a written demand to the developer by registered or certified mail within 10 days seeking compliance. If the developer still refuses to comply, the board can bring an action against the developer and recover attorney’s fees and costs if the court determines that the developer failed to comply with the statutory requirements.
However, the board must be specific when making a demand, and in many cases, this is best handled by a community association attorney. In Metropolitan Condominium Ass’n v. Crescent Heights, 368 Ill. App. 3d 995, 859 N.E.2d 271 (2006), the Illinois Court of Appeals held that a “detailed accounting” must include the dates on which individual units were sold, the assessments paid for each unit, and the dates on which those assessments were paid. The court also stated that “it is incumbent upon unit owner boards to make clear to developers what sort of information they believe to be missing from documents initially produced by developers.” As such, a general complaint that the records appear incomplete will not preserve the claim.
For construction defect purposes, the warranties, plans and specifications, subcontractor agreements, and insurance policies are the documents that matter most. Those materials identify the parties that actually performed the defective work. However, having all the above information is important not only for getting a community association started on the right foot but also for evaluating any settlement with the developer.
5. Determine Whether the Developer Failed to Disclose Any Potential Liabilities
765 ILCS 605/22 requires various representations in connection with the sale of a new condominium, including the declaration and bylaws, a projected operating budget, and a floor plan and street address. If the condominium is a conversion condominium, additional information must be disclosed, including actual expenditures on repairs, maintenance, operation, or upkeep over the last two years, a description of any budget provision for reserves, an engineer’s report as to the present condition of all structural components and major utility installations for developments of more than six units, and any release, warranty, certificate of insurance, or surety.
If any of these disclosures are inaccurate, or if other misleading information is provided, condominium associations may pursue claims for misrepresentations made by a developer, such as fraud or negligent misrepresentation. For example, in 21 Kristin Condominium Ass’n by Its Board of Managers v. Pioneer Engineering & Environmental Services, LLC, 2020 IL App (1st) 191868, the court held that an association could state a claim against an engineer who made representations related to the condition of the roof that was part of the developer’s required disclosure under 765 ILCS 605/22. Additionally, it may be possible to pursue a cause of action under the Illinois Consumer Fraud and Deceptive Business Practices Act. A successful claim asserted under the Consumer Fraud Act may also allow a condominium association to recover attorney’s fees and costs.
6. Carefully Review the Scope of the Release Requested by the Developer
Many developers attempt to get new boards to sign releases that may not be favorable to the community association, and legal counsel should be retained to review any such settlement agreement. The board should confirm the scope of the release. A community association can release claims relating to the common elements, but it generally cannot release claims by individual owners for damage to their own units. The board should also confirm whether the release is partial or complete, and whether it is mutual or one-sided. A release of “all claims arising from the project” is materially different from a release of the roof claim identified in the engineer’s report.
The board should also be aware that a developer’s anti-lawsuit provisions are generally unenforceable. Under 765 ILCS 605/18.9, any provision in the condominium documents requiring unit owners to vote before the association files litigation is void, and any provision requiring a board of managers to arbitrate or mediate a dispute with a developer or the declarants identified in the declaration before filing a lawsuit is also void. Unit owners may vote, by 75% or more, after the election of the first unit owner board, to amend the governing documents to include such provisions. Accordingly, if a developer asserts that a condominium association cannot sue without a vote of the owners, the board should consult with a community association attorney before treating it as a constraint on the negotiation.
7. Request an Assignment of the Developer’s Rights
If a condominium or common interest community association is going to release the developer, it should obtain something beyond money in return. The association should request an assignment of the developer’s rights, including architectural control authority and any transferable manufacturer, subcontractor, or general contractor warranties. The assignment should be specific. A general recital that the developer assigns all assignable rights is of limited value if the association does not also receive the underlying contracts, warranty certificates, and subcontractor information that identify what was assigned and against whom it may be enforced.
8. Be Careful with the Confidentiality Clause
Illinois unit owners have statutory rights to inspect the association’s records, and the community association will need to share the settlement with its accountant, reserve study professional, and insurance carrier. A confidentiality provision that prohibits a community association from lawfully performing is problematic. Accordingly, the board should negotiate carve-outs for disclosures required by statute and for the community association’s professionals before signing. The board should also consider how the settlement will be explained to the owners. A board that has just agreed to a confidentiality clause it cannot discuss, while simultaneously levying a special assessment to cover the remaining repair costs, has created a governance problem as well as a construction problem.
Conclusion
Successfully negotiating a settlement agreement with the developer is crucial to the long-term success of an Illinois condominium or common interest community association. By being proactive, retaining qualified experts, and carefully considering all aspects of the release, a community association can avoid shouldering the burden of costly common element construction defects.
Illinois law is, in several important respects, favorable to community associations. The limitations period does not begin to run until the owners control the board, anti-lawsuit provisions imposed by developers are largely void, and the developer owes a fiduciary duty that includes a duty to fund reserves. However, those advantages disappear if the board waits, signs a broad release without consulting a community association attorney, or never learns what a constructional professional would have found. If negotiations stall, litigation is always an option, and an Illinois community association should not feel forced to accept an unfavorable offer from the developer.
Frequently Asked Questions About Illinois Condo Construction Defects
How long does an Illinois association have to sue a developer for construction defects?
The limitations period does not begin to run until the owners elect a majority of the board under 765 ILCS 605/18.2 and 765 ILCS 160/1-50. Construction defect claims are then subject to a four-year or five-year limitations period under 735 ILCS 5/13-205 and 735 ILCS 5/13-214, and to a ten-year statute of repose measured from when the defective work was performed.
Can an Illinois developer require an owner vote before the association sues?
Generally no. Under 765 ILCS 605/18.9, provisions in condominium documents requiring an owner vote before litigation, or requiring mediation or arbitration of disputes with the developer or declarant before suit, are void.
Is a developer required to fund reserves in Illinois?
Illinois courts have consistently held that a developer owes a fiduciary duty to fund reserves for a condominium association and that the duty begins when the declaration is recorded. Whether the reserves provided were reasonable is generally a question of fact.
Should a condominium association sign the developer’s release?
Not without counsel. Developers frequently request broad releases in exchange for performing obligations that Illinois law already imposes. A community association should first complete an engineering inspection and evaluate the offer against independent repair estimates with a community association attorney before signing a release.
