DC Seeks to Expand Condo Warranty Liability

The DC City Council has proposed two bills intended to make it easier for condominium associations and unit owners to pursue warranty claims against developers and obtain release of warranty funds.

The objective of the proposed legislation is to provide associations and unit owners with a more expedited means to access the warranty security funds posted by developers through a new administrative procedure, potentially hindering developers’ ability to defend against such warranty claims.

The first and more aggressive of the bills is the Condominium Warranty Amendment Act of 2020 (the Warranty Amendment Bill; Bill B23-0601). It seeks to make it easier for unit owners and associations to draw on the warranty security funded by the developer for defects in newly constructed or renovated condominium buildings. It transfers administration of the warranty security from the Department of Housing and Community Development (DHCD) to the Department of Consumer and Regulatory Affairs (DCRA) and provides that disputed claims would be reviewed and decided by a DCRA-appointed independent engineer, subject to a 15 day right to appeal to the Office of Administrative Hearings (OAH).

This is most significant because currently there are no administrative procedures for DHCD to make such unilateral decisions on the disbursement of warranty security funds. Under current law, when a condominium is newly built or converted, a developer is required to deposit with DHCD warranty security in the amount of 10 percent of the construction costs to address “structural defects” that occur within the first two years.

Under the proposed legislation, if the disputed claim is ultimately determined by DCRA’s appointed engineer in favor of the unit owner and/or association (i.e., “perfected”), and is not appealed, DCRA would be authorized to release all or a portion of the warranty security to cover the cost of defect claims, including reasonable attorneys’ fees incurred in prosecuting such claims.

In addition to providing a new administrative procedure for pursuing and deciding warranty claims, this bill expands the definition of “structural defects” to expressly include any defect that fails to comply with applicable building code requirements and further requires developers to increase the warranty security funds at any time actual construction costs increase above the original construction cost estimate.

This bill was introduced on January 7, 2020, and referred to both the Committee on Housing and Neighborhood Revitalization and the Committee of the Whole on January 10.

The second bill is the Claims Clarification Amendment Act of 2020 (Bill B23-0623). This bill appears to be a somewhat less aggressive alternative to the Warranty Amendment Bill, but still makes it easier for unit owners and associations to draw on the warranty security posted by developers for structural defects.

Under this bill, the Mayor would review and administratively resolve disputed structural defect claims and DHCD would continue to administer the warranty security process, without involvement from DCRA. This bill does not propose any material changes to the definition of “structural defects” or the warranty security administration (except in connection with perfected claims). Parties would have 30 days to appeal the Mayor’s decisions on disputed claims to OAH (versus 15 days proposed under the Warranty Amendment Bill).

Following the appeals process, if any, the Mayor would be authorized to release all or a portion of the warranty security to satisfy “any costs that arise” from any surviving perfected claims, which would presumably include reasonable attorneys’ fees.

This bill has been referred to the Committee on Housing and Neighborhood Revitalization. Although it ultimately requires Congressional approval, it may become temporarily effective for 90 days through its related emergency bill (B23-0621). The emergency bill was approved by the council on February 4, 2020, transmitted to Mayor Muriel Bowser on February 14, 2020, and her comments are due on March 2, 2020.

The attorneys in Ballard Spahr’s Mixed-Use Development and Condominiums Group and Zoning and Land Use Group assist developers with various real estate issues including condominium warranty liability.

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