A New Day in Texas for Condo Construction-Defect Litigation

Over the past decade, construction-defect litigation involving condominiums has been red hot in Texas. In spite of the state legislature’s well-intentioned efforts over the past five years to slow the tide of litigation, condominium owners’ associations (HOAs) have routinely sued developers and general contractors after the condo owners have assumed control of the HOA.

But a 2018 Texas appellate opinion is a game changer that adds additional procedural hurdles that will likely cool down future condominium litigation—in Texas and perhaps in other states as well. Moreover, developers now have a roadmap to follow when drafting condominium declarations.  

In 2013 the Texas legislature amended portions of Chapter 82 of the Texas Property Code known as the Uniform Condominium Act (Condo Act). Specifically, Chapter 82.102 now states: “Unless otherwise provided by the declaration, the association, acting through its board, may…institute…litigation…on behalf of itself or [on behalf of] two or more unit owners….”

While this statute does permit an HOA to bring suit on behalf of all of the condo owners, it opened the door for developers to draft condo declarations that blunt the rights of the HOA.

In 2015, the Texas legislature again beefed up the Condo Act by enacting Chapter 82.119, which adds a new list of pre-suit requirements before an HOA can file a lawsuit. These requirements include a unit-owner-wide vote on pursuing litigation, the preparation of a mandatory expert report, prescribed notice to the general contractor, and exclusion of the plaintiff’s attorney during the voting process. Importantly, these must take place before any construction-defect litigation is filed. A lawsuit can be dismissed with prejudice absent strict compliance with Chapter 82.

A Consequential Decision
So, what happened in 2018? The Houston 1st Court of Appeals issued its opinion in Mosaic Residential N. Condo. Ass’n. Inc. v. J.E. Dunn, et. al., a case involving a high-rise condo tower with alleged construction defects. The court confirmed that sensible language woven into the fabric of condo declarations drafted by the developers can indeed strip the HOA of the right to file suit on behalf of all the condo unit owners, and instead reserve that right for each individual condo owner. Preventing the “bundling” of all condo owners into one lawsuit brought by the HOA is a significant hurdle for plaintiff’s attorneys to overcome.

The underlying case in Mosaic centers around a high-rise condo tower, known as The Mosaic, located near the Houston Medical Center. Construction ended in 2007. Window leaks were discovered shortly after Hurricane Ike made landfall in September 2008. Additional window leaks were found in 2012, and even more were found in 2013. The HOA sued the developer and the general contractor in 2014 for construction defects. The HOA demanded tens of millions of dollars in damages for a complete replacement of the entire window-wall exterior system despite only a small percentage of condo units experiencing actual leaking. Moreover, only a small percentage of the condo owners knew about the litigation brought by the HOA.

When drafting the condo declaration for The Mosaic, the developer included favorable language. The Mosaic’s declaration stripped the HOA of the right to sue, stating, “[A]ll Owners hereby acknowledge and agree that the Association shall not be entitled to institute any legal action on behalf of any or all of the Owners which is based on any alleged defect in any Unit or the Common elements, or any damage allegedly sustained by any Owner by reason thereof, but rather, all such actions shall be instituted by the Person(s) owning such Units or served by such Common Elements or allegedly sustaining such damage.”

At the trial-court level, the general contractor filed two motions seeking summary judgment: one based on the HOA’s lack of standing pursuant to the condo declarations, and the other based on the applicable statute of limitations. The trial court granted the contractor’s motion on the HOA’s lack of standing and granted a take-nothing judgment, dismissing all claims against the general contractor and developer.

The HOA appealed, arguing that it had statutory, associational, and common-law standing to sue. But the Houston 1st Court of Appeals affirmed the trial court’s ruling on the lack of standing, striking down the arguments made by the HOA.

What the Ruling Means
Interestingly, the appellate court ruled on the novel argument regarding the HOA’s lack of standing while ignoring the simpler statute-of-limitations argument. The appellate court ruled that the HOA had no standing because the Mosaic declaration specifically removed it, which is allowed under Chapter 82. The court rejected the HOA’s argument that it brought suit on behalf of itself, and not the owners. Further, the appellate court rejected the argument that it was against public policy to allow a developer to include such language.

The appellate court also ruled that the Mosaic HOA had no associational or common-law standing to sue. First, in Texas, an HOA can sue: when its members would otherwise have standing to sue, when the association seeks to protect interests that are germane to its purpose, and when neither the claim asserted nor the relief requested requires the participation of individual members of the lawsuit.

The appellate court stated that each unit was individually owned, and that the damaged units were damaged differently. Therefore, the third prong fails because, to prove its damages, the HOA needed the 30 individual unit owners with varying degrees of water damage to participate. As for common-law standing, nothing in the declaration made the HOA responsible for damages inside the units, and, according to the declaration itself, the glass wall system was a separate part of each separate unit. Therefore, The Mosaic suffered no “injury in fact” and had no common-law standing to sue.
It is a new day for condominium construction-defect lawsuits in Texas. The strongly-worded opinion in Mosaic will likely have a chilling effect on condominium construction-defect lawsuits in Texas. Attorneys pursuing these cases for the HOAs will first want to review the condo declarations and then confirm their clients have met all the necessary pre-suit requirements.

Conversely, attorneys defending the insured developers and contractors should demand proof that the plaintiffs have met all of the pre-suit requirements and additionally review the condo declarations for favorable language. The lesson for adjusters and attorneys representing insureds in condominium construction-defect lawsuits brought by HOAs post-2018 is that the law is now on your side.