Managing Risks in Condo Conversion
When the economy shattered eight years ago, many people were forced to leave their homes though foreclosures or simple economic pressures. This resulted in an increased demand for the development of apartment buildings. Now, many of these apartment buildings are converting into condominiums, tapping into a market of existing “tenants” who are ready to become owners again as the economy improves. Converting an existing building to condominiums is a complex legal process that is filled with risk for companies that do the conversion and for companies that built the original structure, especially glaziers.
The typical conversion process is undertaken by a development entity (the converter) that assembles the parts and papers necessary to change something used (the apartment) into something new (a condominium). This process begins with the necessary governmental filings and project management documents, and with the creation of a plan to meet the needs of the new condominium association.
A converter must also attend to the building and its systems. It has options on how to do so. A converter can rehabilitate a building (a costly option), establish a fund for upkeep or other work to the building after the units are sold, or set up an assessment plan for the owners to fund a rehabilitation themselves. Each option has implications for the sale of the units, as well as the maintenance and upkeep of the structure itself.
Glazing is an important risk evaluation point for converters. As a critical building component, glazing systems offer a key selling point, but are also a prime source of liability. This means the suitability and lifecycle of existing glazing often determines whether a converter replaces that system or provides funding for its upkeep. Obviously, the prospect for liability from water intrusion claims weighs into this choice too.
Many converters avoid replacing glazing if they can. A new system is a liability for which they are responsible to the new owners. Many converters try to avoid ongoing liabilities. In fact, converters are often single purpose legal entities, dissolved after the conversion process to limit owner claims. When this happen, the trades (including glaziers) that worked on the building find themselves as the primary responders for warranty claims or litigation.
Where a converter does not replace glazing, the decision to fund or establish an assessment for the building can put glazing-system choices into the hands of owners, who may not make glazing a priority. Delayed or nonexistent upkeep adversely affects the glazing system, and leads to warranty claims and litigation directed at the original builder and glazier. Unit owners are able to bring these claims even though the trades contracted to build an apartment building, not a condominium.
The complexities are clear. Decisions about existing structures by limited-entity converters can present risks the trades never considered in bidding or contracting. And while it is impossible to avoid all risk of a converted building, consider a few recommendations to address the potential where it could arise.
Define the job. A contract for residential construction should define the end use of the building as apartment or condominium. Establishing expectations in the contract can assist if a later claim arises due to a conversion. A change in the circumstances of a building’s use can help defend contractual warranty, indemnity and insurance obligations. Also consider contract language that terminates any contractual obligations if an apartment building is converted.
Retain records. Every job requires some level of document retention. Residential jobs often require more. It can be difficult to support a bidding history and scope of work when preliminary job documents are destroyed in the normal course of business. Update a written retention policy to address residential structures or consider job-specific retention requirements.
Review insurance policies. Many trades have insurance for apartment work, but the policies exclude condominiums. This means that when the converted-condominiums claim arises, the first fight can be securing coverage from the insurance company. Check all parts of a policy to avoid gaps in the overall risk protection scheme due to conversion.
Be thoughtful of potential design liability. I’ve previously addressed the prospect of glaziers becoming responsible for design liability to the eventual owner of a building (“Protecting Your Company in the Wake of Beacon v. SOM,” pp. 8-9 November 2014 Glass Magazine). While there is nothing to suggest that the owner of a converted apartment unit could bring a wholesale design claim, it is worth considering the potential for condominium-conversion, if you are involved in the design/selection of the glazing systems for a structure. Consideration and evaluation of the end users’ needs is a good glazing practice in any event.