Whether it is redesigning light fixtures in a common space or replacing a roof, repair jobs and capital improvement projects are like death and taxes, they are inevitable. Whereas a property manager most often handles the hiring of contractors and oversees the execution of the job, problems and issues often arise which makes it important for board members to understand licensing, documentation and accepted protocols.
All too often, projects run long and/or cost more money than expected, or contractors do not meet state-mandated requirements for conducting business. These variables lead to headaches—both legal and financial. So aside from cross-referencing recommendations, it’s important that boards and property managers understand existing codes and laws that were designed to protect the consumer, explains Lisa Ryan, public information officer for the New Jersey Department of Community Affairs (DCA).
Ryan points to the Division of Codes and Standards that partners with the state’s municipalities and enforces building codes “to protect the health and safety of New Jersey residents.” Specifically, the Uniform Construction Code oversees building, electrical, plumbing, fire protection, energy, mechanical, elevator, radon, asbestos, rehabilitation and barrier-free sub-codes, and lead hazard abatement; all of which can present significant issues during construction or remodeling projects.
To legally operate in New Jersey, contractors are required to register with the DCA. This process includes listing principal officers of the company, any bankruptcy proceedings the company has been involved in as well as any consumer fraud proceedings involving the company.
Despite these measures, Ryan says there is no legislation that directly addresses co-op or condominium boards. “There is nothing in state statute that specifies the documentation a co-op board or manager must get from a contractor,” she says. “Anyone acting as a fiduciary has due diligence obligations. Failure to perform due diligence may present a liability but the extent of the liability is for a court to decide.”
The majority of boards will deal with contractors licensed for “home repair” and/or “home improvement.” The former is for a home repair contractor who is engaged “in the business of selling goods or services pursuant to a home repair contract.” Licensing is only required for individuals who offer the ability to finance the work to be done.” These contractors must submit a formal application and a $300 fee to be eligible for a two year license.
A home improvement contractor is defined as any person engaged in the business “of selling goods or making home improvements.” This license lasts just one year, costs $90 and covers any remodeling, alterations, painting, repairing, renovating, restoring, moving, demolishing, or modernizing of a residential structure. Projects could range from swimming pools to roof repair, new siding installation to a bathroom remodel, HVAC repair or paving a driveway.
While there are no laws or regulations that require a board or manager to demand or require documentation from a contractor, a common sense approach goes a long way towards covering the bottom line. “It is best practice for a board or a manager to ensure that any contractor have appropriate workers compensation and general liability insurance in place,” says David J. Byrne, a shareholder attorney at the Lawrenceville-based law firm of Stark & Stark. Byrne, who is the co-chair of the firm’s Condominium Law Group, adds, “Preferably, the association should be named as an additional insured.”
While taking legal action often results from a contracting project gone wrong, there are state agencies that can assist in a board’s initial due diligence pursuit, explains Adam Brower of Toms River-based BHB Insurance Services. “Certificates of Insurance are enforced by the Department of Banking and Insurance,” he says. “They are in charge of developing the rules and procedures for the issuing and creation of certificates.”
Additionally, the Department’s purpose is to regulate the banking, insurance and real estate industries “in a professional and timely manner.” This in turn “protects and educates consumers and promotes the growth, financial stability and efficiency of those industries.”
Fraud and Insurance Woes
Funny man Jack Benny once said, “I don’t want to tell you how much insurance I carry with the Prudential, but all I can say is: when I go, they go too.”
Within the construction industry, fraud is an unfortunate common occurrence which makes licensing and insurance all the more important. However, even with the proper paperwork in place, problems can occur. In Chicago, for example, an indictment brought forth by the FBI alleges that between 2005 and 2009, Krahl Construction Company inflated the cost of renovation projects it performed and created false documents to support the inflated costs, resulting in over-billing its clients—to the tune of some $9 million. Prior to the allegations, the company was considered legitimate, which makes oversight especially important.
Closer to home, Donald Brenner, a partner with Stark & Stark, is in charge of the firm’s Construction Litigation Group. Brenner notes that large settlements in favor of boards and management companies are occurring in the Garden State.
“We do multimillion-dollar construction and design defect cases for condominium associations on a contingent fee basis,” says Brenner. “We recently won just under $20 million in the Renaissance Condominium case following a five-and-a-half month jury trial in Monmouth County.” He adds that the firm recently won a jury verdict exceeding $11 million following a lengthy trial in Bergen County for a 22-story condo building. “Other cases we have handled over the last few years include a $7.5 million recovery for a large condominium in Somerset County, a $6 million recovery for a condominium association in Passaic County, a $4.25 million recovery for a condominium association in Morris County and many other recoveries in the $1 million to $4 million range.”
While the aforementioned are worst-case scenarios, when something goes wrong on a project, be it a license dispute or otherwise, who is to blame? “The responsibility could involve the board for the association, a sub-committee, the property manager or the general contractor if there is one,” says Brower.
For many building managers and boards, the issue of subcontractors is elusive. Often these trade professionals are brought in after the project permit has been approved and the contract signed, leaving the decision of whom to hire to the general contractor. “The involvement of a subcontractor doesn’t generally alter any of the normal analysis,” says Byrne. “If the relevant contract prohibits that contract from using subcontractors, then the contractor’s use of subcontractors will constitute a breach of contract, subjecting the contractor to greater liability in the event of a problem. If the association permits the contractor to use subcontractors, all insurance-related obligations should be made to extend to them.”
Ultimately, determining which party is responsible for a mistake or mishap depends on contractual variables, notes Brower. “There could be multiple parties that could be responsible. The responsible parties as well as the responsibilities are going to be determined by the courts,” he continues. “We have seen many different cases, some where the general contractor hiring the subcontractor could be responsible, and other times it's the property manager or board. The liable party is ultimately determined by the court.”
The safe bet or general rule of thumb is to make sure that before a project commences, any contractor’s license and insurance is verified. Occasionally issues arise where a license might expire in the middle of a project, or the general contractor holding the license takes ill—or worse. In this case, a grace period (usually between 30 to 90 days) is provided to obtain a new license so the work can be completed. If a problem still persists or a new one is identified, it’s the board's or managing agent's responsibility to sort it out.
“It is always our recommendation that whether you are a manager, an association or a vendor that you do not use any contractors that do not have a license or insurance in force,” says Brower. “This could lead to financial hardship if a claim were to arise—not to mention many other problematic scenarios.”
It's an unfortunate fact of life that some unit owners may be more adversely impacted than others by a particular construction or renovation project. A roofing job—to name just one example—may cause leak issues for top-floor residents while an exterior project requiring scaffolding may cast residents on lower floors into shadow for weeks on end.
While they have certain rights, individual residents aren't generally allowed to examine the contract their association has with the contractor. “If a unit owner wanted access to these documents and was refused, the DCA does not have jurisdiction to require that access be provided,” says Ryan. “However, the unit owner may have a common law right to access. Common law rights to access must be pursued in court.”
Byrne adds, “It is unlikely that any law, regulation or governing document provision would empower a resident to examine or inspect anything. An owner’s right—or lack thereof—to examine anything would be governed by New Jersey’s Condominium Act, New Jersey’s Non-Profit Corporations Act, New Jersey’s Planned Real Estate Development Full Disclosure Act or that particular association’s recorded governing documents.”
In the event a resident does have an issue or a more significant problem arises during construction, consequences and legal ramifications may result for a board or a manager that didn’t do their due diligence when hiring the contractor. “The legal ramifications would be determined by attorneys and the courts,” says Brower. “However, there is potential that the associations’ insurance policy could come into play.”
To this end, an association is recommended to carry separate property and liability insurance as well as directors and officers (commonly called D&O) liability insurance to protect the decisions made by the board. “The particular association is liable for any damages proximately caused by its failure to comply with or abide by its governing documents,” says Byrne. “In this context, that would implicate the association’s general duty to maintain, replace, repair and/or care for the common elements/common property. If a contractor’s work caused damage to anything, the association would be liable for those damages if they were proximately caused by the association’s failures to hire a licensed and insured contractor.”
Be Safe, Not Sorry
In any event, it’s safe to say that HOA boards and managers need to be smart when hiring a contractor to do work on any type of project. According to the experts, the smartest way to protect yourself is with a detailed written contract, having the proper insurance, and not giving the contractor the final check until you're completely satisfied.
W.B. King is a freelance writer and a frequent contributor to The New Jersey Cooperator.