Click on this link to view the original article which was published in CLM Magazine on September 24, 2019 – Small Steps Toward Promising Change
In 2018, Washington’s legislature enacted the Washington Uniform Common Interest Ownership Act (WUCIOA). WUCIOA adds a new chapter to the Revised Code of Washington that governs the formation, management, and termination of condominiums, cooperatives, and planned communities created after July 1, 2018.
WUCIOA adopted language from Washington’s existing Condominium Act (WCA), including the WCA’s implied warranties of construction quality that have troubled Washington condominium developers for years.
On April 30, 2019 Gov. Jay Inslee signed SB 5334, a bill that amends portions of WUCIOA, including the implied warranties of quality, in part as a response to the Puget Sound’s regional housing crisis. It remains to be seen whether this change in the law promotes the development of new condominium projects, or, instead, inspires new lawsuits by homeowner’s associations (HOAs).
WCA: Historic Overview
The WCA was enacted in 1989, as condominiums were then seen as a tool to meet the challenges created by Washington’s Growth Management Act. Article 4 of the WCA was dedicated to the protection of condominium purchasers, which was consistent with the stated intention to provide quality condominium options to residents of the state. These protections were varied, and included mandatory disclosures, a right to cancel, implied warranties of quality construction, and an attorney-fee-shifting provision that collectively changed the face of condo construction-defect litigation.
Although the WCA improved the quality of construction and protected condo purchasers from predatory developers and builders in many cases, it also increased construction costs for all developers—predatory and honest alike—mostly in the form of increased insurance premiums and the ultimate departure of some insurance carriers from the Washington market.
Over the ensuing decade, the interests of condominium purchasers clashed with those of developers and builders in the face of increasing litigation. In the early 2000s, developer/contractor interest groups successfully lobbied the legislature to amend the WCA to include certain pro-developer reforms, including the right to cure in 2002 (RCW 64.50.050) and the imposition of a higher burden of proof for implied warranty claims in 2004 (RCW 64.34.445). Since 2004, consumer and developer groups have argued their respective cases before legislative committees in Olympia, with limited success, striving for the optimal balance between fairly protecting consumers and promoting healthy business development.
This friction came at a cost to both consumers and developers as construction costs and the number of lawsuits continued to climb while affordable condominium opportunities declined. WUCIOA did not replace the WCA, but rather adopted many of the Article 4 purchaser protections found in RCW 64.34 for application specifically to condominiums.
The Current Picture
Within the last decade, Seattle has experienced dramatic cultural and economic changes. Gone are the Puget Sound’s sleepy two (three, if you count coffee) industry days. The region struggles with big city highs (a booming tech hub and jobs to match) and lows (sixth worst traffic in the U.S. and a lack of affordable housing).
It’s no secret that Seattle is experiencing an affordable housing crisis due in part to income disparity and housing scarcity. Some scholars hypothesize that scarcity of affordable condos contributes to Seattle’s housing crisis because condos traditionally filled the gap between renting and home ownership. Now, even condos remain out of reach for the average single-income Seattle resident. For example, regional real estate listing services show that, from 2010 to 2015, the number of condos selling for less than $500,000 fell by approximately 85 percent while the number of condos selling for over $1 million increased by approximately 51 percent.
Critics of the WCA draw a correlation between the pro-purchaser amendments to the WCA in 2009 and the decrease in new affordable condo construction throughout Seattle. They describe the practical effect of the legislation as grossly increasing the cost of insurance and building inspections for developers and builders, which, in turn, drives up the price of any newly constructed condos.
Some observers believe that developers turned to apartment projects as a means to leverage real estate capital without the risks associated with near-certain exposure to implied warranty claims. Moreover, the WCA and WUCIOA contained provisions that effectively pressured HOA board members to pursue litigation over repair agreements in order to satisfy their fiduciary obligations.
By late 2018, a handful of legislators and real estate groups began discussing changes to WUCIOA as a means by which to alleviate Seattle’s housing crisis by incentivizing the construction of affordable condos.
In 2019, a group of legislators, led by Sen. Jamie Pedersen (D-Seattle), sponsored SB 5334 in an attempt to address Seattle’s housing crisis by incentivizing development of new, affordable condos. SB 5334, in its final version, represents a compromise between consumer and developer interests. In addition to technical modifications, SB 5334’s drafters focused on bringing clarity to the implied warranties and condominium officer and board member liability.
SB 5334 amends Section 64.90.670 by removing the requirement that builders construct the condominium unit, common elements, and improvements in compliance with “all laws then applicable to such improvements.” Instead, builders must construct condos in “accordance with engineering and construction standards, including applicable building codes, generally accepted in the state of Washington at the time of construction.” Although this modification provides a clearer standard, the addition of the word “including” leaves room for claimant creativity.
SB 5334 also modifies the burden of proof in a claim for breach of the implied warranties of habitability by requiring the purchaser to establish an adverse effect on performance by proving that the breach:
1. Is more than technical.
2. Is significant to a reasonable person.
3. Has caused or will cause physical damage to the unit or common elements; materially impaired the performance of mechanical, electrical, plumbing, elevator or, similar building equipment; or presents an actual, unreasonable safety risk to occupants.
These changes mark a great stride forward in clarifying the types of harm that a claimant must prove to recover under an implied-warranty theory. However, the “reasonable person” standard ensures that defendants will be hard pressed to dispose of even frivolous lawsuits through summary judgment motions. Moreover, the addition of specific “material performance” defects in building equipment creates yet another gray area that may spawn new claims stemming from a relatively minor or temporary malfunction in building equipment.
Additionally, SB 5334 amended RCW 64.90.410 to add that HOA officers and board members are entitled to the immunities from liability available to officers and directors under RCW 24.06, Washington’s Nonprofit Miscellaneous and Mutual Corporations Act. While this change expressly allows condominium board members to defend their conduct using the business judgment rule as articulated in RCW 24.06.153, it may still lack the clarity and authority necessary to assure HOA board members that they can freely choose repair agreements over litigation without fear of repercussions based on their fiduciary duties.
While SB 5334 represents one small step for developers and insurers, it does not amount to a giant leap forward in solving the affordable housing crisis. Although the effect of the new law may be confined to boards and courtrooms, these changes represent advancement in the effort to achieve balanced legislation that provides purchasers with reasonable recourse for real construction defects without chilling affordable condo development.