The transition process involves an engineering evaluation of the Association’s common elements to determine if there are defects.  The engineer’s evaluation  typically identifies defects within the site improvements, for example, the landscaping, roadways, sidewalks, detention basins, etc.  These site improvements are often subject to performance bonds with the municipality.

New Jersey statute N.J.S.A. 40:55D-53 permits municipalities to require a developer to post a performance bond guaranteeing the construction of site improvements.  The amount of the performance bond is calculated by the municipal engineer and is intended to cover the cost of constructing the site improvements in the event that construction is not completed or completed improperly.  The developer is then required to post a cash bond, a surety bond payable to the municipality, or a combination of the two, in order to guarantee the construction of the required improvements.

As construction progresses, the municipal engineer will inspect each site improvement and issue a report stating whether it was constructed in accordance with the approved plans.  The municipality (typically a township council) will then decide whether to reduce or release the performance bond after taking the municipal engineer’s findings into consideration.  Each municipality enacts ordinances setting forth the requirements and procedures for the performance bond process.  Therefore the process may vary depending on the municipality where the construction site is located.

The Association’s transition engineering evaluation should be submitted to the Township Clerk and Township Engineer when received, because the Association wants to alert the municipality that construction defects have been identified in the site improvements before the developer’s performance bonds are released.  This way the Township Engineer will have the benefit of reviewing the Association’s engineering report, and the description of those defects, when deciding whether to recommend a reduction or release of the performance bond to the municipality.

Interestingly, in K Hovnanian at Lawrenceville, Inc. v. Lawrence Township Mayor and Council, 234 N.J. Super. 422 (Law Div. 1988) the court held that the Township Council could not refuse to release or reduce the performance bond where the Township  Engineer recommended doing so.  The court noted that homeowner complaints of defective soil and drainage conditions were not sufficient for the Township Council to deny the developer’s request for bond reduction.  However the court stated that the Township Council would have discretion to deny the request if confronted with competent evidence such as an engineering report.

What happens if an Association receives its transition engineering evaluation after the performance bond has already been released?

Some developers “refuse to consider” an Association’s construction defect claim for bonded improvements if the municipality already accepted the construction of the improvements and released the associated performance bonds.  Do not accept this disingenuous argument.  The Association may pursue claims against a developer, for the defective construction of bonded improvements, even if the items were subject of a performance bond and the municipality already accepted the construction and released the developer’s performance bonds for the improvements.

  1. First, submit the engineering report to the municipality anyway as there may be a maintenance bond in place.  Most municipalities require developers to post a two year maintenance bond once the performance bond is released.  The municipality may perform repairs or replace unacceptable improvements and charge the cost against the maintenance bond.
  2. Second, the Association may pursue claims against the developer for the defective site improvements because the Association is not a party to the performance bond agreement.  Instead, the bonding agreement is only an agreement between the municipality and the developer.  As a result, the Association is not bound by actions taken by the municipality or the developer, pursuant to the bonding agreement.
  3. Third, the municipal engineer’s report indicating that construction was completed in accordance with the plans is not binding on the Association.

The municipal engineer’s report recommending release of a performance is similar to the municipal construction official’s issuance of a certificate of occupancy.  In DKM Residential Properties Corp. v. Township of Montgomery, 182 N.J. 296 (2005) the New Jersey Supreme Court held that a municipal construction official had authority to issue notices of violation for failure to comply with the Uniform Construction Code to a developer for defective EFIS construction after the certificates of occupancy were issued by the municipality.  The court noted that the Code does not limit its enforcement after a certificate of occupancy has been issued.

By analogy, the municipality’s acceptance of a site improvement does not limit the Association’s right to pursue a claim against the developer for Code violations or other basis of construction defect.  The Association obtains its right to pursue construction defect claims against the developer by virtue of the contractual provisions of the Public Offering Statement, the contracts of sale between the developer and the various purchasers, and the Association’s other governing documents.  In addition to these contractual rights, the Association also has independent rights to pursue the developer, on behalf of the unit owners, for various tort based claims relating to the common elements. See Condominium Act, N.J.S.A. 46:8B-12, Siller v. Hartz Mountain Assocs., 93 N.J. 370, 380, cert. denied, 464 U.S. 961 (1983).

Practical advice:

  • It is often helpful to keep the lines of communication between the Association and the municipal engineer open because the Township can be a great asset by holding the developer’s “feet to the fire” and making sure the site improvements are constructed properly.
  • If the Association’s engineer identified construction defects after the bonds are released, the Association’s transition counsel should be armed and ready to dispute the developer’s contention that it is not responsible for site improvement defects once the municipality has accepted them and released the bonds.

Pending legislation of concern:

Finally, everyone should be aware of pending legislation that is attempting to limit the developer’s obligations for performance and maintenance guarantees under the Municipal Land Use Law (A1425).  The proposed legislation would only require a performance bond for those improvements that will be dedicated to the municipality after completion and a municipality would only be able to require a performance bonds for privately owned perimeter buffer landscaping. The proposed bill would remove the following improvements from the performance bond requirement: culverts, storm sewers, erosion control and landscaping.

This legislation, if adopted, would leave an Association with defective private roadways or storm sewers to fend for itself with regard to construction defects and removes the first layer of protection that was provided by the municipality and the performance bond.

The cost to remedy construction defects in these improvements can be substantial.  This proposed legislation does not benefit Associations.

Putting lipstick on a pig makes the animal no less a pig.  Cladding the lobby in marble and installing fancy fixtures makes an old building no younger.  Converting old buildings, especially high rise buildings, to condominiums raises unique due diligence, developer-transition, construction defect, financing and litigation issues.  Although the refinished lobby may look great there is much more there than meets the eye.

What due diligence process has the converting developer/sponsor gone through in acquiring the building?  Has the unit owner-controlled board obtained the developer/sponsor’s due diligence documentation?  Was there/is there a fuel storage tank on the property?  Was there/is there asbestos on the property?  Was there/is there lead paint on the property?

What about the water supply – where does it come from?  Is there a water tank on the property?  Is the water supply plumbing system serviceable?  What about sanitary plumbing?  What about airshafts and other conduit?  Has the elevator been maintained, renovated or replaced?  What about the fire suppression and fire/smoke alarm systems?  How old is the roof?  What is the roof made of?

What’s under that fancy new façade and how long will the fancy new façade last?  Is there a parking deck?  Does the parking deck comport with what was described in the public offering statement?  Is the building subject to other contracts – billboards, cell phone towers, laundry rooms?  What are their terms?  Who gets the money?  Has there been any “pre-payment” to the developer/sponsor?

How old are the windows? Who owns the windows?  If the unit owners own the windows, is the Association being stuck with a water infiltration problem anyway?  How old is the HVAC equipment?  Are there detailed maintenance records?  How old is the boiler system?  What about the electrical system?

Is the Association inheriting a staff such as maintenance employees, managers, black seal building engineers etc.?  Do any of these employees live on site?  Are there employee leases in place?  Are there employment agreements in place?  Are the employees unionized?  Are the staff members adequately experienced and trained?  Are they loyal to the association rather than the developer?

The questions go on and on.  The point is that, although purchasers may be dazzled by cosmetic enhancements, unit-owner board members must not be.  Especially in the condominium conversion context, the unit-owner board members must hire the right professionals to evaluate the Associations position from the physical to the financial to the personnel standpoints.  We assist unit owner board members in forming the professional teams necessary to evaluate the Association’s position and, where necessary, we litigate on behalf of Associations to compel the developer/sponsor to make things right.