Minnesota HOA Avoids Liability to Unit Owner

by Alex Nelson

February 2, 2012

HOA board members faced with newly-discovered construction defects in their community often ask us things like:  “What are my responsibilities to the HOA and the owners?”  “If we don’t pursue the builder for theses defects, can I be held responsible?”  Our short answer to those board members is that you and your Association can’t afford to do nothing. The defects have to be addressed in some manner, so either the HOA and its owners will pay for the repairs (often via special assessment in a young community with underfunded reserves), or the developer and/or builder of the community can be pursued (through legal action if necessary).

A recent case from the Minnesota Court of Appeals confirms that when HOAs pursue their builders for construction defects, they protect themselves from potential liability to their individual homeowners that might arise from taking no action to address known construction defects.  See Creswell v. Estate of Howe, 2011 WL 4346273 (Minn. App. Sept. 19, 2011).

In the Creswell case, a second purchaser of a townhome alleged that certain known construction defects and needed repairs were not disclosed to her before her purchase. She filed suit against the townhome’s seller, both realtors involved in the transaction, the HOA, and four of the HOA’s board members individually.  In granting the Association’s summary judgment motion and dismissing it from the lawsuit, the trial court determined that there was evidence from which a jury could conclude that the Association had failed to disclose known construction defects to the purchaser.  However, since the unit owner: (a) was never assessed by the HOA for any property repairs, (b) had never paid for any property repairs herself, and (c) did not present any evidence that the value of her unit was impaired by the construction defects, she had suffered no damages and could not prevail. The court also noted that the Association had subsequently settled its construction defect with the developer of the townhomes, and that the settlement agreement required the developer to make the needed repairs.  The Court of Appeals upheld the Association’s dismissal from the case on the same grounds. So, the case makes clear that although the HOA and its individual directors might have breached some disclosure obligation to the townhome buyer (although a jury or other fact finder never actually decided the question), the unit owner wasn’t harmed because the HOA had forced the developer to make the needed repairs to the known construction defects, and the unit owner therefore never suffered the financial burden of the defects herself.

HOA board members are fiduciaries of the units owners, and must act in the best interests of those owners. When faced with costly construction defects, it’s in the unit owners’ best interest to have someone else pay for the needed repairs, namely: the person that created the defects in the first place.  Often, that means taking the unpleasant step of pursuing the developer or builder of the community in legal action. In the long run, however, the Association itself and the individual owners will be better off financially, and will be able to live in a community where needed repairs to construction defects have been performed and are not ongoing inconveniences or maintenance headaches for the Association.