Structural Defects Claims in Multi-Unit Developments

Apartment ownership in Ireland is based on a series of interlocking rights and obligations. Typically, the owner’s management company (OMC) holds the freehold (meaning the land and property), and the “owner” holds a long (eg. 999 year) lease of the unit. Importantly, the OMC also owns the common areas. The long lease gives an owner exclusive rights to the unit and limited rights regarding the common areas. It also includes an obligation to pay an annual charge to the OMC. The owner is also typically given a shareholding in the OMC. The shares are broadly proportionate to the ratio of one unit to the number of units in the entire development.

This ownership structure seeks to collectivise the management of common areas for the common good, while allowing individual freedom over each individual unit. The structure works well in practice for ordinary ownership, everyday living, and the purchase and sale of apartments. However, it gives rise to particular complexities when a development, or part of a development, suffers from substantial defects.

We explore the issues that can arise where defects are discovered and suggest some approaches to efficiently manage claims for the collective benefit of affected unit owners.

Questions to ask when defects arise

If defects are found, the most important questions that need to be answered first are:

1. Where are the defects or the resulting damage located?
2. Who is potentially responsible for causing the defects?
3. When were the defects or the resulting damage first discovered?
4. Is there insurance cover in place?

The answers to these questions will help determine who should be pursued in any claim. They will also help decide whether an individual owner or the OMC should manage the dispute.

Key considerations

1. Where are the defects/damage located?

If the defect or damage is to the internal structure of an apartment, the responsibility to repair that defect will most likely lie with the individual unit owner. However, if the defect or damage is to the balconies, the cladding of a development, or to the common areas of the development under the ownership of the OMC, then the OMC will be responsible for remedying the defect. In economic terms, this means that all unit owners will collectively bear the cost of the repair of these areas, even if their particular unit is unaffected.

Quite often, the defects affect both the common areas and individual apartments. In those circumstances, there may be a conflict between the individual unit owner’s desire to prioritise remedying their own unit, and their obligations as members of the OMC to contribute to the repair of the common areas of the development.

2. Who is responsible for causing the defects?

Once defects are discovered, it is then necessary to identify who is likely to be legally responsible for causing the defects. Is it the original developer, builder or sub-contractors employed when the development was being constructed? It is important that each individual or company that may have contributed to the defective construction be identified. This includes any sub-contractors that may have carried out sub-standard workmanship on the development or the suppliers of any defective material used in the development.

For example, if the windows in a development are defective and this causes water to enter the building, several parties may be held liable. These may include the supplier of the windows, the party responsible for their installation, and the architect who certified that the windows met a certain standard. Each of these parties may be liable.

3. When were the defects discovered?

If there are any signs of defects in a development, managing agents and OMCs should deal with them without delay. This is because there is only a short window of time for a unit owner and/or an OMC to take legal action against those responsible for damage caused by structural defects. In most cases, the time limit is six years. The starting point depends on the type of claim being brought, but is usually either:

• The date the unit was first purchased, or
• The date the defects could have been discovered.

Similarly, insurance policies for large developments may only cover loss arising from structural defects discovered and notified within 10 years of the purchase of the policy.

OMCs/agents should therefore take note of any reports indicating there may be defects to a development, including for example, the presence of water ingress, and investigate these thoroughly and promptly.

4. Is there insurance cover in place?

Another question to consider when defects arise in a development is whether the units were sold with the benefit of an insurance policy. These policies usually cover damage to a development caused by structural defects. However, that damage must have occurred within a certain period of time, usually 10 years from the date the policy was taken out.

The extent of cover provided by the insurance policy can vary, as can the requirements to notify damage to the insurer. Policies often cover both damage to the common parts of a development as well as damage to internal units caused by structural defects.

However, the financial limits under a policy will usually apply equally to internal damage and damage to the common areas caused by structural defects. In other words, if you claim under the policy for internal damage to a unit, this will reduce the amount payable by the insurer for damage to the common parts. If the structural defects cause both internal and common parts damage, a conflict may arise between:

• The unit owner’s desire to claim for the repair of the internal damage under the policy, versus
• The OMC’s wish to claim under the policies for the costs of repair of the common parts.

Regardless of the location of the damage, the OMC/managing agent should take legal advice on the application of the policy in order to ensure strict compliance with the terms and conditions of the policy. Otherwise, costly disputes with the insurer may arise.

Litigation/Arbitration

Once the managing agent/OMC is in a position to answer the key questions set out above, and the relevant parties have been notified of any claims, the next step is to consider whether litigation may be necessary. Litigation may be required to recover some or all of the costs of repairing any damage caused by structural defects. These proceedings can also involve a claim against an insurer where there is an insurance policy in place and the insurer is refusing to indemnify the unit owners for some or all the cost of repairing the damage.

Where litigation is necessary, the following factors arise:

1. Who is the correct claimant?

The first issue to be determined is who should bring the proceedings. If the defects and damage affect only the common areas, it may be appropriate for the OMC itself to issue proceedings. However, if the defects affect both the common areas and the individual units, or only the individual units, then it may be necessary for the unit owners themselves to issue proceedings. Also, where claims are being brought against an insurer, these must be brought in the names of the policyholders.

In the latter case, the unit owners can still elect to authorise the OMC to administer the claim on their behalf. This can simplify the procedure significantly for the individual unit owners, as the unit owners’ proceedings are administered collectively and by one legal team.

Where an OMC is authorised to bring the claim on behalf of the unit owners, the OMC must ensure that:

• It has written authority from each unit owner to issue and administer the proceedings on their behalf.
• It provides regular updates to unit owners on how the proceedings are progressing.
• It has sufficient cash reserves to pay legal costs, outlays and the costs of experts to investigate the defects. This may require raising additional levies or increasing its service charges.
• It has a process in place for when a unit is sold, so that the seller’s claim is transferred to the buyer and the buyer gives permission to the OMC to continue managing the proceedings on the buyer’s behalf.
• The terms upon which any settlement offers are to be accepted or rejected are clearly set out.

2. Forum or venue

Proceedings relating to the defects may proceed by litigation before the courts or by way of arbitration. The default position is that the claim will be dealt with through the courts, but the construction contract or insurance policy, if one applies, may require that any disputes arising be dealt with through arbitration. In such cases, the contract or insurance policy will determine how the arbitrator is to be appointed.

Regardless of the process engaged, it is likely that any claim will be costly to run and will involve considerable resources. It will also likely take an extended period of time to be resolved. OMCs/managing agents should engage lawyers at an early stage to ensure a streamlined approach to the proceedings, and reduce the incurrence of any unnecessary costs.

3. A judgment or award

Where proceedings advance to a full hearing either before the courts or at an arbitration, the court or arbitrator will ultimately make a decision as to which party, if any, is liable to contribute to the repair of the damage and/or structural defects. These types of proceedings can involve the determination of:

• Who is liable for causing the defects, and, as a result, is liable for their repair, or
• Where liability is not in issue, the proceedings can deal solely with the amount the unit owners and/or OMC are entitled to recover. This is known as a quantum only claim.

Any judgment or award will also usually deal with the costs of the proceedings. However, even where a party to proceedings is successful, it will usually only recover between 60 to 70% of its legal costs. This is something that should be borne in mind by an OMC and budgeted for.

4. Alternative dispute resolution

Parties can agree to settle a dispute at any stage of proceedings.

The parties can also appoint a mediator to help them try to reach a settlement. The mediation is confidential and, if it doesn’t succeed, the parties can still continue with the legal proceedings.

If the OMC is administering claims on behalf of a group of unit owners, and terms of settlement are agreed between the parties, it may be necessary for the OMC to have the terms of settlement approved by each individual unit owner. This can be done by either:

• Ensuring the mandates signed by the unit owners at the outset of proceedings authorise the OMC to settle the dispute on the unit owners’ behalf, or
• Agreeing settlement terms with the defendants/respondents to the proceedings on a conditional basis subject to the approval of the members at a later date.

Conclusion

Addressing structural defects in multi-unit developments is a complex process that encompasses legal, financial, and procedural considerations. The interplay of individual unit ownership and collective responsibility under the OMC framework necessitates a systematic approach when defects are discovered.

Key questions, such as the location of defects, the responsible parties, the timing of discovery, and available insurance coverage serve as critical starting points for resolving issues efficiently. Understanding these elements helps clarify the responsibilities of unit owners and the OMC, and also aids in determining the appropriate course of action.

In addition, there is the potential for conflicts of interest to arise between individual unit owners and the OMC. These conflicts must be carefully managed to ensure that all parties' interests are adequately represented. This includes making informed decisions about legal proceedings and settlements, which should ideally be handled collectively to minimise costs and streamline processes.

When defects at a development are discovered, or even suspected, OMCs/managing agents should seek legal advice at an early stage. Lawyers will be able to advise OMCs on their own legal position, and the best way to advance their members’ interests. Timely legal advice will also help OMCs/managing agents avoid serious pitfalls such as failing to notify defects to an insurer in time or failing to include all appropriate parties in legal proceedings.

For more information and expert advice, contact a member of our Dispute Resolution team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.