News
Portland condo buyers win $2.3 million salve
Oregonian
Portland, Oregon
Tuesday, August 19, 2008
BY JEFF MANNING
Owners of Northwest Portland's Hilltop Condominiums at Uptown have won $2.3 million in their long legal battle against prominent local developer Marty Kehoe.
Multnomah County Circuit Judge Judith Matarazzo found Friday that Kehoe's company, Uptown Heights Condominiums LLC, was negligent and that it breached its contract to repair some of the decks at the 108-unit complex.
Matarazzo also ruled that Kehoe's company breached its fiduciary duty of loyalty to the buyers of the units. The judge determined that neither Kehoe nor any of his companies committed fraud, as had been alleged by the plaintiffs. The plaintiffs were seeking as much as $7 million.
The $2.3 million will not cover full repair costs at the buildings, which suffer from a variety of moisture-related problems, an attorney for the condo owners said. "The homeowners are left holding the bag here," said Dean Aldrich, the Portland lawyer who represented them. "It will probably take $2.5 million to repair the decks alone and more than $5 million to do the whole thing."
Kehoe said the ruling was a huge victory for him and an enormous loss for the homeowners. "The result of the lawsuit must be devastating for homeowners up there," Kehoe said. "They were able to prove just a fraction of the repairs they alleged were needed to the court."
The Hilltop condo suit, filed in July 2006, is one of hundreds of complaints filed by homeowners in and around Portland in recent years. Shoddy construction, sensitive new building materials and tighter energy efficiency requirements created a generation of buildings vulnerable to moisture damage.
In response to the growing problem, the Oregon Legislature in 2006 passed legislation aimed at protecting homeowners and toughening education requirements for builders.
Kehoe is among the builders and developers who argue that the construction defect phenomenon is a myth created by plaintiffs' lawyers like Aldrich.
Kehoe bought the 108-unit complex in 2004 for $15.3 million and immediately converted the units from apartments to condominiums.
Originally built as apartments in 1990 on a steep hillside above Northwest 23rd Avenue, many of the units boast striking Mount Hood views. Kehoe sold them for prices ranging from $162,900 to $315,000.
Before Kehoe converted the units, the apartments underwent a series of repairs to address various water intrusion issues. Some of the repairs were big, including replacing much of the exterior siding.
The homeowners alleged that a Kehoe disclosure statement provided to prospective buyers stated that the siding and structural plywood, lumber and framing were in good shape and would last for "life," according to the complaint.
But the new owners quickly complained about leaky windows, poorly draining decks and other issues. In May 2006, they hired a consultant to evaluate the building. The consultant reported that "the entire exterior building envelope . . . was in the process of complete failure and had caused extensive property damage," according to the complaint.
Kehoe insists he never misled anyone. He does admit that his companies promised to repair some decks at the building and never followed through.
A disclaimer issued by Kehoe's company to Hilltop homebuyers loomed large in the case. It warned homeowners of some prior issues at the building, and it released all contractors who ever worked on the building from legal liability.
"The disclaimer got everyone else out of the case," Aldrich said. By the end, the sole defendant was Uptown Heights Condominiums, the limited liability company formed by Kehoe to buy and convert the Hilltop condos.
Even though they got less than they hoped for, Aldrich said his clients were happy to win the judgment. "The (condo) owners view this as some relief and some degree of vindication," he said.
Kehoe's insurance company, Farmers, is on the hook to provide the $2.3 million, Kehoe said. He said he doesn't know whether the insurer will appeal the ruling.
Construction defect law may not be flawless
New July 1 law requiring contractor-provided, two-year warranties on building envelopes for commercial structures could turn out to have a few defects of its own, legal experts say
Daily Journal of Commerce, Portland, Oregon
Monday, June 2, 2008
BY MELODY FINNEMORE
A new law that takes effect July 1 requires general contractors to offer a two-year warranty on the building envelope of large commercial structures. While the law is intended to protect building owners against defects in materials and workmanship, it still leaves plenty of room for problems to arise, according to attorneys specializing in design and construction law.
Under the new law, commercial contractors will be required to annually inspect the structures they build during the warranty period. And the warranty may exclude issues that come up because of improper building maintenance by the owner, according to the Oregon Construction Contractors Board.
Eric Grasberger, a partner at Portland’s Stoel Rives who specializes in development, construction and design law, chaired the Construction Claims Task Force that met for two years to gather testimony regarding building defects and put together a set of recommendations for the 2007 Legislature.
“Our goal was to try to improve the quality of construction in Oregon, reducing the number of construction defects plaguing commercial and residential consumers and reducing the cost of insurance for contractors,” he said.
Many of the task force’s recommendations, particularly those related to residential warranties, were opposed by industry trade groups, Grasberger said, adding the resulting warranty laws for both residential and commercial projects bear little resemblance to those crafted by the task force.
“These new warranties really don’t offer much, in my opinion,” Grasberger said. “Most contractors were already offering some kind of warranty for at least one year, and there was already an implied warranty that work would be done in a workmanlike manner. All the new statutes say is that general contractors have to offer a residential and commercial warranty.
The terms of these warranties are not specified and there is no explicit limitation on whether the warranties may contain disclaimers and other limiting terms. The two new warranties displaced the task force’s recommendations, which offered more comprehensive protection for consumers.”
Tim Calderbank, an attorney with Bullivant Houser Bailey’s Portland office, represents several general contractors and a few owners of public buildings, primarily school districts. He said the most immediate impact of the new law is that project costs will rise. These costs – which include increased insurance costs and the additional expense of providing annual inspections during the warranty period – most likely will be passed on to owners.
While the law’s focus on building envelopes is intended to prevent problems such as the onslaught of water intrusion troubles that have dogged the industry for the last five to 10 years, it actually may open up another avenue for lawsuits, Calderbank said.
“Now there’s an extended warranty obligation on the part of the general contractor and that may lead to additional lawsuits for breach of warranty,” he said. “On the pro side, certainly general contractors are going to be paying very close attention to the work on the building envelope to make sure it’s done right the first time so they won’t have to worry about it.”
Calderbank ensures his clients’ contract documents include terms that specifically comply with the new warranty requirements. “Another thing I’ve been advising my clients is…to have pretty tight language in their contracts about what an owner’s obligations are with regards to maintenance requirements,” he said.
Dean Aldrich of Aldrich Eike in Portland said much of his work revolves around defect-related construction claims, though commercial structures generally carry a lower risk for such problems.
“The defect problem mainly has involved residential structures. We have had a fair share of problems with commercial structures such as hospitals, hotels, schools and eldercare facilities, but it’s nothing like the residential market,” Aldrich said.
Aldrich said about 75 percent of his practice is representing property owners, and general contractors make up the other 25 percent. He advises his contractor clients to pay particular attention to the way they cost their projects.
“It’s all about costing the job properly. Construction is basically the allocation of risk and costing those risks,” he said. “And many of those costs are incremental. Owners will usually be glad to share in those costs as long as the contractor stands behind the work.”
Aldrich also advises contractors to hire an independent inspector to carry out the annual inspections required under the new law. “Because then if something goes wrong, someone else carries the liability,” he said.
While the new law has its share of detractors, Aldrich said it does have at least one positive impact.
“The nice thing about it is it’s a start and it does force a dialog between the contractor and the owner about envelopes, where significant problems can develop,” he said. “So long as everybody has a dialog about what’s going to happen, these projects usually work out.”
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