NJ Supreme Court Redefines When Construction Defect Claims Accrue
In light of a recent decision by the New Jersey Supreme Court, individuals and entities owning recently constructed or renovated properties should take extra caution to ensure that they pursue any construction defect claims within the six-year statute of limitations. Otherwise, they may be left without any recourse.
On September 14, 2017, in The Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisade, LLC, the New Jersey Supreme Court held that the statute of limitations for a construction defect begins to run when any person or entity “in the chain of ownership” first knows or should know about the defect.
Before Palisades, a plaintiff could rely on the “discovery rule” to avoid a statute of limitations defense. Under the discovery rule, a cause of action does not accrue until the plaintiff discovers, or by an exercise of reasonable diligence, should have discovered that he may have a basis for an actionable claim. Thus, in construction defect cases, the focus was on when the plaintiff (or current owner) knew or should have known that he had a claim. However, in Palisades, the Court reined in the scope of the discovery rule by placing the focus on when any owner of the property knew or should have known about the potential claim.
By way of brief background, in Palisades, the plaintiff, a Condominium Association, sued a general contractor and three subcontractors for construction defects at a building complex. At the time construction was substantially completed in May 2002, the building was owned by a different entity, Palisades A/V Acquisitions Co., LLC. Two years later, the building was sold to 100 Old Palisade, LLC, which converted the building into condominium units pursuant to the NJ Condominium Act. In July 2006, 100 Old Palisade, LLC turned control of the building over to the Condominium Association. In June 2007, an engineering and architectural firm hired by the Condominium Association to inspect the building issued a report, identifying several construction defects. Thereafter, the Condominium Association commenced actions against the contractors. The contractors moved for summary judgment on the grounds that the actions were barred by the six-year statute of limitations applicable to construction defect claims.
The trial court initially granted summary judgment for the contractors on the grounds that plaintiff’s claim accrued on the date the building complex was substantially complete. The Appellate Division reversed and, relying on the discovery rule, held that the claim did not accrue until the Condominium Association discovered the defects when its expert issued the report. The Supreme Court rejected both approaches, and remanded the case to the trial court for a “Lopez hearing” to determine whether either of the previous owners knew or should have known about the construction defects.
A Lopez hearing (named after the Supreme Court’s seminal decision, Lopez v. Swyer, is a pre-trial preliminary hearing held before the judge and outside of the presence of the jury to determine when the cause of action accrued. At a Lopez hearing, the trial court hears testimony, reviews deposition transcripts, and receives evidence before determining when the plaintiff (or, in light of Palisades, a prior property owner) knew or should have known about the construction defect.
Construction litigators should be prepared to adjust their strategy in cases involving statute of limitations defenses as a result of the Palisades decision. Because the owner bears the burden of proving that the claim was not and could not be known of until after substantial completion, contractors can assert statute of limitations defenses and require owners to prove that neither they nor the prior owners had any reason to discover the defect.
Attorneys for contractors should also pursue extensive discovery in advance of the Lopez hearing, including obtaining depositions and documents from prior owners relating to any inspection reports, pre-sale disclosures, and post-construction repairs. While the burden of proof is on the plaintiff, this discovery will be critical for the contractors because, with the right
testimony or evidence, a contractor can more expeditiously prevail if one person in the “chain of ownership” knew or should have known of the construction defect.
The Supreme Court’s decision may also have a serious impact on the real estate industry. This Court’s holding emphasizes the importance of a buyer’s vigorous due diligence when purchasing a property. Buyers should investigate any construction work performed on a property they intend to purchase to determine whether there is a construction defect. Further, if the buyer decides to proceed with the transaction after its due diligence, it should bring any defect claims within six years from substantial completion to avoid a potential statute of limitations defense. Additionally, the scrutiny into what the seller knew or should have known about construction-related problems involving the property, and the possibility that claims against the general contractor may be barred by the statute of limitations, may result in additional fraudulent concealment claims against sellers.
Only time will tell the full impact of this decision on buyers and sellers in a real estate transaction; however, should a statute of limitations issue arise, contractors and owners must be prepared to address whether anyone in the chain of ownership knew or should have known of the construction defect.