Condominium Associations’ Rights are Expanded Against Developers

In a case of first impression, the Massachusetts Supreme Judicial Court expanded the rights of condominium associations to recover for damage for the negligent construction of common areas of a condominium development. The case is Wyman et al. v. Ayer Properties, LLC.

Ayer Properties purchased a 150-year-old vacant four-story mill building in Lowell and intended to be the general contractor for the renovation of the building for the purpose of converting it into 22 luxury condominiums and five commercial units. Construction began in January, 2003. The sale and occupancy of 22 residential units proceeded as each unit was completed during the three-year construction period. Ayer established the condominium trust and was the initial trustee, and in August 2004, Ayer ceded control to a newly-appointed board of trustees.

After the transfer of control of the condominium association, the new trustees became concerned with the condition of the building, specifically the windows, exterior masonry, and roof, and hired a professional engineer. Suit was then filed against Ayer for negligent design and construction of the common areas.

The issue addressed by the Court concerns what is known as the “economic loss rule.” The rule establishes a limitation on damages a plaintiff may recover in an action based on negligence. (The rule does not extend to breach of contract matters.) Basically, the negligent supplier of a defective product is not ordinarily liable for negligence if the damage is only to that product itself. That is, in order to recover for negligence, there must be physical damage to other than the defective product at issue, or there must be personal injury. By way if example, if someone negligently installed a window and the only damage was to the window, there would be no recovery in tort (negligence). However, if the window caused a leak and damaged a floor or the furniture (or fell and injured a person), recovery would be allowed. In the Wyman case, one of the damaged areas was the masonry, and the defects were limited to the masonry itself only.

The economic loss rule limitation is a very important issue in lawsuits by condominium associations for claims of defective workmanship against developers and contractors because the condominium association itself has no contract with such entities, and their claims are generally based on negligence or tort theories.

The Court held that the economic loss rule would not apply to damages caused by negligent design and construction of the common areas of the condominium. The Court determined that it did not want to leave a damaged party–here the condominium association who has exclusive authority to bring claims on behalf of the unit owners for negligent construction of common areas–without a remedy. The Court made it clear, however, that it was not invalidating the economic loss rule in general, and it is still a valid defense in other contexts.