May 7, 2019
By Hugh D. Brown
Hugh Brown is a member of the firm’s Construction Law Department. He can be reached at 612.359.7663 or firstname.lastname@example.org.
Contractors rely on Minnesota’s construction-specific statutes of limitations and repose for certainty on the length of their exposure to liability for completed projects. But the date on which these statutes begin to run, and the work to which they apply, can be surprisingly hard to pinpoint. Two decisions from the Minnesota Court of Appeals in Village Lofts at St. Anthony Falls Association v. Housing Partners III-Lofts LLC et al, and Schmaedeke v. All Service Plumbing, LLC illustrate this point. This Briefing Paper will discuss these two decisions and provide guidance on how to obtain certainty about the length of your exposure for design and construction claims.
The Village Lofts case involved two multi-unit condo buildings in northeast Minneapolis. The first, Building A, received partial certificates of occupancy covering common areas and one condo unit in September 2002. It received others later in 2002, more in 2003, and another in July 2006. Building B received a single certificate of occupancy in October 2004. Problems arose almost exactly ten years later when a resident saw evidence of water intrusion in her unit on January 30, 2014.
The homeowners’ association investigated both buildings and found problems with water pipes associated with the HVAC system in each unit. It sued the developer, the general contractor, the architect, and three subcontractors on August 5, 2015 for the common law claims of breach of contract and negligence, and claims for breach of statutory warranties under Minnesota Statutes Chapter 327A. The contractor moved for summary judgment, and the district court dismissed the association’s claims on the grounds that the claims are barred by the 10-year statute of repose of Minnesota Statutes Section 541.051.
Section 541.051 contains two time bars: (1) a statute of limitations, which cuts off claims two years after the discovery of a defect; and (2) a statute of repose, which cuts off all claims ten years after substantial completion of the construction. It also states that the date of substantial completion is determined by “the date when construction is sufficiently completed so that the owner or the owner’s representative can occupy or use the improvement for the intended purpose.”
The court in Village Lofts applied this provision to the two-building condo development at issue. First, the court held that the two buildings in the single development constituted two independent improvements to real property. It reasoned that the two buildings were constructed at different times, under different construction contracts, and involved two separate HVAC contractors. The court rejected the argument that the buildings were a single improvement simply because they were part of a common development and were served by some common areas and amenities that were completed after the second building. Hence, the court held that the two buildings were two separate improvements to real property, and, for that reason, the 10 year statute of repose on each building would expire at a different time. This analysis was surprising as there are many cases finding that separate buildings constructed at different times are still part of one overall improvement in the context of determining the last date of work for purposes of filing mechanics liens.
Second, the court addressed when substantial completion of Building A occurred. It held that substantial completion of Building A occurred when certificates of occupancy had been issued for the common areas and “all but two of the condominium units in Building A.” However, it isn’t clear why the court determined that substantial completion, at least for the latter two units, had not yet occurred because their certificates of occupancy had not yet been issued. Particularly in the context of multi-unit developments, the date of the issuance of a certificate of occupancy is not a good way to fix the date of substantial completion.
Takeaway: To avoid having this arbitrary date control the beginning of a limitations period, state in your construction contract the point at which the building will be considered sufficiently completed so it can be used for its intended purpose. A careful and specific definition of when a structure can be used for its intended purpose will likely discourage a court from using the date of a certificate of occupancy for a majority of units as a benchmark in the absence of other guidelines.
Third, the court addressed when the alleged defect in Building B was discovered. The contractor argued that the alleged defect in Building B was discovered when defects were discovered in Building A. The court disagreed, saying that discovery of the defect in building A did not give the HOA or its inspecting engineers knowledge or reason to know that there was a problem in Building B. It reasoned that, because the buildings had separate HVAC systems, “any suspected defect in building B would have been speculative.” This too is concerning for contractors. It would seem that an owner who learns that one building in a two-building development suffers from a pervasive construction defect should go and determine whether the other building has similar problems. But this decision suggests that the owner can wait and extend the statute of limitations by avoiding an inspection until absolutely necessary. This will keep contractors on the hook for construction claims for longer.
Fourth, the court addressed the meaning of the term “warranty date” on which the time limits of Minnesota’s home warranty statute would begin to run for multi-unit buildings. It pointed out that the statutory definition, which defined “dwelling” as a “new building, not previously occupied, constructed for the purpose of habitation” sat uneasily with the reality of multi-unit condo buildings, which involved several separate purchasers within a single “building.” The court held that each condo unit had a different “warranty date.” Therefore the warranty begins to run on the earlier of the date that the initial purchaser takes occupancy or legal or equitable title to each individual unit, rather than the development as a whole. This ruling effectively allows the warranty statute of repose to extend well beyond 10 years after the date of substantial completion of the building.
Takeaway: The “warranty date” is defined by statute, but contractors can make it more likely that the warranty date will begin to run when their work is complete by defining the warranty date in the contract as the date on which the first unit is occupied. Although not the only thing a court will look at, this will certainly weigh in favor of an earlier warranty date if a court is forced to make a decision on this question.
The second decision, Schmaedeke v. All Service Plumbing, dealt with the question of when claims for defective work related to improvement of real property are subject to the two-year limitations period of 541.051 or to the regular six-year limitations period for regular breach of contract and negligence claims. In Schmaedeke the contractor replaced a boiler in a rental property. An employee failed to close the “bleeder valves” on the radiators connected to the home’s heating system after the boiler had been installed, and as the boiler was being filled with water, water poured out of the various radiator valves and flooded the property. Six years later, the property owners commenced a negligence action against the contractor, and the court was faced with the following question: Does the two-year limitations period applicable to improvements to real property apply, or is the matter controlled by the general negligence limitations period of six years?
The court of appeals held that the six-year limitations period applied. It rejected the argument that filling the heating system with water was a necessary part of the installation of the boiler and that the contractor’s scope of work necessarily included that work. It decided that the scope of work in the construction contract was not determinative and that the refill was only tangential to the improvement.
It’s easy to understand the court’s desire to allow the homeowner’s action to proceed – after all, the contractor’s error was clear, and the damage severe. But the resulting decision also leads to confusion. Construction contracts routinely require a contractor to perform several pieces of work, which may include procurement, installation, and startup/commissioning-type work, some of which is an improvement to real property and other only tangential to the improvement. So what can a contractor do? The court here assumed that the refill was “only tangentially related” to the installation of the improvement, and this appears to have been critical to the decision.
Takeaway: Contractors can make it more likely that all work will be considered part of the improvement with careful contract drafting, which in the Schmaedeke case would have made clear that the refilling of the system and commissioning was integral to the improvement of the property.
This article is a general discussion only and does not constitute legal advice or representation.
Dean Thomson and Mark Becker will be presenting a Live Webcast Seminar from 12:00 to 1:00 p.m. on Wednesday, May 15th “Riding the Wave: Early Dispute Resolution Fundamentals”. For details and registration information, please visit the Minnesota CLE page here.
Once again, Fabyanske, Westra, Hart & Thomson, P.A. has been ranked as a Band 1 Construction Law Firm in Minnesota by the well-recognized Chambers professional rating service. Here’s what Chambers has to say about FWHT:
The team is known as “Esteemed for its dedicated construction group, which brings deep industry insight to disputes, contract negotiations and planning issues. Represents diverse participants from the public and private sectors, including design professionals, insurers and subcontractors. Frequently acts on large-scale regional and national projects. Numerous attorneys within the team are well known in the sector, having been appointed to leadership roles at a variety of industry bodies.”
Dean Thomson offers a broad construction law practice covering both contentious and non-contentious matters. He is viewed by market observers as “one of the top construction minds in Minnesota” and a “shining star” of the state construction Bar.
Kyle Hart is consider by sources to be a “tremendous lawyer” with “excellent trial skills.” He enjoys a leading reputation in the Minnesota market, handling construction disputes in all of their forms, including litigations, arbitrations and mediations.
Gregory Spalj has vast experience in the construction arena, offering a broad practice that encompasses contract negotiation, dispute resolution and insurance matters.
Jesse Orman continues to consolidate his reputation in the market, handling contract drafting and negotiations, defect disputes and insurance coverage litigation, among other matters. Interviewees label him an “excellent” attorney and consider him a “rising star” of the Twin Cities Bar.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2019 FWH&T