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Mud in your eye

What issues arise when defects are discovered in multi-unit developments – and what approaches should you adopt to efficiently manage claims for the collective benefit of affected unit owners? Conor O’Leary and Ciaran Moore fill in the cracks

Apartment ownership in Ireland is based on a series of interlocking rights and obligations.

Typically, an ‘owner’ holds a long lease (for example, 999 years) to a unit that is held from an owners’ management company (OMC), which owns the freehold and, importantly, owns the common areas in a development.

The long lease gives an owner exclusive rights to the unit and limited rights in relation to the common areas, coupled with an obligation to pay an annual charge to the OMC.

The owner is also typically given a shareholding in the OMC, which is 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 in relation to any one unit.

While practical and functional in terms of ordinary ownership, everyday living, and the purchase and sale of apartments, the structure gives rise to particular complexities when a development, or part of a development, suffers from material defects.

If defects arise, there are certain key questions that must be answered as a matter of priority:

• Where are the defects or consequent damage located?
• Who is potentially responsible for causing the defects?
• When were the defects or consequent damage first discovered?
• Is there insurance cover in place?

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

The where

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 and, 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.

The who

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 subcontractors 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 subcontractors that may have carried out substandard workmanship on the development or the suppliers of any defective material used in the development.

For example, if the windows to a development are defective, thereby causing water ingress to the development, the supplier of those windows, the party responsible for their installation, and the architect who certified the windows to be of a certain standard may all have a liability to the unit owners and/or the OMC for the damage caused by the defects to those windows.

In addition to those parties who may be liable for the defects, the unit owners may have policies of insurance purchased with their unit that indemnify them against loss resulting from damage caused by structural defects in a development.

Therefore, the unit owners may also have recourse to an insurer, subject to the terms and limitations contained in their insurance policy. This is dealt with further below.

The when

Any indication that there are defects in a development should be responded to as a matter of urgency by managing agents and OMCs.

This is because the time period within which a unit owner and/or an OMC can bring proceedings against parties responsible for damage caused by structural defects is short; usually six years from the first purchase of the unit or from when the defects were discoverable, depending on the type of claim being brought.

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

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

Insurance

As mentioned above, a further 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, and that damage must have occurred within a certain period of time, usually ten 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 in respect of 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, it is then necessary to consider whether litigation may be necessary to recover some or all the costs of repairing any damage caused by structural defects.

As previously mentioned, such 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, there are certain factors to consider.

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.

Furthermore, 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 the following:

• 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 procedure in place for when a unit is sold, so that the purchaser provides their authority to be substituted into the proceedings in place of the vendor and the vendor’s claim is thereby assigned to the new purchaser, and
• The terms upon which any settlement offers are to be accepted or rejected are clearly prescribed. 

Forum or venue

Proceedings brought in respect of the defects may proceed by litigation before the courts or by way of arbitration. The process chosen will depend on the construction contract, or insurance policy if one applies.

The contract or policy may dictate that any disputes arising thereunder are to be resolved by means of arbitration. In those circumstances, such contracts or insurance policies will also determine how the arbitrator is to be appointed.

Where the contracts are silent on the forum for the resolution of disputes, litigation before the courts is the default procedure.

Regardless of the process engaged, it is likely that any claim will be costly to run and will involve considerable resources and an extended period of time to be resolved.

Therefore, OMCs/managing agents should engage lawyers at an early stage to ensure a streamlined approach to the proceedings, thereby reducing the incurrence of any unnecessary costs.

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 thereby 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 (a quantum-only claim).

If the case is heard before the courts, a decision will be given by way of a judgment. If an arbitrator hears the case, he or she will make an award.

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 60-70% of its legal costs. This is something that should be borne in mind by an OMC and budgeted for.

Alternative dispute resolution

Parties can agree to settle a dispute at any stage of proceedings. Parties may also appoint a mediator to facilitate settlement discussions on a confidential basis and without prejudice to the rights of the parties to continue proceedings if the mediation is not successful.

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.

Systematic approach

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, and these 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.

Conor O’Leary is a partner on the commercial litigation team in Mason Hayes & Curran specialising in negligence claims and insurance-coverage disputes. Ciaran Moore is an associate with expertise in managing multi-plaintiff litigation.