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New Requirements Under MCIOA: Preventative Maintenance Plans and Construction Defect Claims

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Important changes to Minnesota law were recently made that will affect real estate developers, builders, associations and unit owners.  Minnesota Statutes Chapter 515B, the Minnesota Common Interest Ownership Act (“MCIOA”), was amended to establish new requirements regarding preventative maintenance plans and construction defect claims (see 2017 Minnesota Session Laws Chapter 87, House File No. 1538).   The specific requirements vary depending on the date that the common interest community (“CIC”) was created.

A.    Preventative Maintenance Plans for CIC’s Created Before August 1, 2017

If a CIC was created before August 1, 2017, the association's board of directors must comply with the following requirements by January 1, 2019:

  1. Prepare and approve a written preventative maintenance plan, maintenance schedule and maintenance budget for the common elements.
  2. Provide all unit owners with a paper copy, electronic copy, or electronic access to the preventative maintenance plan, the maintenance schedule, and any amendments or modifications to or replacements of the preventative maintenance plan and the maintenance schedule.
  3. Follow the approved preventative maintenance plan, subject to amendment, modification or replacement from time to time.

It is significant that the 2017 MCIOA amendment requires preventative maintenance plans for common elements, but not for components of the units that the association is required to maintain.  This means that the preventative maintenance plan for a typical condominium must include roofs, siding, and other exterior building surfaces (which are part of the common elements in a typical condominium), but the preventative maintenance plan for a typical townhouse community need not include roofs, siding and other exterior building surfaces (which are part of the unit, not part of the common elements, in a typical townhouse community).

The amendment does not provide information as to what is to be included in a “preventative maintenance plan,” “maintenance schedule” or “maintenance budget,” so the association's board of directors currently must use its judgment in determining how to interpret those terms.

B.     Preventative Maintenance Plans for CIC’s Created On or After August 1, 2017

If a CIC is created on or after August 1, 2017, then the declarant’s Disclosure Statement in connection with the initial sale of a unit must include a preventative maintenance plan, maintenance schedule and maintenance budget for the common elements. The initial maintenance plan prepared by the declarant must be based on the best available information listing all building elements to which the plan will apply and the generally accepted standards of maintenance on which the plan is based. The initial plan must be dated and signed by the declarant and must be fully funded by the initial budget provided by the declarant.

If a declarant deliberately or inadvertently fails to include an initial preventative maintenance plan, maintenance schedule and maintenance budget in the Disclosure Statement for a CIC created on or after August 1, 2017, there may be significant consequences for the declarant under Minnesota Statutes section 515B.4-106.  First, a purchaser may have the right to cancel a purchase agreement prior to closing and receive a refund of all money paid before cancellation.  Second, the declarant may be liable to the purchaser for a statutory penalty of $5,000, in addition to any damages, attorney’s fees or other amounts recoverable under MCIOA or otherwise.

C.    Construction Defect Claims for CIC’s Created On or After August 1, 2017

The 2017 MCIOA amendment creates several new requirements that must be satisfied before a construction defect claim may be brought against a “development party” if the CIC was created on or after August 1, 2017.  “Construction defect claim” is specifically defined in MCIOA as a lawsuit or arbitration proceeding based on “a defect in the initial design or construction of an improvement to real property that is part of a common interest community, including an improvement that is constructed on additional real estate[.]”  The term “construction defect claim” specifically excludes claims related to subsequent maintenance, repairs, alterations, modifications or additions that are contracted for by the association or a unit owner.

The amendment adds a new term to MCIOA: “development party,” which includes “an architect, contractor, construction manager, subcontractor, developer, declarant, engineer, or private inspector performing or furnishing the design, supervision, inspection, construction, coordination, or observation of the construction of any improvement to real property that is part of a common interest community, or any of the person's affiliates, officers, directors, shareholders, members, or employees.”  Claims against any “development party” in a CIC created on or after August 1, 2017, are subject to the new approval and mediation requirements under MCIOA.

The new requirements for construction defect claims for CIC’s created on or after August 1, 2017, may be summarized as follows:

  1. Written Notice to Unit Owners. The association must give written notice of the anticipated commencement of the action to each unit owner. The notice must describe the construction defect claims, the relief sought, and the manner in which the association proposes to fund the cost of pursuing the construction defect claims.
  2. Approval of Majority of Unit Owners.  The association must obtain the approval of owners of units to which a majority of the total votes in the association are allocated (excluding votes allocated to units owned by the declarant, an affiliate of the declarant, or a mortgagee who obtained ownership of the unit through a foreclosure sale). The association may obtain the required approval by a vote at a meeting of the members or, if authorized, by a vote taken by electronic means or mailed ballots. If the association holds a meeting and voting by electronic means or mailed ballots is authorized by statute, the association must also provide for voting by those methods in addition to voting at a meeting. In this particular situation, votes taken by electronic means or mailed ballots must be used in combination with the vote taken at a meeting and are not in lieu of holding a meeting, if a meeting is held, and are considered for purposes of determining whether a quorum was present. This is completely contrary to Minnesota Statutes section 515B.3-110, which specifically states that voting by electronic means or mailed ballots (for purposes other than authorizing a construction defect claim) cannot be combined with a vote taken at a meeting.  Further, if the association holds a meeting to obtain approval of a construction defect claim, proxies may not be used unless (i) the unit owner executes the proxy after receipt of the construction defect claim notice and (ii) the proxy expressly references that notice.
  3. Mediation.  Before an association can bring a construction defect claim against a development party, the association must submit the matter to mediation before a mutually agreeable neutral third party.  If the parties are not able to agree on a neutral third-party mediator from the roster maintained by the Minnesota Supreme Court, they may petition the district court to appoint a mediator. Mediation will not be required prior to commencement of a construction defect claim if the parties have completed home warranty dispute resolution under Minnesota Statutes section 327A.051. The applicable statutory time limits for bringing a construction defect claim  will be “tolled” (placed on hold) from the date that any party makes a written demand for mediation until (i) five business days after mediation is completed, or (ii) 180 days, whichever is later.

These amendments take effect on August 1, 2017.