TOLLING AGREEMENTS: Construction Defect Lawyers use them to preserve Association Warranty Claims during Construction Defect Negotiations with Developers

If properly drafted, a tolling agreement stops, or “tolls,” the running of the statue of limitations and other time periods aplicable to an association’s legal claims while it attempts to negotiate the repair of and/or monetary compensation for construction deficiencies with the developer and other responsible parties. In short, it is a “time -out” that allows and association to preserve its legal claim so it can focus on settling its claims rather than pursing them in court.

Too often, condominium associations and homeowner associations (“HOA“)  unknowingly allow their legal claims for construction defects to expire during lengthy negotiations with developers and builders. If negotiations fail, the association may turn to a construction defect attorney for legal representation only to find their construction defect legal claims are time barred because the statute of limitations or other legal time period has expired.                 .

This article explains how condominium associations and HOAs can avoid this scenario by the use of tolling agreements to preserve their legal claims while engaged in potentially lengthy negotiations with developers to correct construction defects.

There are a variety of potential legal claims for construction defects that a condominium association or HOA can bring in its own name and on behalf of its homeowner members. These include express and implied warranties, consumer protection act claims (for which attorneys fees may be recoverable), and negligent construction. It is often only by reason of the fact that the association could bring these legal claims that a developer is willing to negotiate. Thus, it is essential that the association preserve these claims or lose its bargaining power.

In some cases, by the time homeowners take control of their condominium association or HOA from the developer, some claims may be about to expire. It is customary for the initial “homeowner controlled” association to commission an engineering report (a Transitions Study or Deficiency Report) in order assess construction before warranties and other legal claims expire. In most cases, a developer should be asked to sign a tolling agreement in connection with any attempt to negotiate warranty repairs or compensation, especially when potentially serious construction defects are in dispute.

A tolling agreement is important because an association’s legal claims are limited in duration and must be brought within a time period know as the “statute of limitations.”  The statute of limitations refers to the time period within which a particular legal claim must be brought in a court of law or it shall be forever barred. This issue is complex, since different legal claims have different statute of limitations periods and those time periods can also vary depending as to different defect depending on the factual circumstances. In general, however, there are only two ways to stop the statute of limitations from running: (1) file a law suit asserting the legal claim in court; or (2) have the responsible parties sign a tolling agreement”.

A tolling agreement is a private contract that courts will enforce. Pursuant to such an agreement, the association and developer ( and other responsible parties) agree that the statute of limitation and other legal time periods will stop running (or “toll”) while they attempt to negotiate a resolution of their construction dispute. Thus, tolling agreements provide a “time out” period that allows the association to negotiate and preserve its legal claims without having to file a lawsuit to protect its construction defect warranty claims and other legal rights. A tolling agreement does not harm a developer and its willingness to enter into such an agreement is evidence of its intentions to negotiate in good faith. .

An example of the importance of tolling agreements is provided by the case of Milton Company v. Council of Unit Owners of Bentley Place Condominium. In that case, a condominium association entered into a tolling agreement with the condominium developer while negotiating the repair of construction defects identified in an engineering report. Ultimately, negotiations failed and suit was filed before the tolling agreement expired. The Developer’s lawyer argued that the tolling agreement did not apply and that the claims brought by the association were barred by statute of limitations. The Court rejected the developer’s argument and upheld the tolling agreement. Subsequently, following a four week trial the jury awarded the condominium association a judgment against the Developer for approximately 6.6 million dollars for construction defect damage repairs and the Court awarded the association $500,000 in attorney fees under the Maryland Consumer Protection Act. Without the tolling agreement the association’s case might have been dismissed on grounds of statute of limitations before ever going to trial. Thus, the importance of tolling agreements is apparent. .

In sum, a condominium association or HOA faced with significant construction deficiencies should seek legal advise at the early stages regarding the negotiation of construction deficiencies. The construction defect attorneys at Cowie & Mott are well versed in condominium and HOA construction law we routinely review association documents for transitioning associations and meet with the board of directors free of charge to advise the association of its rights and the applicability of the statute of limitations as well as provide our recommendations for identifying, preserving and successfully negotiation a revolution for construction defect warranty claims.

Nicholas D. Cowie is an attorney in the construction defect law firm of Cowie & Mott, P.A. and also served as an adjunct Professor of Construction Law at the University of Baltimore School of Law. Mr. Cowie is one of the Attorneys that represented the Condominium Association in the Bently Place Condominium case referred to in this article in which a Maryland condo association was awarded $6.6 million damages for cost of repairing construction defects, plus $500,000.00 for attorney fees.