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WSHB Nevada Update: The Law on HOA Representative Action and Construction Defect Evolves AgainNovember 13, 2014
Oxbow Construction, LLC v. District Court, 130 Nev. Adv. 86, ___ P.3d ___ (2014)
(2014 WL 5305896)
WHY THIS CASE IS IMPORTANT
Contractors, developers and their counsel should take note of this decision, as it clarifies both the standing of Homeowners’ Associations (HOAs) to pursue construction defect claims on behalf of their members and it explains when remedies under Nevada’s construction defect statute, Chapter 40, are available with respect to appurtenances, such as common areas and limited common areas, in conversion projects.
This case presents three significant holdings:
- A district court does not have to conduct an NRCP 23 (“Rule 23”) analysis of whether an HOA can satisfy class action requirements in an HOA representative action unless the HOA is seeking to prosecute the case in a class-action format.
- A dwelling is not a “new” residence for the purposes of Chapter 40 if the dwelling was actually occupied prior to its original sale (regardless of the chronological age of the dwelling or the length of the prior occupancy).
- Appurtenances, including common elements and limited common elements, do not have to be “new” for Chapter 40 relief. However, limited common elements assigned solely to an individual unit must be “new” to seek NRS Chapter 40 remedies. Further, in order to pursue NRS Chapter 40 claims for limited common elements that are assigned to benefit multiple units in a common building, there must be at least one unit that qualifies as a “new residence.”
This case involved a mixed-used conversion project located in Las Vegas, Nevada. The original developer, El Capitan Associates, hired Oxbow as its general contractor. After the completion of each building in the project, El Capitan obtained certificates of occupancy and leased some of the units as apartments.
After the completion of the project, El Capitan entered into an agreement to sell the project to Regent Group II, LLC. By the time El Capitan completed the title transfer of Town Centre to Regent Group II, LLC, 212 of the 246 units were occupied. The average length of the lease occupancy was 7.7 months.
Regent at Town Centre Homeowners’ Association (the “Association”), on behalf of itself and its members, served Oxbow with an NRS 40.645 (“Chapter 40”) Notice alleging the existence of construction defects. Oxbow, in response, filed a declaratory action against the Association and sought a determination that NRS Chapter 40 does not apply because the units did not qualify as residences after being rented as apartments. The Association counterclaimed and alleged construction defect claims.
The parties engaged in motion practice regarding (1) whether the units qualified as “new residences” under NRS 40.615 based on their chronological age and duration of occupancy, (2) whether NRS Chapter 40 remedies are available for all common elements, including those contained within “building envelopes,” (3) whether the Association could bring claims for common elements in a representative capacity, and (4) whether the Association can satisfy NRCP 23 class action requirements for standing to pursue claims for limited common elements.
The District Court determined that (1) units that were previously occupied do not qualify as new residences and cannot pursue NRS Chapter 40 claims and (2) the Association may pursue common element claims. The Court did not conduct an NRCP 23 class action analysis.
Oxbow filed a writ petition requesting that the District Court’s order be vacated because it failed to conduct an NRCP 23 class action analysis. The Association filed its own writ petition seeking a determination that NRS Chapter 40 remedies are available to all the units regardless of occupancy status.
1. HOA Standing to Pursue Individual Unit Claims
In D.R. Horton, Inc. v. District Court (“First Light II”), the Nevada Supreme Court held that a common interest community association must satisfy the class action requirements of NRCP 23 in order to prosecute claims on behalf of its members. After multiple writ petitions, the Court reversed course in Beazer Homes Holding Corp. v. District Court (“Black Mountain”). In Black Mountain, the Nevada Supreme Court held that a district court must conduct an NRCP 23 analysis upon request to determine if the case should proceed “like a class action, a joinder action, consolidated action, or in some other manner.”
Here, the Nevada Supreme Court departed even further from its First Light II ruling and held that the district court was not required to conduct an NRCP 23 analysis because the Association had not sought to proceed as a class action or in a class action format.
This ruling does not answer the question of what it means to “proceed as a class action or in a class action format.” Given the holdings of Black Mountain and Shuette v. Beazer Homes Holding Corp., there is a possibility that this holding will affect construction defect plaintiffs’ ability to use generalized evidence or extrapolation to prove their claims.
2. The Meaning of “New Residence” for NRS Chapter 40 Claims
In Westpark Owners’ Association v. District Court, the Nevada Supreme Court held that dwellings that were previously occupied prior to their original sales were not “new residences” for the purpose of NRS Chapter 40 and could not pursue NRS Chapter 40 claims. Here, the Association sought to have the Court determine that the 212 units that were previously occupied were “new residences” due to chronological age and the length of the prior occupancy, 11.4 months and 7.7 months, respectively. Despite the relatively insubstantial prior occupancy, the Court stated that its decision in Westpark was a balance between NRS Chapter 40’s remedial purpose with the need for certainty. As such, it was unwilling to replace the Westpark definition with a sliding-scale standard based on the dwelling’s chronological age and duration of any occupancy.
While the impact of this holding is limited on its face to conversions of relatively new developments, this case has some potential significances for project converters due to the difference in applicable statutes of limitation and/or repose. The statutes of repose for construction defect claims begin to run at the time of substantial completion, while the statute of limitation begins to run at the time of discovery of the injury. However, claims under NRS Chapter 116 (Nevada’s codification of the Uniform Common-Interest Ownership Act), are subject to a six year statute of limitation that generally begins to run when the original purchaser takes possession. Additionally, NRS Chapter 116 permits the parties to shorten the statute of limitation period to two years.
3. Common Elements and Limited Common Elements Do Not Have to be New for NRS Chapter 40 Claims
In its analysis of whether the District Court erred in allowing the Association to pursue claims for limited common elements assigned to multiple units in a common building, the Court clarified three separate issues.
- First, the Court interpreted NRS 40.615 and held that appurtenances to a residence do not need to be “new” in order to qualify for NRS Chapter 40 remedies.
- Second, the Court held that Chapter 40 remedies are only available for limited common elements that are assigned solely to an individual unit if the unit qualifies as a “new residence.”
- Third, with respect to limited common elements assigned to multiple units in a common building, there must be at least one unit that qualifies as a “new residence” in order for NRS Chapter 40 remedies to be available.
Limited common elements are a portion of the common elements allocated by the declaration or by operation of law for the exclusive use of one or more, but fewer than all, units. They may include, among other things, stairs, stoops, entrances to buildings, exterior surfaces, trim, siding and doors.
This decision is another attempt by the Nevada Supreme Court to clarify the relationship between NRS Chapter 40 and NRS Chapter 116, as well as common interest communities’ ability to pursue claims on behalf of its members.