After conflicting conclusions by the lower courts, the New Jersey Supreme Court recently decided whether a condo association’s lawsuits for construction defects were timely filed against a general contractor and three of its subcontractors. The trial court and appellate division came to opposite conclusions by using different commencement dates for the 6-year statute of limitations at N.J.S.A. 2A:14-1.

Construction of the building was complete in May 2002 and the owner rented units for two years. In June 2004, the owner sold the building to a developer who converted the building from a rental to condo ownership. As part of the conversion, the developer retained an engineer to inspect the common areas. In October 2004, the inspector found that the structure of the building, townhomes and parking deck appeared to be in good condition with “some spalling of concrete” and “some sporadic cracking of the concrete” in the parking deck. The report was in the condo public offering statement and master deed. Once 75% of the units were sold in July 2006, the developer transferred control of the building to the condo association. The association then retained an engineer to perform an inspection in June 2007. Numerous construction defects were found including in exterior walls, roofing, concrete flooring, plumbing, landscaping and the parking garage.

The condo association commenced lawsuits in March 2009, more than 6 years after the building was completed. The suits alleged negligence, breach of express and implied warranties of good workmanship, breach of habitability and merchantability. After discovery, the GC and subcontractors filed motions for summary judgment, arguing that the lawsuits were not commenced within the 6-year statute of limitation.

The trial court agreed, finding that the time began to run in May 2002 when the building was substantially completed, determining that the condo association had time to discover the problems within that time. The court concluded that the October 2004 report put the owners on notice of potential problems.

The appellate division reversed, finding that the statute of limitation clock did not begin to run until the condo association obtained its inspection report in June 2007, which was when they had actual notice of the defects. The appellate division rejected arguments that this would make contractors “forever liable,” violating the 10-year statue of repose for claims against construction contractors. See N.J.S.A. 2A:14-1.1(a).

The Supreme Court disagreed with both of these approaches and concluded that a construction defect cause of action accrues at the time the building’s original or subsequent owner first knew or, through reasonable diligence, should have known of the basis for a claim. The time commences even if there are subsequent owners because a subsequent owner “stands in no better position than a prior owner in calculating the limitation period.” The Supreme Court recognized that the discovery rule applied, i.e., a cause of action will be held not to accrue until the injured party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim. However, it found that the discovery rule does not re-triggered the statute of limitations each time there is a sale; it is triggered when anyone in the chain of title first knew or should have known of the actionable claim against an identifiably party.

In this particular case, the Supreme Court found that it did not have the factual record to determine when the claim accrued. It remanded the case to the trial court to determine when all of the entities in the chain of ownership first knew, or should have known through the exercise of reasonable diligence, that it had a cause of action against each defendant.

The Supreme Court also addressed the statute of repose, which requires the filing of a lawsuit against persons who provided services in the construction of an improvement, within 10 years of the date of substantial completion of the work. In this case, the condo association’s suits were commenced within this 10 year period.

The lessons of this decision are that property buyers must be diligent in discovering not only construction defects, but if and when prior owners knew or should have known about the defects. Seller who know and do not disclose potential problems will face claims of fraudulent concealment by a subsequent owner. Hopefully, sellers will not unwittingly trigger the statute of limitations clock by turning a blind eye to construction defects that could have been discovered.