In Port Liberte Homeowners Assoc., Inc. v. Sordoni Const. Co., A-2138-04T1, 2007 N.J. Super. LEXIS 168 (App. Div. June 4, 2007), the New Jersey Superior Court's Appellate Division recently held that a condominium association may bring claims under the Consumer Fraud Act, N.J.S.A. 56:8-1 et seq. ("CFA"), and for common law fraud, directly against subcontractors and materialmen who entered into subcontracts or supplied products for use in construction of a condominium's common elements, even where the alleged conduct on which such claims are based occurred before the condominium association existed.

The case arose from the construction, in the 1980s, of a large condominium complex in Jersey City. In May 1986, the developer registered the project with the Department of Community Affairs ("DCA"). In July 1986, the developer decided to clad the buildings with an Exterior Insulation and Finish System ("EIFS") manufactured by defendant Dryvit, and a subcontract for the installation of the EIFS was executed on July 17, 1986. Installation of the EIFS occurred between November 1986 and November 1987. The plaintiff condominium associations (the "Associations") were created in March 1987, when the developer filed the Master Deed and Declaration of Covenants with the DCA and recorded those documents. The developer controlled the Associations up to the time it filed for bankruptcy in January 1991.

The unit owners first assumed control of the Associations upon the bankruptcy filing, and, shortly thereafter, defects were discovered in the EIFS, which had allegedly caused significant water and structural damage. The Associations filed suit in June 1992 against the contractor and others who participated in the construction of the common elements. After 11 years of litigation, including eight years of mediation, the Associations had settled with all parties except Dryvit. The Associations then sought and received permission to file a seventh amended complaint, in which they asserted common law fraud and CFA claims against Dryvit. The Associations alleged that Dryvit had falsely advertised and represented to the developer and/or the EIFS subcontractor that Dryvit's product would act as an effective water barrier, when, in fact, Dryvit knew its products would not remain water impermeable when installed over the buildings' non-masonry substrate.

The trial court dismissed the Associations' fraud claims, finding there was no evidence that Dryvit intended that anyone other than the developer and contractor rely upon its representations regarding the EIFS products, and, because the Associations did not exist at the time the representations were made, there was no evidence that the Associations reasonably relied on such representations or sustained damages as a result of their reliance.

The Appellate Division reversed, holding that a condominium association has standing to assert claims for common law and consumer fraud against contractors and materialmen for defects in the common elements, regardless of whether the association existed at the time of the representations. The representations and/or omissions made to or concealed from the developer, the Court noted, were made after the project had been registered with the DCA as a condominium development, which placed Dryvit on notice that the Associations were the intended end-users of Dryvit's products and the entities that would eventually assume control over the common elements.

The Court also noted that the relationship between association and developer, under the statutory scheme governing condominium development, allows an association to step into the developer's shoes when control of the development is passed to the association, and bring suit for damage to the common elements. The Court distinguished prior holdings that subsequent purchasers of homes and condominium units, unlike initial purchasers, could not pursue CFA claims because they had not relied on the developer's representations. Here, the Court noted, the Associations were not subsequent purchasers of the property, but rather occupied the same role as the developer and had the same right to assert fraud claims that the developer would have had if the developer had discovered the defects while it controlled the Associations.

The Port Liberte decision marks a considerable expansion of the potential liability faced by subcontractors and materialmen, considering not only that it recognizes that parties pitching their products and services owe a duty to entities that, at the time of the pitch, have not yet come into existence, but also because such parties can be subjected, many years removed from the alleged conduct, to claims for treble damages and attorneys' fees under the CFA. A considerable period of time elapses, usually several years, between the point at which a developer registers a condominium project with the DCA and the point at which the developer turns over control of the association to the unit owners (i.e., by statute, when 75% of the units have been sold). During such period, the developer is attempting to sell the units and has little or no incentive to highlight and pursue claims for defects.

Thus, to the extent Port Liberte confirms that the association steps into the developer's shoes with respect to the developer's claims arising from conduct occurring prior to the turnover of control, and given the high concentration of condominium developments in New Jersey, condominium unit owners appear to have gained rights that have the potential to significantly impact construction defect claims and litigation in New Jersey.