Look at almost anyone’s workstation these days and you’re sure to see their computer connected to a battery backup, or UPS (uninterruptible power supply).  The concept is simple: maintaining continuity directly after an unexpected and unavoidable event.  With a UPS, the idea is that in the event of a power outage, the user would have enough time to save their work and safely power down their system, so once power is restored, they can resume from right where they left off, without having to redo or recreate lost work.  Think of how a similar concept could play out in the context of disaster planning in connection with a Florida condo association’s official records, with these two hypothetical examples:

Example 1: The property manager for our hypothetical association works out of a small room in the security guardhouse on the property.  A hurricane hits and completely destroys the guardhouse, along with all of the documents stored there.  Among the lost documents are all of the association’s official records required by statute.  Among the damaged property is the single computer system that the property manager worked from, along with all of the association’s data.  All of the association’s official records are lost, along with financial information needed to see which homeowners have delinquent assessment balances, vendor contracts, invoices, and much more.  The effects are both devastating and embarrassing.  To the extent possible, the association tries to obtain records from third parties (such as bank statements, etc.) to begin rebuilding what it lost, but it is unlikely that many of the association’s internal records will be recoverable.  Essentially, the association has to start from scratch; something that would severely impair the operations of an established association with outstanding receivables, open contracts, and the like.

Example 2: Same association.  Same property manager.  Same office.  Same hurricane.  This time, however, the association’s records were scanned into electronic files and were backed up in the ‘cloud’ (more on that term later).  Once the hurricane passes and normal association operations resume, the property manager downloads all of the lost records from the association’s online document repository, gets them printed out, and the association is back in business.  All of the data on the property manager’s computer is likewise restored from the online backup, and the association is up and running again, as if nothing had ever happened, in a matter of days.  Sound impossible?  Read on.

What is cloud computing?

Generally, ‘cloud computing’ (sometimes used in conjunction with the term ‘hosting’) is a service where one party entrusts the storage and provision of its data to a third-party provider. In some instances, the data resides on servers controlled, operated and maintained by the third-party provider. In others, the provider itself may outsource some or all of those functions. The core concept with a cloud-based or hosted service is that the end user can simply access its data without having to worry about maintaining the underlying infrastructure.  Hosting comes in several forms, such as storage hosting (like an online disk where users can upload and access their data), and application hosting (where an application is delivered online via a web browser, and the application and the data is stored with the provider).  This latter form of hosting is commonly referred to as Software-as-a-Service (SaaS). There are other forms of hosting as well, including platform and infrastructure hosting, both of which are beyond the scope of this post.  Consumer end user are primarily focused on storage hosting (online disks) and SaaS.

Selecting a hosting provider.

There are many factors to consider in selecting a hosting provider.  Selecting a provider is in many ways like selecting a bank (except you don’t get the added protection of the FDIC). Usually you are trusting critical business assets with the provider, and it is important to select a provider that is financially stable, reliable, and able to deliver the service and support that you need. Service providers should be willing to answer questions about their company’s strength, and provide information about their storage and security practices. Providers should also be willing to allow customers (and potential customers) to tour their facilities, so end users can see exactly where their data will be housed. If you get a bad vibe about a specific provider, ask questions until you are satisfied. If you don’t feel comfortable with a specific candidate, move along.

The hosting agreement.

A hosting agreement (or the terms of service) is the written contract that governs your relationship with the provider. Much like any other agreement, this is where the terms of the relationship are set out. Since many providers offer online sign-up, the hosting agreement may be presented to you online, and the provider may ask you to agree to them before setting up your account. In almost all instances I have seen where sign-up is online, the provider will not process your order unless you acknowledge your agreement to their terms and conditions. Don’t just click “Accept.” Read the terms of service thoroughly and familiarize yourself with them completely. If you don’t agree to something (or something isn’t clear), call or email the provider and see if the terms are negotiable. If not, you may have to go elsewhere. As when entering into any other agreement, consultation with an attorney is strongly encouraged.

Service level agreements.

A service level agreement (SLA) is an agreement pertaining to how often the service will be available to the end user. An SLA is sometimes referred to as an uptime agreement. It may be either a standalone agreement, or incorporated into the hosting agreement. It is important to make sure that the SLA is consistent with the provider’s marketing. For example, make sure that if a provider markets itself as providing 99.99%, 99.999%, or even 100% uptime, those terms are clearly outlined in the SLA. Check to see how downtime is measured, if there is a cure period that would allow a provider to repeatedly violate the SLA over the course of small periods of downtime, and what end users are entitled to if downtime exceeds agreed-upon thresholds. This language is one of the most important areas to review. Review it closely and carefully.  This is especially important if an association plans to provide online access to its data, as when fulfilling certain requests under, for example, Section 718.111 of the Florida Statutes.  Again, consultation with an attorney is strongly encouraged.  Keep in mind that there will always be planned service interruptions (a.k.a. planned maintenance), which are intentional periods of downtime which are necessary to provide periodic maintenance to the provider’s infrastructure. It may include anything from an operating system or application upgrade, to physical plant maintenance which requires that systems be brought offline. Check with the provider to see if planned service interruptions are included in the SLA, or if those are separate. If separate, your SLA might not reflect true system availability.

Where is my data stored?

The hosting agreement should outline where your data will be stored. If the provider is going to outsource this function, it should clearly be disclosed in the hosting agreement, and your provider’s provider should be clearly identified. Keep in mind that if your provider outsources this function, it likely has a separate hosting agreement with its provider, and those terms may ultimately affect you. Also keep in mind that where your data is stored may implicate data, privacy, and other laws of both yours and different jurisdictions.  This post only applies to official record backups — not to the online storage of official records in lieu of keeping paper records altogether.

Data protection and confidentiality.

The hosting agreement should outline how your data will be protected (in some detail, but not enough as to compromise security), and should place on the provider certain responsibilities with respect to data security, access control, and antivirus measures.  The hosting agreement should also outline confidentiality of your data. Some agreements might simply restrict the provider’s ability to disclose your data to third-parties (except in cases where necessary to provide the service or as required by law). However, consider looking or asking for an agreement which restricts the provider’s right to view the data itself (while the provider will likely except from this technical support requests, this is a reasonable request). Overall, look for the language which best protects your data from being viewed and disclosed.

Unattended access to data at any time.  Proprietary formats.

Having unattended access to your data is very important. It will allow you to keep an updated copy of the data in-house, should it ever be needed and unavailable from the provider. Being allowed access to your data only upon request to the provider is very different from having unfettered FTP or web-based download access (e.g., imagine having a bank account without ATM access; see the difference?).  Mainly an issue with application hosting (but may also be implicated with traditional data hosting and online backup providers), consider that many applications store data in proprietary formats, which render the data inaccessible unless being read by that specific application. Make sure that not only is your data accessible, but that it is in a readable format even without the application. If the raw data is proprietary, make sure that it can be exported and made available in a non-proprietary, readable format, such as CSV or XML. After all, having access to your data is meaningless if you can’t do anything with it.

Data escrow.

Data escrow is relatively simple, and works essentially the way you would expect any other escrow arrangement to work. With data escrow, the hosting provider is typically required to mirror the data you store with it (at an agreed-upon frequency) with yet another third party, the data escrow agent. The data escrow agent then holds a copy of the data, should access to it ever be necessary. Both the agreement with your hosting provider and the escrow agreement with the data escrow agent should address in detail who can access the data, when, and under what terms. It is important to make sure that the agreements allow you immediate access to your data upon request to the data escrow agent. Language that requires both parties to agree before the data is released may seem fair, but when disputes arise, it may also mean a long delay before you are actually able to get your data. Be careful with data escrow companies that are affiliated with or are operated by the same company as the hosting provider, as this does not offer a true escrow.  If your provider will not cooperate or work with an escrow provider, be careful.

Service cancellations.

Make sure that the hosting agreement expressly covers this, and clearly addresses who can terminate, when, under what conditions, at what cost, and how the data is returned to you. Make sure you are comfortable with the language, and always make sure the agreement provides that your data is returned to you in a timely fashion, and in a readable format.  Some providers may actually facilitate a move to another provider in the event you discontinue your service. Check with them in advance if this is something that is important to you. Make sure whatever you are told is ultimately incorporated into the hosting agreement.  As with anything else that is agreed to, get it in writing by someone who is authorized to act on behalf of the provider.

Used properly, cloud computing can be an important tool in the association disaster planning and preparedness toolkit — and can have a profound impact on business continuity after a catastrophic data loss (whether by hurricane, fire, theft, or otherwise).

The Court held that the plain meaning of § 718.202 required the developer to have established two separate escrow accounts to hold the purchaser’s deposit, since the deposit was in excess of 10% of the purchase price of the unit.  In so holding, the Court commented:

Subsection (1) states that all payments up to 10 percent of the purchase price are to paid “into an escrow account” by the developer.  Subsection (2) states that all payments in excess of 10 percent of the purchase price are to be “held in a special escrow account established as provided in subsection (1) . . . .” The use of the modifier “special” in subsection (2) differentiates the account referenced in subsection (2) from the escrow account described in subsection (1), notwithstanding that the “special” account is to be established as provided in subsection (1). That language referring back to subsection (1) does not mean it is the same escrow account, merely that the second, “special” escrow account is to be established in the same manner as the escrow account described in subsection (1). Had the two accounts been referring to the same account, rather than discrete accounts, the legislature could have simply stated that payments in excess of the 10 percent are to be held “in the escrow account already established in subsection (1).”

Section § 718.202(5) of the Florida Statutes provides that

The failure to comply with the provisions of this section renders the contract voidable by the buyer, and, if voided, all sums deposited or advanced under the contract shall be refunded with interest at the highest rate then being paid on savings accounts, excluding certificates of deposit, by savings and loan associations in the area in which the condominium property is located.

As a result, the Court held that “… given the express language of section 718.202(5), Swire’s failure to establish two separate escrow accounts for Plaintiffs’ deposit violated the statute, and rendered the Purchase and Sale Agreement voidable by the Plaintiffs.”

The Court’s decision has widespread implications for Florida condominium developers that did not establish two separate escrow accounts to hold purchaser deposits that exceeded 10% of the unit’s purchase price.  Under the decision, purchasers would be entitled to void their contracts and seek a full refund of their deposits, plus interest as provided by the statute.  For many developers that have already used a portion of purchaser deposit funds for construction purposes, this means digging into their own pockets to pay back purchasers, something that in this market may be extremely difficult.

One way to try and determine whether a condominium deposit was segregated into two separate accounts as required is to simply look at the back of the canceled checks, to see if they were endorsed with the same deposit account number.  If that doesn’t answer the question, or the canceled checks are no longer available, escrow agents should be able to provide this information.

*Any italic emphases in original quotes were lost in formatting this post.

A brief refresher on Florida’s Chapter 558.

Chapter 558 of the Florida Statutes was enacted in 2003 in order to provide the design and construction industry with pre-suit notice and opportunity to cure before a claimant can file a lawsuit for construction defects. Under the statute, before a claimant can file a lawsuit against a developer, contractor, subcontractor, material supplier, or design professional alleging a construction defect, the claimant must first provide notice of the alleged defect, along with an opportunity to cure. The statute is highly specific, outlining the periods of time in which the recipient of such a notice has to put others on notice, inspect the alleged construction defect, and provide a response to the claimant. The most recent set of amendments to Chapter 558 took effect on October 1, 2009.

A brief summary of the notice provisions under s. 558.004 that are specific to associations representing more than 20 parcels:

• The written notice of claim under Ch. 558 must be served at least 120 days before filing a lawsuit pertaining to the claim (as opposed to 60 days for all others);
• The person served with the notice of claim is allowed 50 days after service in which to perform a reasonable inspection (as opposed to 30 days for all others);
• The person served with the notice of claim may serve a copy of the notice on each contractor, subcontractor, supplier, or design professional whom it reasonably believes is responsible for each defect specified in the notice (as opposed to 10 days for all others);
• The person who was served with a copy of the notice must furnish a written response to the person who served it within 30 days after such service (as opposed to 15 days for all others);
• The person originally served with the notice by the claimant must furnish the claimant with a written response within 75 days after being served with the notice (as opposed to 45 days for all others).

While Chapter 558 can be a valuable resource for those with construction defect claims, and when used correctly can be an excellent tool in mitigating construction defect litigation, it can also be a minefield for those not familiar with its extensively detailed provisions.

This post is not meant to be a complete analysis of Chapter 558, or the way in which it applies to associations representing more than 20 parcels. For information pertaining to your specific situation, consult a Florida-licensed attorney experienced in handling construction defect matters.

Stay tuned in January 2010 for the following:

Construction Law: Is coverage for green building excluded by your insurance carrier?

Condominium Law: Chapter 558 has special provisions for associations of a certain size.  Learn what they are.

Information Technology Law: How can a data escrow clause save your business when using remotely hosted and cloud computing services?

* * * * *

Can’t wait until January?

Visit blog.molderlegal.com for some posts you can read right now:

• Recent changes to Florida’s construction defect notice law.
• The importance of an engineering report for new condominiums.
• Florida new construction buyers get some relief from the Courts.
• Be careful with what you post on social media sites.

Florida new construction buyers fighting with their developer over who gets to keep the deposit may get some well-needed relief in Court these days, thanks to a recent decision from the Third District Court of Appeals. On October 21, 2009, the Third DCA (with appellate jurisdiction that includes Miami-Dade County) held in Terra-Adi International Bayshore, LLC. v. Kostandinos Georgarious, et. al. that the purchasers were entitled to the immediate release of the amount deposited over 15% of the purchase price of their units, pursuant to the terms of the purchase agreement, even before the cases go to trial.

The purchase agreements at issue in Terra-Adi contained language which entitled the purchasers to a refund of any amount deposited over 15% of the unit’s purchase price upon a purchaser-default. After the trial Court ordered that the developer return this amount immediately to purchasers, the developer appealed. Even though purchasers were claiming rescission and breach of the purchase agreements (among other claims), they took the position that the language of the purchase agreements provided that, regardless of the outcome of the litigation, they were entitled to the immediate return of any amount they deposited over 15% of the purchase price. In part, the default provision of the purchase agreements state as follows:

If Buyer defaults after fifteen percent (15%) of the Purchase Price, exclusive of interest, has been paid, Seller will refund to the Buyer any amount which remains from the payments Buyer made after subtracting fifteen percent (15%) of the Purchase Price, exclusive of interest.

This language is one of the acceptable “default provisions” provided by the Federal Interstate Land Sales Full Disclosure Act, commonly known as ILSA. By including this language, the developer essentially obligated itself to return at least that amount to the purchasers, even if they defaulted and the developer prevailed in the litigation. Failure to immediately release those funds, the purchasers successfully argued, amounted to an improper restraint on the use of their own assets.

This is a clear win for new construction buyers involved in litigation with their developers, at least in the Third District. Litigants previously inclined to settle for only a release of this ILSA refund amount (the amount deposited over 15% of the unit’s purchase price) may now find themselves willing to go the distance with developers, since the Court’s ruling in Terra-Adi should mean that they no longer have to wait for the case to end (which could take years) in order to get that amount returned to them. Although the war continues, this battle win goes to the purchasers.

On October 30, 2009, Florida’s First District Court of Appeals held, in Marseilles Condominium Owners Association, Inc. v. Travelers Casualty and Surety Company of America, that a condominium association can sue and recover from a performance bond surety for construction defects arising out of construction of the condominium. In that case, the condominium’s developer was the named owner/obligee under performance bonds issued by the surety for the project. Ultimately, the contractor failed to perform and the developer hired another contractor to complete the condominium. During construction, while disputes were ongoing between the developer and the original contractor, the association was formed. After turnover of the condominium, the developer settled pending litigation with the contractor and the surety, wherein the developer agreed to cancellation of the bonds. The developer was already on notice that the association was claiming construction defects relating to the condominium. The settlement was entered into without the association’s knowledge.

Subsequently, the association filed suit against both the developer and the surety, claiming that the condominium suffered from both incomplete and defective construction. As to the surety, the association sought recovery under the bonds. The surety moved for (and was granted) summary judgment in its favor, claiming that the language of the bonds precluded a claim by anyone other than the developer or its successor. The association appealed.

In reversing the lower Court, the First District held that the association was a successor to the developer under the language of the bonds, and accordingly, had standing to bring an action against the surety under the bonds. Although the bonds did not define the term “successor,” the First District pointed out that “[w]hile the Developer controlled the Association at the time of filing the declaration of condominium and amended declaration of condominium, the Association succeeded to control of the condominium pursuant to section 718.301(4), Florida Statutes.” The Court also stated that:

The end users of the condominium project are the individual unit owners who own their respective units and share ownership in the common elements of the project. … The Association is the legal entity responsible for operating and maintaining the common elements owned by the collective unit owners. … The face of the bonds indicates that they were issued for a condominium project. Thus, when Travelers issued the bonds, it knew that control over and operation and maintenance of the common elements would be vested in the Association.

To make matters worse for the surety, the performance bond, by its terms, expressly incorporated the construction contract between the developer and the contractor. As stated by the Court, this was significant

because the construction contract expressly provides that the warranties in the contract “shall be for the benefit of the Owner, and all unit owners and any owner’s association.” Thus, because paragraph 1 of the bonds obligate the surety “for the performance of the Construction Contract” and paragraph 6.1 obligates the surety “for correction of defective work and completion of the Construction Contract,” the surety’s obligations included the correction of all breaches of warranties for the benefit of the Association.

The Court further stated that

By virtue of the terms of the construction contract and the nature of a condominium development, Travelers had to know that the Developer would not be the owner when the construction was completed and that the condominium would be transferred to the unit owners and the Association.

In holding that the association here was the successor to the developer, the Court rejected the notion that the term “successor” should always be limited to corporate entities “that have become vested with the rights and duties of another entity through amalgamation, consolidation, or other assumption of interest.”

It is important to note the importance of the Court’s ruling in light of the 1985 decision by Florida’s Fourth District Court of Appeals in Beach Point Condominium Ass’n., Inc. v. Beach Point Corp., wherein the Fourth District held that a condominium association was not a third-party beneficiary of a payment and performance bond secured by the contractor in favor of the original developer of the condominium. Here, however, the Court disposed of any such apparent conflict by simply stating that “[b]ecause we hold that, under the facts and circumstances of this case, the Association is a successor and may sue on the bonds, it is not necessary to reach the third-party beneficiary issue.”

It’s been about a year since you closed on your brand new Florida condominium unit. You receive a notice from the developer-controlled association that the association is being turned over to the unit owners at an upcoming meeting, and you put your name down as a candidate for the board. You’re elected as President at the meeting and you and your fellow board members, neither with prior experience in this field, are now in control of a several hundred-unit condominium project with approximately 600 unit owners and residents, all looking to you for guidance on how best to manage their property. Luckily for your association and its residents, you hired an independent engineer to inspect your building and provide you with a comprehensive building report.

Florida law provides four years in which to bring an action for construction defects (FS 95.11(3)(c)). For condominium associations, the time runs from the date that the developer turns over control of the association to the unit owners (FS 718.124). If the defect is latent (i.e., not obvious), the time runs from the date on which the association discovered (or should have discovered with the exercise of due diligence) the defect. In any event, however, the action must be commenced within ten years following the developer’s turnover of the condominium to the unit-owners (FS 95.11(3)(c)). After that time, the statute of repose as it’s called, would effectively bar any such actions.

(Note: The limitations periods referenced above do not apply the same to individual purchasers bringing suit for construction defects, even if they are condominium purchasers. In such instances, they would not get the tolling protections afforded to associations by FS 718.124.)

Although a leaking roof is the quintessential example of a non-latent defect (e.g. when water is dripping on your head, you are pretty much on notice of the defect), the patency or latency of other types of defects are not necessarily that easy to determine. If you’re litigating the issue years later, it’s likely too late. Further complicating issues are the statutorily implied warranties that come with all new condominiums in Florida. Indeed, Chapter 718 of the Florida Statutes grants purchasers of new condominiums a statutorily implied warranty from the developer, contractor, subcontractors, and material suppliers who furnished labor or materials to the project (FS 718.203). Since the time in which purchasers (or the association) have to make a warranty claim is different from the running of the statute of limitations, there are separate timelines that the association must be aware of (keep in mind that making a claim within a warranty period is completely different from filing suit within the statute of limitations). And since the statutory warranties expire at different times for different building components, keeping track of the relevant deadlines can be daunting, especially to an inexperienced or ill-advised board.

Consider the following scenario:

A unit owner reports leaking into his penthouse unit from the ceiling above. A routine, non-invasive inspection reveals that the leak might be coming from a small void in the roof above. Your property manager calls out the roofer and a minor patch is applied. The leak in the unit stops. Several years later, the building experiences a major leak in another unit. A survey of the roof reveals excessive moisture below the roofing system, and extensive water damage and mold growth in the space between the roof and the penthouse floor’s ceiling. The roofer recommends that remediation work be performed, and then, due to the widespread damage to the roof system, that the roof be completely replaced. With the roof warranty expired, the replacement costs will be staggering, possibly resulting in a large special assessment to each unit owner. You consult an attorney and ultimately bring a claim against the builder for construction defects. The builder defends on the basis that the statute of limitation has expired, since you first knew or had reason to know of the defect years earlier, when the leak first manifested in the other unit.

To help mitigate the possibility of something like this occurring, it is highly recommended that a new unit-owner-controlled board engage the services of a competent licensed Florida engineer to perform a thorough evaluation of its property. Think of it like a physical for the building, and make sure that no stone is left unturned. First, ask around to find the best engineer for the job. Most likely your condominium attorney has worked with engineers before, so he or she may be able to make a recommendation. If not, try and get a recommendation from your property manager or property management company, other condominium or community association board members you may know, or people in the industry that you trust. Once you’ve located and selected an engineer, develop the scope of work for your specific needs.

At a minimum, your engineer should inspect the property and prepare a comprehensive report covering all building components, including (but not limited to):

• architecture
• structure
• building envelope (including stucco and paint)
• windows and doors
• fire protection
• mechanical
• electrical, and
• plumbing.

Since each project is different, your report may need to include other components as well, such as seawalls, docks, common element recreation areas, etc. The report should include an itemized list of both design and construction issues related to the project, and at a minimum, for each:

• the location(s) where the issue appears;
• a detailed description of the issue;
• an explanation as to the nature of the specific criteria used to evaluate the issue;
• recommendations for repair and remediation, and;
• pictures depicting the issue.

Make sure that the contract with your engineer specifies that a report will be provided with this level of detail.

Although in Florida a condominium developer is required to provide the unit-owner-controlled association with a similar report at turnover, there are two important things to remember about this report. First, it only needs to encompass what the statute requires it to, and one could argue that the statute’s coverage is less than that which is provided in a more comprehensive report of the building components. Second, the report is likely being prepared by an engineer selected by, and working for, the developer. Although the report may be 100% accurate and prepared with the utmost of good faith, the single fact that it is being prepared by the developer’s engineer gives me pause in advising a unit-owner-controlled association to trust it without independent verification.

With an independent building report in hand, a new unit-owner-controlled board should be prepared to analyze any issues affecting the design and construction of its building. The association should then be equipped to raise warranty and defect claims as may be necessary, and provide those responsible with specific detailed information relating to the possible defects and deficiencies in their work. Finally, both the report and the relationship that has developed between the association and the engineers should enable the association to better maintain the building for years to come.

« Please note: The foregoing is for informational and educational purposes only, and is not intended to apply to any specific legal situation. You should not rely on any information appearing herein to make any decisions pertaining to any particular legal matter. No legal advice is being given by this material, and no attorney-client relationship is created by this material. »

]]> http://molderlegal.com/content/365/feed 0 http://molderlegal.com/content/378 http://molderlegal.com/content/378#comments Sat, 29 Aug 2009 18:05:04 +0000 Jason L. Molder http://molderlegal.com/?p=378 (Originally published on August 29, 2009 at blog.molderlegal.com)

Welcome to our Florida Condominium Law section! This topic thread is intended to cover many issues pertaining to condominium law and litigation in Florida, including the following:

• Condominium defects and warranty claims (including statutory warranties provided by Chapter 718 of the Florida Statutes)
• Condominium management
• Condominium-related litigation & arbitration

For condominium-related construction defects, you may want to also check out our construction law section.