Transition Settlements: Beware Giving a Sponsor/Developer a General Release
January 17th, 2020 | Community Association Law Blog
By Eric F. Frizzell, Esq.
At the conclusion of a successful transition negotiation, the entire understanding reached between a community association and Sponsor/Developer (“Sponsor”) settling the association’s claims should be memorialized in a formal, written settlement agreement. As part of the settlement, the Sponsor normally will demand that the association execute a general release relinquishing all other defect claims that the association then possesses, or might ever possess against the Sponsor, “from the beginning of time until the end of time” as Sponsor’s attorneys like to say – even if the association could not possibly know a particular defect exists at the time of the release! The association should reject the Sponsor’s demand and negotiate for a narrower, “specific” release.
Why? Long after the release is signed, latent defects could appear. The classic example is a sinkhole that could cost millions of dollars to rectify. Our law firm represented an association that had a five foot deep sinkhole – the size of a football field – appear years after the transition settlement. A community association must preserve its right to make claims against the Sponsor for latent construction defects that were not discoverable, through the exercise of reasonable diligence by the association’s engineer in performing visual non-invasive inspections, at the time of the settlement agreement. The association also must preserve its right to sue the Sponsor and other persons involved in construction of the complex in the event the association is sued by a unit owner or other person who alleges personal injury or property damage due to a defect in any aspect of the design or construction of the community.
Simply put, the Sponsor is not paying you any money to release claims for such latent defects, so why is it fair for the Sponsor to require you to release them? It’s not.
Once the association and Sponsor have tentatively agreed on the wording of the release, the association may wish to obtain its insurance carrier’s written approval of the release before executing it. Otherwise, the association might find itself in a future coverage dispute with its insurer. For example, if a unit owner sues the association, but not the Sponsor, for serious bodily injury or extensive property damage caused by a latent construction defect, the association very likely will file a third party complaint against the Sponsor. But if the association gave the Sponsor a general release at the time of the transition settlement, and the Sponsor successfully invokes the release to dismiss the association’s claims, the association’s insurance carrier might decline coverage on the ground that its ability to recover damages against the Sponsor has been prejudiced by the association’s release. The association can avoid this consequence by obtaining its carrier’s approval of the release before signing it.