‘Continuous Operation’ Language Declaration Requires Association to Keep Lift Working
An owner sued an association for breach of contract and negligence after its tenant moved out because its unit was flooded with raw human sewage. An Indiana state court found a breach of contract but dismissed the negligence claim (Castleton Corner Owners Ass’n, Inc. v. Conroad Associates, L.P.). Here’s what you need to know about how a court can reach such a seemingly contradictory conclusion — and how that could affect your clients if they aren’t careful.
The Sewage Hits the Fan
“It’s important to note that the association in this case isn’t your typical HOA — it’s a business association,” says Dave Jacuk, an attorney in the Indianapolis office of Kovitz Shifrin Nesbit. Similar to a community association, he says, “business associations govern business units in a development and will usually ensure that rent and assessments are being paid and that the buildings are in working order.” The court’s reasoning, therefore, applies to community associations, too.
The owner in the case leased its building to retailer Pier 1; the lease was set to expire in February 2016, but Pier 1 had the option to extend. On Feb. 14, 2015, a sewer lift station that collected toilet and sink runoff from the association’s buildings failed and flooded the unit with sewage. Pier 1 subsequently terminated its lease, prompting the owner to file the lawsuit against the association.
The declaration required the association to pay “all maintenance costs” in connection with improvements, with the costs allocated to the owners. Maintenance costs were defined to include “the cost of all upkeep, maintenance, repair, replacement … and any other expense reasonably necessary or prudent for the continuous operation of such facilities.”
The bylaws required the board of directors to provide for the “ownership, operation, maintenance, upkeep, repair, replacement, administration, and preservation of the roads, drainage ditches, utility strips and sewers, including a sanitary lift station.”
The trial court ruled against the owner on the negligence claim but for it on the breach of contract claim. The association appealed.
The Association’s Argument Sinks
The association argued on appeal that the trial court’s finding in its favor on the negligence claim couldn’t be reconciled with the finding of a breach of contract. Because the court found that the association had acted reasonably, it contended, the court couldn’t also have found that the association breached the contract.
The Court of Appeals, however, held that a finding of no negligence doesn’t preclude a finding of breach of contract. Although both claims arose from the failure of the lift station, it said, they nonetheless are different and distinct from one another.
To prove negligence, the owner had to show that:
- The association owed a duty,
- The association breached that duty by letting its conduct fall below the standard of care, and
- The owner was harmed by that breach.
To prove breach of contract, though, the owner was required only to show that a contract existed and the association breached it. So, while acting reasonably under the applicable standard of care can defeat a negligence claim, an owner can prevail on a breach of contract claim even if the association acted reasonably.
“The association was found not negligent because of the actions it took with respect to the lift,” Jacuk says. “It retained a vendor to inspect the lift every Monday and Friday, and the vendor was on call 24/7. The association made a true effort to maintain the lift.”
The breach of contract claim stemmed from the declaration, though. “Both the trial and the appellate courts agreed that the declaration constituted a binding contract between the parties,” Jacuk says.
And the declaration imposed a strict obligation on the association to keep the lift station in continuous operation. That’s why, according to the appellate court, the finding that the association had acted reasonably in maintaining the lift station wasn’t inconsistent with the finding of that it nonetheless breached the contract by failing to keep it functioning.
Lessons for Community Associations
Associations would be wise to review their governing documents to determine whether the documents impose similar strict obligations.
“If the declaration and bylaws put a duty on an association – which they do — make sure you plan for that duty by either complying or having the document amended to something the association can accomplish,” says Daniel Miske of the Milwaukee, Wis., law firm Husch Blackwell LLP. “In the Indiana case, an emergency back-up generator might have been required considering the use of the word ‘continuous.’”
Where might strict obligations get community associations into trouble? Jacuk says many communities run into issues related to roof repairs, failing to maintain the common areas, and drainage.
“Water is a regular problem for associations,” Miske says, “whether it’s a lack of water from failing to plan for some event or unexpected water as a result of a bath, air conditioning, or roof leak.
“When water leaks from an upper floor, it may be the lower unit’s problem the first time, but, once an association is on notice of a problem, it needs to fix the problem — not simply the water damage from the problem.”
Jacuk advises managers and boards to track any repairs. “Sometimes events simply happen, even if an association is being diligent in its duties. That’s kind of what happened in this case.
“It’s important to keep a record of any repairs that were conducted just in case the association lands in litigation. The business association was able to show that it truly was maintaining the lift, and I believe that saved them a lot of money in the end.”