New Jersey Clarifies How the Discovery Rule Applies In Construction Cases

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In Palisades at Fort Lee Condominium Association v. 100 Old Palisade, LLC, et al., 2017 N.J. LEXIS 845 (Palisades), the Supreme Court of New Jersey addressed how the discovery rule – which tolls the statute of limitations – applies in construction defect cases. The court clarified that, when a building has multiple owners, the statute of limitations begins to run when the first owner – be it an original or subsequent owner – in the line of building owners reasonably knew or should have known of the basis for a cause of action.

In December 1999, Palisades A/V Acquisitions Co., LLC (A/V) hired AJD Construction Co., Inc. (AJD) to serve as the general contractor for the construction of an apartment complex, The Palisades. AJD, in turn, hired various subcontractors. Construction commenced, and on May 1, 2002, the project architect certified that The Palisades was “substantially complete.” A/V thereafter rented units at The Palisades until June 2004, when it sold the building to 100 Old Palisade, LLC (100 Old Palisades).

With the plan of converting the apartments into condominiums, 100 Old Palisade hired Ray Engineering, Inc. (Ray Engineering) to inspect the common elements of the property. In October 2004, Ray Engineering issued a report stating that the structure appeared to be in good condition. In July 2006, when 75% of the condominiums were sold, 100 Old Palisade relinquished control of the building to Palisades at Fort Lee Condominium Association (Association). At this time, the Association hired The Falcon Group (Falcon) to inspect the property’s common elements. On June 13, 2007, Falcon issued a report detailing a number of construction defects.

Thereafter, the Association filed lawsuits against the general contractor and three subcontractors, alleging that the defendants defectively constructed the building. The defendants moved for summary judgment, arguing that the Association filed its claims beyond New Jersey’s six-year statute of limitations, which began to run May 1, 2002, the date on which the building was deemed substantially complete. The trial court granted the defendants’ motion because the building’s prior owner knew or reasonably should have known of any defect at the point of substantial completion and, therefore, all claims needed to be brought by May 2008. The Appellate Division of the Superior Court (Appellate Division) reversed, holding that the Association’s claims accrued not at the time of substantial completion, but in June 2007, when Falcon issued its report detailing the construction defects for the first time. The defendants appealed this decision to the Supreme Court of New Jersey.

On appeal, the Association argued that its claims did not accrue until it took control of the governing board and Falcon issued its report. The Association also argued and that it was not bound by the prior owners’ knowledge of the construction defects or the prior owners’ failure to exercise reasonable diligence to discover the defects. The Association further argued that it was entitled to the full six-year statute of limitations from the date Falcon issued its report on June 13, 2007. Conversely, the defendants argued that the statute of limitations began to run on the date of substantial completion and, therefore, ended on May 1, 2008. The defendants further argued that, when the Association received Falcon’s report in June 2007, the Association still had nearly a year before the statute of limitations ran in May 2008; therefore, the Association was not entitled to any extension of the statute of limitations.

The New Jersey Supreme Court held that neither the trial court nor the Appellate Division applied the correct legal standard for determining the accrual date for construction defect claims subject to New Jersey’s six-year statute of limitations. The court began its analysis with N.J.S.A. 2A:14-1, the statute of limitations that governs tort-based property damage claims, including the construction defect lawsuit at issue. N.J.S.A. 2A:14-1 provides:

Every action at law for trespass to real property, for any tortious injury to real or personal property, for taking, detaining, or converting personal property, for replevin of goods or chattels … shall be commenced within 6 years next after the cause of any such action shall have accrued.

The Legislature did not define the term “accrued” in N.J.S.A. 2A:14-1. The Palisades court stated that the start of a statute of limitations under an accrual statute is when facts would alert a reasonable person that she was injured due to the fault of another. In a construction defect case, the start date of the statute of limitations is typically the date of substantial completion, unless the plaintiff could not be made aware of a cause of action against an identifiable defendant despite the exercise of reasonable diligence.

In Palisades, the court found that there were insufficient facts in the record to determine when the Association or the prior building owners knew or should have known of a cause of action against each defendant, but said it could have been when either the Ray or Falcon report was issued or any time before, after or in between. As such, the Palisades court reversed the Appellate Division and remanded the case to the trial court to determine when the Association’s causes of action accrued against each defendant. Of more importance, the Palisades court ruled that, whatever the accrual date, the six-year statute of limitations would run from said date, even if said date was within six years from the date of substantial completion.

Editor’s Note: On January 18, 2022, the governor signed into law Senate Bill 396, which tolls the 6-year statute of limitations for construction defect claims by a condominium association, cooperative corporation or other planned real estate development association against a developer or any person acting through or at the behest of the developer until the first election when unit owners take majority control of the association board. The act takes effect immediately.

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