Tipping Point

SCALING A BUSINESS LEGALLYMore housing could equal more legal headaches.

By Scott Fradin

Following a slowdown last year, multifamily deliveries are expected to hit a peak in 2018. An estimated 360,000 new units are slated for delivery over the next 12 months, which is a 20 percent increase over 2017, according to a new Yardi Matrix report. 

Hidden in this good news is a very real but little-known or appreciated risk that could spell financial disaster for developers, architects and contractors: everyone involved in the construction could be liable for a violation of the Federal Fair Housing Amendments Act of 1988 (FHAA) and the Americans with Disabilities Act of 1990 (ADA).

But what about that indemnification provision in your contract meant to protect you from this exact claim? It may be useless.

A Piece of the Action

With steady growth in multifamily housing, those involved in the development process can expect a parallel increase in discrimination lawsuits for violations of the accessibility guidelines established by the FHAA and the ADA, and brought by the U.S. Department of Justice, state agencies (e.g., a state’s department of human rights), private individuals and public interest groups.

These lawsuits are based on violations that are found by “testers” who visit new residential projects looking for any accessibility violations. Such violations range from failure to provide accessible routes to lack of usable kitchens and bathrooms. These suits not only seek to correct the violations (a laudable goal) but also request the award of attorneys' fees and costs (including expert fees).

Who is Actually Responsible? 

Few are aware of the FHAA and its application to certain private, multifamily projects. The FHAA establishes the following accessibility requirements for multifamily housing with four or more dwelling units:

(i)   Public and common areas must be accessible by handicapped persons.

(ii)  All doors must be wide enough for a wheelchair.

(iii)The dwelling units must contain the following features of adaptive design: (a) accessible routes; (b) switches, outlets and controls at accessible heights; (c) reinforced walls in bathrooms to allow installation of grab bars; and (d) usable kitchens and bathrooms for wheelchairs.

Typically, the developer enters into design and construction agreements with third-party architects and contractors. The developer reasonably expects that these third parties will perform their tasks in accordance with applicable laws and will be responsible if the project is found not to comply by one of these testers.

Consistent with this expectation, each contract will invariably include indemnification language to ensure that the developer is held harmless for any violation of applicable law or damage arising out of the design or construction. The same goes for the architect's and contractor’s contracts should any other party’s deficient performance lead to an alleged violation of the FHAA and the ADA. This belief may be incorrect. 

Protect Yourself 

Since 2010, the rule has been that no third-party indemnification claim can be brought to transfer liability for FHAA and ADA violations. In the Equal Rights Center v. Archstone-Smith Trust  case, a developer, an architect and a contractor of a multifamily project were sued for violating the FHAA and ADA. The developer sued the architect for indemnification for the cost of retrofitting, plus their attorney's fees.

The court held that the developer could not sue the architect concluding that the developer’s obligation to comply with the FHAA and the ADA was absolute and could not be delegated through indemnification. The court reasoned that if an entity was allowed to transfer liability under the FHAA and the ADA to third parties (e.g., the architect), it would interfere with the purpose of these acts by disincentivizing developers from ensuring compliance. 

The Archstone decision made clear that a developer could not rely upon contractual indemnification provisions to avoid liability where a project fails to comply with the FHAA and/or the ADA. 

However, a recent decision from U.S. Court of Appeals for the Fourth Circuit may provide developers with needed relief while denying architects and contractors the “Archstone shield”. In City of Los Angeles v. AECOM Services, Inc., the appellate court held that the city could bring its claim against the designer and contractor on a bus terminal facility arising out of their alleged breach of their duties to design and construct an accessible facility. Interestingly, the AECOM court made no mention of the Archstone court’s reliance on the fact that the FHAA and ADA placed non-delegable duties on an owner.

It remains to be seen how the courts sort out the apparent conflict between the Archstone and AECOM decision. 

Developers, architects and contractors are now faced with two inconsistent federal court decisions and there does not appear to be any certain solution to this problem. The best course, therefore, is to be proactive and to heed the old adage to "measure twice and cut once." Developers should consider implementing a compliance program involving a knowledgeable third-party review of not only the architect's plans but also the contractor's work to ensure accessibility requirements under the FHAA and the ADA.

A highly experienced attorney and licensed architect who practiced architecture for several years, Scott Fradin works closely with individual and institutional owners, developers, builders, architects, engineers, contractors and specialty subcontractors to guide projects from inception through completion and dispute resolution. He is the co-chair of Much Shelist’s construction law group. 

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