Code Violations After Issuance of the Certificate of Occupancy

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April 28, 2005

Over the past year to year and one-half, developers in New Jersey have benefited from the decision of the Superior Court Appellate Division in the case of DKM Residential Properties Corp. v. Township of Montgomery where the Court determined that once a Certificate of Occupancy had been issued on a home by the municipal code office, the developer would then be immune from future efforts by the municipality to issue Notices of Violation of the Uniform Construction Code.  Prior to that decision, municipalities had frequently engaged in the practice of making further investigations even after a Certificate of Occupancy had been issued and title to the home had been transferred to the buyer.  Based on their findings they would frequently issue a Notice of Violation to the builder/developer even though title had passed.  The Appellate Division decision ruled that once the Certificate of Occupancy had been issued, the municipality had relinquished its authority and jurisdiction to pursue the developer for any subsequently discovered code violations in the homes.  On June 24, 2005, the Supreme Court of the State of New Jersey reversed the Appellate Division's decision and specifically found that the Department of Community Affairs, and through it the municipal code officials retained authority and jurisdiction to investigate alleged code violations and to issue Notices of Violation to the developer/builder.

Specifically, the Supreme Court found that the state adoption of the Uniform Construction Code was "remedial" legislation and that the Department of Community Affairs and the municipal code officials were not limited by the issuance of a Certificate of Occupancy in their enforcement of the Code.  While this does not open up non-code issues, it does place a builder/developer at risk for a period long after it may have transferred title to a particular house or completed a particular development.

Builders should be further aware that the ability of a dissatisfied homeowner to seek involvement by the municipality reviewing alleged code violations transcends any limitation of warranty provisions that may exist in the contract for sale; transcends the New Home Warranty Act and is separate and distinct from any limitations that may have been built into the contract with the Buyer pertaining to arbitration of disputes.  The municipality has the authority, separate and apart from any such limited ability that the Homeowner may have, to investigate and to issue Notices of Violation which may require return work, fines and other sanctions against a developer for discovered code violations.  The municipality need not pursue such issues through contractual arbitration or the Home Warranty Program which are usually built into the construction contract.  The municipality is not limited to the "performance standards" adopted by the Home Warranty Program.  The municipality is not necessarily restricted by any statute of limitations that might otherwise apply to a dispute between a Homeowner and the Contractor.  The availability of municipal code enforcement potential is an extremely attractive aspect for the dissatisfied homeowner since it transcends all of the contractual limitations and can be pursued without legal costs and expense on the part of the homeowner.  The fact that code officials made inspections and signed off on inspections throughout the course of construction and signed off on the Certificate of Occupancy does not constitute an absolute defense to the developer/builder where a further review at some later date by the code officials results in the finding of a violation.

There is no absolute defense nor process that can be guaranteed to protect a builder/developer from this right of municipal code officials.  The builder and developers should, nevertheless, reanalyze their practices with regard to quality control, internal inspections, oversight of subcontractor work, insurance programs and subcontract relationships, all in an effort to mitigate potential disastrous results that may occur long after construction has completed.  Particular attention should be given to ensure that insurance policies cover the work of subcontractors and that subcontractors maintain their own policies.

The hiatus provided by the Appellate Division was short-lived and may have lulled some participants in residential construction development into a false sense of security.  As in the past, it is no longer a defense that a given condition passed a preliminary inspection.  If a condition slipped through, notwithstanding the inspection, but is subsequently noted, the developer may well bear responsibility not only to the Homeowner, but also must be responsive to the municipal code official.  Potential liability on meeting the requirements of the Uniform Construction Code will not be over ‘til it's over.

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