Seller/Developer Liability in TIC Conversions and Sales

By Andy Sirkin

How Often Are TIC Developers Sued?

Many apartment building owners are afraid to sell tenancy in common interests because they feel such sales would subject them to a high level of liability. This fear is not supported by historical data. In fact, TIC sellers do not seem to get sued any more often than non-TIC sellers of similar property, and get sued much less often than condominium developers.

Statistics on TIC Construction Defect Exposure

The type of exposure of most concern to prospective tenants in common sellers is construction defect liability. The volume of construction defect litigation involving new development has diminished in recent years, but is still uncomfortably high as is the cost of insuring for this liability which extends for 10 years after completion of the project. The extent to which liability exists in the condominium conversion context is unclear, but most experts believe that it applies to any significant renovation or construction work that the condo converter undertakes. Although there is no legal authority addressing construction liability for TIC sellers, it is logical that the courts would apply this same approach.

Protecting TIC Sellers/Developers From Defect Liability

This means that the level of concern a TIC seller should have for construction defect liability is driven by the amount of renovation work the seller undertakes. If the seller is essentially gutting the building, or replacing all of the mechanical systems as well as kitchens and baths, construction defect exposure is probably present, and the seller should take protective measures such as forming an entity to own the property during the work and at the time of the tenants in common sales, and obtaining developer-specific insurance. On the other hand, a tenancy in common seller who is doing only cosmetic work and moderate kitchen and bath remodeling is probably not subject to developer liability.

About the Author

D. Andrew Sirkin is a recognized expert in fractional ownership and other co-ownership SirkinLaw APC was a pioneer in the area of tenants in common (TIC) arrangements involving occupancy rights assignments, which are often used as a substitute for subdividing a property when true subdivision is impossible or unduly expensive. In 1985, Andy Sirkin created the legal and transactional structure which has become the industry standard for this type of TIC. Over the succeeding years, Andy’s innovations have included being the first state-approved real estate instructor for occupancy-based TICs, being the first to obtain state approval for a large-building TIC sale, being the first to convince institutional lenders to offer individual TIC financing, and being the first to develop the loan documents and lender underwriting guidelines for fractional TIC financing. In recent years, the type of co-ownership arrangement Andy conceived nearly 25 years ago has grown to comprise approximately 1/3 of all attached-home sales in San Francisco.

SirkinLaw APC has prepared close to 3,000 occupancy-based TIC agreements for properties of every size and type, and continues to assist in the vast majority of these transactions in California. This unmatched level of experience allows us to offer time-tested approaches for the vast majority of co-ownership situations, to quickly and effectively solve problems, and to produce documents that are clear, easy to navigate and read, and efficient and cost-effective to enforce. We continue to improve our documents each month as we encounter new situations and learn more about what TIC arrangements perform best in the real world. We also share our accumulated knowledge, and support real estate professionals and the TIC community, by continuously publishing new articles on our website and offering free educational workshops.

Our tenancy in common practice involves general advice and counseling, TIC agreement preparation, loan documents, and ongoing consultation to developers, seller, Realtors and TIC owners, on either a flat fee or hourly basis. We have a well-deserved reputation for returning calls promptly and providing fast turnaround times. But more important, we are known for finding creative solutions, calming fears, and finding common ground, so that transactions and relationships work. Although our role usually begins at the time the tenancy in common is first formed or sold, we are committed to remaining available to solve problems throughout the life of each TIC. Contact us via our contact form.