The economy has rebounded and, as Freddie Mac observed in its Multifamily Outlook 2016:

“Demand for multifamily rental housing was higher than expected in 2015…. Steady economic growth and key drivers will keep the multifamily market moving forward in 2016.”

As an example of this trend, a recent article in Crain’s Chicago Business reported that the developers of Wolf Point West are changing the plans for the next phase of the Wolf Point development project from a mixed-use, multifamily office building to an all-apartments structure due to the high demand for downtown apartment rentals.

Developers, architects and contractors are jumping on this train and are reaping the benefits of this rental-housing rebound. Hidden in this good news is a very real but little-known or appreciated risk that could spell financial disaster for all of the participants in a project: each of the parties involved in the construction of the project 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), even if they performed perfectly.

More to the point, that indemnification provision in your contract, the very one you thought would protect you from this type of claim, will be useless to transfer liability for a violation of these acts.

Everyone Wants a Piece of the Action

With continued growth in multifamily projects, those involved in the development process — including developers, architects and contractors — 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., the Illinois Department of Human Rights), private individuals and public interest groups.

These lawsuits are based on violations that are typically found by so-called testers who visit new residential projects looking for any accessibility violations, big or small. Such violations range from lack of proper slope at curb cuts and failure to provide accessible routes to lack of usable kitchens and bathrooms. The plaintiffs in these suits not only seek to compel the correction of the violations (a laudable goal) but also request the award of attorneys’ fees and costs (including expert fees) incurred in litigating the claim, relief that is specifically allowed under these acts and a host of extra-statutory remedies. 

I Didn’t Know That

While most participants in the development process are familiar with the ADA’s accessibility requirements as they relate to public accommodations, few are aware of the FHAA and its application to certain private, multifamily projects. The FHAA establishes the following accessibility requirements specifically for multifamily housing consisting of four or more dwelling units: 

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

(ii) All doors allowing passage into and through dwelling units must be wide enough to allow passage by a person in a wheelchair.

(iii) The dwelling units must contain the following features of adaptive design: (a) accessible routes throughout the dwelling unit; (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 allowing wheelchairs to maneuver.  

Since the developer, generally, does not design or construct the project itself, 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 (such as the FHAA and ADA) 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 that arises out of the design or construction. Further, the architect’s contract will typically provide that the architect will be held harmless from the contractor’s failure to construct the project in accordance with the plans and specifications. Likewise, the contractor’s contract will typically provide that the contractor will not be responsible if the architect’s plans and specifications are in violation of applicable law.  

This type of vertical indemnification is standard in the construction world and, until recently, each party has reasonably believed that it will be held harmless for any other party’s deficient performance that led to an alleged violation of the FHAA and the ADA. 

This belief, however, is incorrect. 

Up the Creek Without a Paddle 

The current rule is that no third-party indemnification claim can be brought to transfer liability for FHAA and ADA violations. This was the holding in the seminal case, Equal Rights Center v. Archstone-Smith Trust, 602 F.2d 597, cert denied, 131 S.Ct. 504 (4th Cir. 2010). In that case, a developer, an architect and a contractor of a multifamily project were sued for violating the FHAA and the ADA. The developer entered into a consent decree with the plaintiffs that required retrofitting the buildings and payment of damages and fees. The architect entered into a separate consent decree with the plaintiffs. The developer then sued the architect for indemnification for the cost of retrofitting the complex, plus the attorney's fees that the developer paid to the plaintiffs.  

The architect’s moved for summary judgment, arguing that all of the owner's claims were preempted by the FHAA and ADA. The trial court agreed and the U.S. Court of Appeals for the Fourth Circuit affirmed. The court concluded that compliance with the FHAA and the ADA is a non-delegable duty. Accordingly, if an entity was allowed to transfer liability under the FHAA and the ADA to third parties, it would interfere with and stand as an obstacle to the purpose of these acts by disincentivizing developers from ensuring compliance. (Id. at 602.) As the court stated:

“If a developer of apartment housing, who concededly has a non-delegable duty to comply with the ADA and FHA, can be indemnified under state law for its ADA and FHA violations, then the developer will not be accountable for discriminatory practices in building apartment housing. Such a result is antithetical to the purposes of the FHA and ADA.” (Id. at 602.)

What the Archstone decision makes clear is that a developer cannot rely upon contractual indemnification provisions to avoid liability where a project fails to comply with the FHAA and/or the ADA. The rationale underlying this decision could also be used to find that the architect and the contractor are not able to escape liability for a violation of the FHAA and/or the ADA by pointing at the other as the cause for the noncompliance.  

Arguably, if the contractor claims that it is not liable because it built what the architect had drawn, a court could find that the contractor is liable because it had an obligation to correct the noncompliant condition. (See Baltimore Neighborhoods, Inc. v. Rommel Builders, Inc., 3 F.Supp.2d 661, 665 n.2 (D.Md.1998): “For example, if an architect draws up plans with noncomplying entrance ways, and a builder follows the plan resulting in a covered dwelling with an inaccessible entranceway, both entities would be liable as both were wrongful participants.”)  

Similarly, if the contractor creates an accessibility violation by failing to follow the architect’s plans and the architect has site observation responsibilities, a court could find the architect liable because it had an obligation to discover the noncompliant condition.

Conclusion

Unfortunately, there does not appear to be a contractual solution to this problem. The best advice, therefore, is to be proactive and to heed the old adage to “measure twice and cut once.” In other words, the developer should consider implementing a compliance program involving a third-party review of not only the architect’s plans but also the contractor’s work. This review should be conducted by an entity familiar with the accessibility requirements under the FHAA and the ADA.