Why a lawsuit against the association is the buyer's problem
A buyer's instinct is that a lawsuit against the association is the association's problem. It is not. In a condominium the owners are the association, and every dollar spent defending, settling or losing a case is raised from the owners — through the regular assessment, through a special assessment, or by drawing down reserves that then have to be rebuilt. Litigation is a direct claim on a buyer's future cash flow, and underwriting treats it as project-level financial risk.
There is a second reason, less obvious and more important. Litigation is often the only visible symptom of a problem the association has not otherwise disclosed. A construction-defect suit means somebody with expert reports believes the building was built wrong. A coverage dispute means an insurer has declined to pay for something the association believed was covered. A habitability claim means residents say the building is not fit to live in. The lawsuit sits downstream of a physical or financial condition, and it is what makes that condition discoverable by an outsider reading a document package.
The reframe to carry through this page: is somebody suing the association about money it is owed, or about the building itself? The first is usually noise. The second is the question.
The four words that decide it
The secondary-market rules are the clearest published articulation of the line between minor and material litigation, and they encode what underwriters actually think matters.
Fannie Mae's ineligible-projects topic, version dated 5 August 2026, makes a project ineligible where the association is named as a party to pending litigation, or where the sponsor or developer is named as a party to litigation relating to the safety, structural soundness, habitability or functional use of the project. Those four terms are the spine of the analysis. Everything else is a candidate for the published carve-outs, which the same topic sets out:
- Non-monetary litigation, expressly including neighbour disputes and rights of quiet enjoyment;
- matters where the association's insurance covers both the defence and the damages;
- matters where the association is the plaintiff and the matter is minor with insignificant expected impact;
- matters where anticipated or known damages and legal expenses are not expected to exceed 10 percent of the project's funded reserves;
- matters seeking recovery for a condition already remediated, with no material adverse impact anticipated;
- matters where damage is isolated to individual units with no project-wide impact;
- foreclosure and assessment-collection actions brought by the association.
Personal injury and wrongful death claims sit in their own box: minor only where the amount is known, the insurer is defending and the damages are covered.
Two cautions about that 10 percent. It is a documentation threshold in one agency's guide, not a general rule that small lawsuits do not matter. And its denominator is the association's funded reserves, so the same claim clears in a well-funded association and fails in a thin one.
Freddie Mac applies the same conceptual test, with comparable exception routes: insurance where the amount is known and covered, and an attorney letter where it is not. FHA's project approval form, revised 25 February 2025, requires disclosure of pending litigation and an assessment of whether it affects the project's solvency or those same four qualities. VA's prescribed submission stack names a litigation letter alongside the special assessment letter and the presale letter.
Why construction defect is the hardest category
Construction defect is the category that most reliably makes a project unfinanceable, for structural rather than reputational reasons.
It is unbounded until it is over. A defect case starts with a symptom — leaks at window heads, cracking at balcony edges, corrosion at embedded steel — and scope grows as destructive testing proceeds. The association usually cannot state a damages figure while a buyer is asking, which is exactly what fails the exception routes, since those require an amount known and insured.
It maps directly onto the disqualifying words. Defect claims are by definition about safety, structural soundness, habitability or functional use. There is no reading in which a building-envelope or structural-frame case is a neighbour dispute. Fannie Mae's post-Surfside requirements listed construction-defect litigation as an ineligibility trigger, and they are not expired emergency measures: they were folded into the Selling Guide for applications dated on or after 18 September 2023.
It takes years. Defect litigation is expert-heavy and multi-party — developer, contractor, subcontractors, design professionals and their insurers — and in many states a mandatory notice-and-opportunity-to-repair process must run under a right-to-repair statute before a complaint is even filed. Throughout, the project's financing status is impaired.
It is time-barred in ways buyers do not expect. Separately from any limitation period, every state has a statute of repose cutting off construction claims a fixed number of years after substantial completion, regardless of when the defect is discovered. Periods differ substantially by state and several have shortened theirs. An association discovering a defect late may find its claim already extinguished, converting a potential recovery into a certain special assessment. No number of years appears here; that figure has to be checked against the current statute.
The remedy is usually a special assessment either way. If the association loses, owners pay for the repair; if it wins, recoveries frequently fall short once fees and expert costs are met, and owners pay the gap. A defect suit is rarely a lottery ticket. It is a partial offset against a bill that is coming regardless.
And a subtlety worth holding on to: an association that has not sued over a known defect is not necessarily better placed than one that has. It may simply be closer to the repose deadline with no defendant left. Absence of litigation is not evidence of absence of defect.
The question the standard form does not ask
This is the strongest single point on the subject, and almost nobody makes it.
The joint condominium project questionnaire that lenders send to associations asks the litigation question as: "Is the HOA involved in any active or pending litigation?"
That question is narrower than the underwriting standard it serves. It reaches active or pending matters. On its face it does not reach demand letters, pre-suit notices under right-to-repair statutes, tolling agreements, threatened claims, matters in arbitration, or open code-enforcement proceedings. An association can answer "no" truthfully while sitting on a fully developed construction-defect claim that has not yet been filed.
Now put that beside another item on the same form. The addendum asks about current and planned special assessments. The form reaches forward in time on assessments and does not reach forward in time on litigation. That asymmetry is the most useful thing a buyer can know about the document. The word "threatened" is doing real work here, and the standard form does not contain it.
The categories living in the gap are not exotic. They are the ordinary early life of a serious claim:
- a pre-suit notice under a right-to-repair statute, during which a developed defect claim exists with no lawsuit;
- a demand letter from an owner, a neighbouring property, a contractor or a public body;
- a tolling agreement with a developer, which by design freezes limitation periods so suit need not be filed yet;
- a mediation or arbitration required by the declaration, which may never appear as a civil case;
- an open code-enforcement matter — administrative rather than litigation, carrying the same repair exposure;
- a board resolution instructing counsel to pursue a claim: the decision made, the filing not yet happened.
Reviewers do probe where something prompts them to, but a buyer should not assume the form did that work. A "no litigation" answer is a point-in-time answer to a narrow question, not a representation that no claim exists. And threatened matters carry the same repair economics as filed ones: if the roof is failing and the board is deciding whether to sue the roofer, the owner pays for a roof either way.
How a buyer actually finds out
There is no single register. Discovery is triangulation, and every source below sits ahead of the lender's review, which arrives last and can surface matters the buyer never saw.
- The association's own disclosure. Most states require pending suits to be disclosed in a resale certificate or disclosure package, and underwriting requires a questionnaire signed by the association or its manager. What each certificate must contain is set by state statute.
- Board and membership meeting minutes. Litigation is discussed and voted on before it is filed — retaining counsel, authorising a claim, approving a settlement, funding a litigation reserve. Minutes routinely disclose matters that never reach a questionnaire. Executive session minutes may be withheld, and a pattern of frequent executive sessions is itself informative. Read twenty-four months.
- Court records. County civil dockets, and the federal system for federal matters, searched under the association's exact legal name — often not the building's marketing name — and the manager's. Indexing and public access vary by county.
- The financial statements. A contingencies note, a legal-expense line that jumps year over year, or a newly created litigation reserve are signals even where the narrative disclosure is thin.
- Insurance documents. A reservation-of-rights letter, a denied claim or a sudden change of carrier can indicate a coverage dispute; a certificate of insurance shows none of it.
What to do about it
Sort the matters into two piles first: money owed to the association, or the building itself. Collections actions, small claims, neighbour disputes and insurer subrogation claims after a unit water loss belong in the first pile and are ordinarily unremarkable — subrogation is usually the carrier driving a routine recovery in the insured's shoes, and master policies are commonly endorsed to waive subrogation against unit owners. Construction defect, structural failure, habitability, coverage denial and injury claims exceeding policy limits belong in the second.
Ask for the damages estimate and the insurer's coverage position in writing. "Amount known, insurer defending, damages covered" is what converts an alarming matter into a manageable one. Then ask the threatened questions separately and by name: any demand letters, pre-suit notices, tolling agreements, matters in mediation or arbitration, or open code-enforcement proceedings, and has the board instructed counsel on any claim?
Treat construction defect as a financing question first. Before negotiating price or booking an inspection, confirm with the lender whether the project is currently reviewable, because that determines whether the transaction is possible at all. Where subrogation targets the developer or a design professional and the loss was systemic, that is a defect matter too.
Know the boundary, which here is wider than usual. Whether a claim is time-barred, whether a pre-suit procedure applies, what the association must disclose, and what a settlement binds future owners to are questions of state law and of the project's own documents — for an attorney licensed in that state. The physical condition underlying a defect claim is for a licensed engineer or architect, not a general home inspector. And project eligibility is a determination only the lender can make.
Common questions
Does pending litigation stop a condo loan?
Only certain litigation does. The disqualifying category is litigation relating to the safety, structural soundness, habitability or functional use of the project. Published carve-outs treat as minor: non-monetary matters including neighbour disputes, matters where insurance covers both defence and damages, assessment-collection and foreclosure actions brought by the association, claims for conditions already remediated, damage isolated to individual units, and matters where anticipated damages and legal expenses are not expected to exceed 10 percent of the project's funded reserves.
Is a collections lawsuit against a delinquent owner a problem?
No. Foreclosure and assessment-collection actions in which the association is the plaintiff appear expressly among the published minor-litigation categories. So do non-monetary matters such as neighbour disputes and rights of quiet enjoyment. These are the ordinary cost of running a building and they tell a buyer almost nothing about its condition. Some litigation in a document package is normal.
Why is construction defect litigation treated so differently?
Because it is unbounded at the moment a buyer is looking. Scope grows as destructive testing proceeds, so the association usually cannot state a damages figure, which fails the exception routes that require a known and insured amount. It also maps directly onto the disqualifying words, it takes years, and in many states it is preceded by a mandatory pre-suit notice procedure. Fannie Mae's post-Surfside requirements listed it as an ineligibility trigger, and those requirements became permanent Selling Guide policy for applications dated on or after 18 September 2023.
Does the condo questionnaire ask about threatened litigation?
No, and this is the most useful thing to know about the form. The joint agency questionnaire asks whether the association is involved in any active or pending litigation. It does not on its face reach demand letters, pre-suit notices under right-to-repair statutes, tolling agreements, arbitration or open code-enforcement matters. Note the contrast with the same form's treatment of special assessments, where it asks about current and planned assessments. It reaches forward on assessments and not on litigation.
How do I find out if a condo association is being sued?
Triangulate. Read twenty-four months of board and membership minutes, the contingencies note and legal-expense line in the audited financial statements, and the resale disclosure package. Search county civil dockets under the association's exact legal name, which is often not the building's marketing name, and under the management company's name. Ask about insurer reservation-of-rights letters, denied claims and any recent change of carrier. The lender's project review comes last and should not be the first you hear of it.
Is no litigation always a good sign?
Not necessarily. An association that has not sued over a known defect may simply be closer to its statute of repose deadline with the same repair bill and no defendant left to pursue. Statutes of repose cut off construction claims a fixed number of years after substantial completion regardless of when the defect is discovered, and periods differ substantially by state. Absence of litigation is not evidence of absence of defect.