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(This story, in slightly different form, originally appeared in Incisive Media’s Daily Business Review.)

WEST PALM BEACH, FL-The Related Group, already facing financial problems at several projects and foreclosure on CityPlace South Tower locally, may have to pay $7 million for alleged construction defects at the oceanfront Beach Club in Hallandale Beach before disbursing proceeds from its last three units there. The Beach Club master association last week asked Broward Circuit Judge Ronald Rothschild to take jurisdiction of the three units through a writ of attachment. A hearing is scheduled for Friday.

If Rothschild does take control of the units, proceeds from the eventual sale of them would be used to pay for the alleged construction defects, says Michael Hyman, the association’s attorney in Miami.

Built in 2005, condos in the three-tower Beach Club range from 800-square-foot, one-bedroom units to 4,000-square-foot, four-bedroom condo-townhouses. Prices range from $900,000 to $2 million-plus, according to the developer’s Web site. The three unsold units are townhouses.

“It’s a fairly aggressive action to take,” Hyman says. “We’ve done it over the years, but in environments where developers had other assets. This is the last asset of the developer’s at this development.”

An attorney for Related did not return a phone call. As in most of its projects, Related developed the Hallandale Beach towers through three separate limited liability companies.

The association can’t collect for the alleged construction defects if the units are sold and the limited liability companies disburse the sale proceeds, Hyman says. And, as a single-purpose entity, the company created by Related to develop each tower will have no other assets the association could claim against for repayment.

Martin Schwartz of Bilzin Sumberg Price Baena & Axelrod in Miami, who usually represents developers, said he has never heard of a writ of attachment being used in similar situations. He wouldn’t speculate about the likelihood of the judge upholding the writ.

“It’s an extreme move,” said attorney Ken Direktor of Becker & Poliakoff in West Palm Beach. Construction attorney Steve Lesser of Becker & Poliakoff in Fort Lauderdale also said Beach Club’s effort is an extraordinary one.

Related could likely demand that the association post a bond for twice the amount of the alleged construction defects to offset the effect of the writ, Lesser says. “But how will an association that is probably in dire financial straits get a bond?” he asked. “That could be a nightmare.”

In a separate action, the Beach Club Tower Two association in April filed liens totaling about $137,000 for unpaid maintenance fees for the three condos. Earlier this year, Beach Club sued Related, operating as TRG-Hallandale Beach (Tower One) Ltd., TRG-Hallandale Beach (Tower Two) Ltd. and TRG-Hallandale Beach (Tower Three) Ltd. and contractor John Moriarty & Associates of Florida for alleged breach of implied warranties and violation of the Florida Building Code.

The developer and contractor, and their employees and agents, “designed, constructed, supervised and inspected the properties,” the lawsuit states. In building and selling the units, Related and Moriarty granted implied warranties that the units were suitable for being occupied and sold, the suit says.

But the project allegedly has several building code violations. They include improper installation of planters and landscaping, fire and pedestrian hazards, inadequate building access, malfunctioning doors, sinkholes, concrete cracks and leaks, according to a February 2008 report by Pistorino & Alam Consulting Engineers in Miami.

In late March, the Related Group filed a motion to dismiss the association’s suit, citing master covenants that “disclaim” the developer from all express or implied warranties for the project’s design, construction, sound or odor transmission, and existence or development of mold and mildew. Friday’s hearing is expected to address Related’s motion to dismiss.

“Our experience with Related up until now is that they are a stand-up group of people, and if there are defects, they get the general contractor to take care of them,” Hyman says. “But the days of them protecting their marquee name seem to be over. And they have bigger fish to fry than just one community [like Beach Club].”

Late last month, a lending consortium led by Toronto-based Scotia Capital filed a foreclosure suit against Related’s CityPlace South condo in Palm Beach Circuit Court. Related had borrowed about $135 million from the consortium to build the 420-unit project in 2006. But only 39 units had been sold by the time the loan came due. According to the foreclosure suit, Related owed about $119 million on the debt.

Related also is negotiating with other lenders on its projects, chief financial officer Matt Allen said in an interview last month. He did not return a phone call for this article.

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