Maryland Condo Lawyer Blog » rburke

Fannie Mae and Freddie Mac Financing

rburke — Tue, 29 Jun 2010 14:20:39 +0000

Like the FHA, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have specific requirements when providing financing for condominium sales or refinancing. Fannie Mae involves the FHA, because it was established for the purpose of purchasing FHA loans from loan originators to provide liquidity for government-insured loans. Freddie Mac is a federally charted corporation established to purchase mortgages in the secondary market with the intent to stabilize the nation’s residential markets and expand home ownership. Each have restrictive policies as to condominium projects that qualify for financing that must be considered in conjunction with the applicable FHA requirements.

Fannie Mae’s condominium requirements are:

At least 90% of the total units in the project must be conveyed to unit purchasers.

Control of the Association must have been turned over to the unit owners.

The following projects are ineligible for Fannie Mae loans:

(1) Projects that offer rentals on a daily basis.

(2) Projects with individual units operated as a hotel or motel.

(3) Projects with mandatory rental pooling agreements.

(4) Projects where more than 20% of the total space is used for non-residential purposes.

Freddie Mac’s condominium requirements are:

At least 90% of the total units in the project must be conveyed to unit purchasers.

Control of the Association must have been turned over to the unit owners.

No more than 20% of the income of the Association can be from sources other than dues and assessments.

The following projects are ineligible for Freddid Mac financing:

(1) Timeshares.

(2) Hotel projects.

(3) Projects with more than 20% of the total square footage being used for non residential purposes.

(4) Projects in litigation, arbitration and mediation that arises out of a dispute as to safety, structural soundness or habitability.

(5) Any condominium that Fannie Mae has rejected.

New FHA Regulations Effect Condominium Unit Sales and Financing

rburke — Tue, 25 May 2010 20:53:40 +0000

Like all housing, the sales of condominiums have been significantly impacted by the state of the housing market. Also effecting sales are new rules and regulations applicable to government backed loans, as well as those adopted by conventional lenders. In particular, new requirements for FHA financing directly concern condominium sales. As of February 1, 2010, the FHA now requires that an entire condominium project be FHA approved, discontinuing the prior “spot approval” for the sale individual units. Significantly, these regulations preclude FHA financing where 15% or more of the units are delinquent in paying fees and assessments. Additionally, only 50% of the units in a project may receive FHA financing, and that ratio will be reduced to 30% after 2010.

HUD Section 234(c) of the National Housing Act provides for government insurance to lenders against losses on mortgage loans for purchase or refinance of condominium units. Condominium projects often had FHA approval at the time they were constructed and units were first offered for sale by the developer. If not, there was previously a “spot approval” process for the financing of sales of individual condominium units. As of February, however, the entire condominium must be an FHA approved project. Unless a project is already on the approved list, the condominium must apply for approval in order for FHA financing to be offered in connection with unit sales.

In order to apply, existing condominium must meet certain eligibility guidelines:

- The Council of Unit Owners must have a completed the HUD questionnaire.

– The condominium must be completed, with no on-going or anticipated addition of common elements, units or other facilities.

– At least 50% of the units must be owner occupied.

– No more than 15% of the units may be delinquent for more than thirty days with respect to the payment of fees and assessments.

– FHA insurance will be available to only 50% of loans in any Condominium until December 31, 2010, after which this limit will decrease to 30%.

– The Council of Unit Owners’ insurance premiums and deductibles must be included as part of the annual operating budget.

– The condominium must secure fidelity coverage in an amount equal to three months aggregate assessments plus reserve funds.

- The condominium’s insurance policy must cover 100% of the replacement cost exclusive of the land.There may not be any litigation, other than that related to assessment collection. However, the FHA will, on a case by case basis, consider requests for exemptions for pending litigation.

– The condominium must not be a party to litigation, except for that related to the collection of delinquent assessments. However, a request for an exemption for pending litigation will be considered on a case by case basis.

– The condominium may not permit daily rentals.

Once approval is obtained, it is good for two years. Any community that is unsure as to whether it is on the approved list, or wishes to obtain information on applying for approval, should contact the local HUD office. Condominiums in Maryland can contact the Baltimore field office at The City Crescent Building, 10 South Howard Street, Fifth Floor, Baltimore, Maryland 21201, 410-962-2520. Condominiums in Montgomery and Prince George’s Counties can also contact the Washington field office at 820 First Street, NE, Suite 300, Washington, D.C. 20002, 202-275-9200.

A final note on pending litigation: The involvement of a condominium in litigation, except that relating to the collection of delinquent assessments, is always an issue in connection with financing for sales or refinancing of units. This is true for conventional loans, as well as government backed financing. However, commercial lenders and HUD will make exceptions, provided that they are given with sufficient information on the nature of the law suit, and its anticipated duration and outcome.

LEGISLATURE PASSES NEW WARRANTY PROVISIONS BUT NO FORECLOSURE RELIEF

rburke — Fri, 30 Apr 2010 16:04:44 +0000

The Maryland General Assembly passed House Bill 620, which, if signed into law by the Governor, will take effect on October 1, 2010. The newly enacted law will expand common element and common area warranty protections in condominiums and homeowners associations beyond the period of a developer’s control. It extends the implied condominium common element warranty, by providing that the warranty run for two years from the election of the first board of directors controlled by the unit owners. Similarly, it provides that the implied warranty on homeowner association common areas be extended to run for two years from the election of the first governing body controlled by the homeowners. It also requires that the common elements identified in a condominium declaration be consistent with those components that are specified as being subject to the common element warranty provisions under the Maryland Condominium Act. The Legislature did not, however, pass the proposed Residential Sustainability Act that would have provided some limited relief to condominiums and homeowners associations where foreclosure sales do not result in sufficient funds to cover unpaid association assessments.

Section 11-131(d) of the Maryland Condominium Act provides that there is an implied warranty on certain specified components of the common elements; namely, “the roof, foundation, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural elements.” An issue and potential loophole arose, however, whenever a condominium declaration identified these components, or any part of them, as being included within the units rather than the common elements. The new enactment amends Section 11-103(a)(4) of the Condominium Act, which concerns the required content of a condominium declaration, for all condominiums created on or after October 1, 2010. New subsection (4)(ii) provides that “the description of the common elements shall include the” same five components listed in Section 11-131(d), “to the extent that the improvements are shared by or serve more than one unit or serve any portion of the common elements.” This ensures that developers cannot use the declaration to define these specified components as part of the units, and thereby avoid the intent of the law that these components be subject to the common element implied warranty, provided that the components serve more than one unit or serve the common elements. Additionally, the new subsection provides that “the description and designation of the common elements … may not be amended until after the date on which the unit owners, other than the developer and its affiliates, first elect a controlling majority of the members of the board of directors for the council of unit owners.” This prevents the developer from modifying the definition of common elements during the period of time that it controls the condominium’s board of directors.

With regard to the common element warranty itself, Section 11-131(d)(3) of the Condominium Act presently provides that the warranty “commences with the first transfer of title to a unit owner,” and “extends for a period of 3 years.” For common elements not completed as of the first transfer of title, the three years commences “with completion of that element or with its availability for use by all unit owners, whichever occurs later.” In many instances, however, unless condominium units sell quickly, the developer can maintain control of a majority of the council of unit owners for several years; sometimes even until after the three-year warranty has expired. The new enactment is intended to address this. It retains the provision that the warranty extends for a period of 3 years from the first transfer of title to a unit owner, or, with respect to an incomplete element, from its completion or availability for use, whichever is later; but also provides that the warranty may run for “2 years from the date on which the unit owners, other than the developer and its affiliates, first elect a controlling majority of the members of the board of directors for the council of unit owners, which ever occurs later.” As a result, developers who maintain control of a majority of the units for the first several years cannot avoid responsibility for the common element warranty, because the unit owners will still have at least a two year warranty from the time they assume majority control.

As to the homeowner association warranty, Section 11B-110(a) of the Maryland Homeowners Association Act now provides that there is an implied warranty on improvements to the common area, which runs for a period of one year. It “begins with the first transfer of title to a lot to a member of the public by the vendor of the lot.” For improvements not completed at the time of the first transfer of title, the warranty commences “with the completion of the improvement or with it availability for use by lot owners, whichever occurs later.” As in the case of the condominium common element warranty, this meant that a developer that maintains majority control of the association could avoid the warranty obligation. The new enactment make two significant changes. First, it extends the warranty from one to two years, commencing with the first transfer of title to a lot, or, with regard to an improvement not completed at the time of first transfer, from its completion or availability for use, whichever is later. Additionally, it also amends Section 11B-110(a)(3) to provide that the warranty may also commence “2 years from the date on which the lot owners, other than the declarant and its affiliates, first elect a controlling majority of the members of the governing body of the homeowners association,” if this would result in a later date for commencement of the warranty period.

House Bill 842, known as the Residential Association Sustainability Act of 2010, would have provided that a specified portion of a lien on a condominium unit or lot in a homeowners association, would, in certain circumstances, have a priority over any future first mortgage or deed of trust recorded after October 1, 2010. This was intended to assist condominiums and homeowners associations that have been left with unpaid assessments, despite having obtained a lien on the property, where the proceeds of a foreclosure sale are exhausted by the outstanding mortgage debt. This measure was defeated.

PROPOSED LEGISLATION WOULD EXPAND WARRANTY PROTECTION FOR FUTURE CONDOMINIUMS AND HOMEOWNERS ASSOCIATIONS

rburke — Thu, 04 Mar 2010 17:45:37 +0000

The current session of the Maryland General Assembly is considering new legislation that would expand common element and common area warranty protections in future condominiums and homeowners associations. House Bill 620 proposes to expand the application of both the three-year condominium common element warranty, and the one-year homeowners association common area warranty, for projects created after October 1, 2010. The warranty on condominium common elements would run for three (3) years from the first transfer of title to a unit, or two (2) years from the date the developer transfers control, whichever is later. The warranty on homeowners association common areas would run for two (2) years form the first transfer of title to a lot, or two (2) years from the date the developer transfers control, whichever is later.

Under current law, there is a three-year implied warranty on certain specified components of the common elements, including the roof, foundation, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural elements. This warranty, which is enforceable only by the council of unit owners, commences with the first transfer of title to a unit in the condominium. (There is an exception for common elements not completed at that time, in which case the warranty on such common elements commences when they are completed or become available for use, whichever is later). That means that the warranty will expire regardless of when the unit owners take control of the condominium from the developer, and regardless of the number of units that have been sold. It is possible, therefore, depending on the pace of sales and the size of the condominium, for the common element warranty to expire before or close to the council of unit owners assumes control of the complex, which usually occurs about the time that a majority of the units have been sold. The warranty can also expire even before some units have been sold. So it is possible to buy into a condominium community at a time when the three-year common element warranty no longer exists.

Under the proposed bill, Section 11-131 of the Maryland Condominium Act would be amended to provide that the three-year common element warranty, while commencing with the first transfer of title, runs for a period of three (3) years from that date, or for two (2) years from the date on which the developer transfers control of the council of unit owners, whichever occurs later. This would extend the common element warranty in any community where there transfer of control occurs more than a year after the transfer of title to the first unit. The legislation would also require that the specified components to which the warrant is applicable, must be included in the definition of common elements contained in the condominium governing documents, provided that they serve more than one unit or serve the common elements. Presently, any of the specified components could potentially be excluded from coverage under the warranty by their inclusion as part of the units as defined in the declaration.

Under the original language of the bill, these provisions would not be applicable to any current condominium, but, instead, would apply only to those for which the declaration, by-laws, and plat are recorded after October 1, 2010.

The current homeowners association common area warranty commences upon the first transfer of title to a lot. (There is an exception for not yet completed common area components, in which case the warranty commences when they are completed or available for use, whichever is later). The warranty extends for period of only one year. As a result, it is possible for the warranty to expire before the developer transfers control of the community to the property owners, and before many lots have even been sold.

The proposed legislation would amend Section 11B-110 of the Maryland Homeowners Association Act to enlarge the warranty to two (2) years. It would also provide that the two-year period commence at the time of the first transfer of title to a lot, or at the time the developer transfers control to the homeowners, whichever is later.

In its present form, the legislation would not effect any existing homeowners association. Instead, it would only apply to those created after the effective date of the legislation, which is identified in the bill to be October 1, 2010.

MARYLAND GENERAL ASSEMBLY CONSIDERING LIMITED FORECLOSURE RELIEF FOR CONDOMINIUMS AND HOMEOWNERS ASSOCIATIONS

rburke — Thu, 04 Mar 2010 16:39:46 +0000

Legislation has been proposed in the current session of the Maryland General Assembly that would provide some relief to condominiums and homeowners associations in the event of a foreclosure. House Bill 842, known as the Residential Association Sustainability Act of 2010, provides that a specified portion of a lien on a condominium unit or lot in a homeowners association, would, in certain circumstances, have a priority over any future first mortgage or deed of trust recorded after October 1, 2010. This is intended to assist condominiums and homeowners associations who have been left with unpaid assessments, despite having obtained a lien on the property, where the proceeds of a foreclosure sale are exhausted by the outstanding mortgage debt.

As I discussed in a recent post, the wave of foreclosures arising from the recession has significantly affected condominiums, as well as homeowners associations, in their ability to collect delinquent assessments. When a mortgage lender forecloses, even when an association has pursued and established a lien on the property, the mortgage loan has priority. And, as a result of plunging real estate values, the proceeds of a foreclosure sale are most often sufficient to satisfy both the mortgage loan balance and any other liens. The condominium or association lien is then extinguished by the foreclosure sale, and the condominium or homeowners association is left with a deficit arising from the uncollectable unpaid assessments.

The proposed legislation would add new language to Section 11-110 of the Maryland Condominium Act, to provide that, in the event of a foreclosure under a mortgage or deed of trust, up to six (6) months of unpaid assessments would have a priority over any claim of the holder of the mortgage or deed of trust. However, under the initial version of the bill, this priority would only be applicable in the event of a mortgage or deed of trust recorded against the unit after October 1, 2010. This would include, in addition to the unpaid assessments, late fees, interest, and attorney’s fees associated with the condominium having established a lien, provided that they were levied in accordance with the provisions of the condominium’s governing documents.

The bill would also amend Section 11B-117 of the Maryland Homeowners Association Act, to provide the level of relief to homeowners associations with respect to delinquent assessment liens. Again, six (6) months of assessment would have a priority over claims under a mortgage or deed of trust, but only those recorded after October 1, 2010. As with the condominium version, the lien priority would include properly established late fees, interest, and attorney’s fees.

The significant deficiency in this legislation is its limited applicability. It will provide relief to condominiums and homeowners associations only as to future mortgages or deeds of trust recorded after October 1, 2010. No presently recorded loans would be affected. As a result, in the event of a foreclosure on any exiting mortgage or deed of trust, along with any recorded before October 1, 2010, condominiums and homeowners associations will still be precluded from collecting on assessment liens where the proceeds of the foreclosure sale are exhausted by mortgage loan.

Those interested in following this legislation may refer to the following link:

http://mlis.state.md.us/2010rs/billfile/HB0842.htm

Foreclosures Impact Condo Fee Collections

rburke — Tue, 05 Jan 2010 16:55:53 +0000

The effects of the recession on real estate values, and the resulting wave of foreclosures throughout the country, has had a direct and immediate impact on the ability of many condominium councils to collect the assessments necessary to properly operate and maintain their communities. Unit owners who are unable to keep up with their mortgage payments often become delinquent in their fee assessment payments as well. When this happens, the entire association is negatively impacted, because a condominium’s financial viability is entirely dependent upon timely payment of assessments by all unit owners.

Because condominiums cannot operate without full participation of all unit owners in paying their share of the common expenses, the Maryland Condominium Act establishes a procedure in which a council of unit can obtain a lien on a delinquent owner’s unit that is enforceable by foreclosure. However, the current real estate climate has left many associations empty handed in spite of the fact that unpaid condominium fees remain due and are subject to a lien. This happens when the sale of a unit fails to produce sufficient proceeds to satisfy all existing obligations. This can occur when the condominium forecloses on its lien, or when the unit is subject to foreclosure by a mortgage lender. In either case, the resulting sale often produces less than the amount due under the mortgage. This deficiency means that there is nothing left from the sale to satisfy other amounts due on the unit, including unpaid fees and assessments.

It is generally good practice for a condominium council to diligently pursue all of the collection remedies that are available to it in a timely fashion. However, even this may not guarantee that all or any fees will ultimately be collected if the value of the unit has diminished to the point that its sale cannot satisfy all existing obligations.

Pursuing the lien process requires the condominium to incur legal fees and expenses. The first step is to provide the required notice to the delinquent unit owner. Notice of intent to create a lien must be given in accordance with requirements of the Maryland Contract Lien Act. Md. Real Prop. Code Ann. §14-201 et seq. The notice should present a specific and clear identification of the fees that are due, with the dates that payments were due, along with all other charges permitted by the condominium’s declaration or bylaws. These additional charges can include interest, late fees, and reasonable attorney’s fees, all of which should be separately delineated. The notice must also properly identify the condominium and the unit, reference the unit owner’s responsibility for payment of assessments, and state that the unit owner has a right to a hearing.

The notice must be presented by personal delivery to the unit owner or their agent, or by certified or registered mail, return receipt requested, sent to the unit owner’s last know address. If neither of these methods is successful, the notice can be mailed to the unit owner’s last known address, but must also be posted in a conspicuous manner on the door or entrance to the unit. This posting must be performed by the condominium’s agent in the presence of a competent witness.

Once notice has been properly served, there is sometimes an opportunity to reach an agreement to have the overdue amounts paid. However, the current economy has made such resolutions less likely. If there is no agreement, and no payments are made within 30 days after notice has been given, the condominium can then file a lien statement in the county land records. Such a lien is enforceable in the same manner as a mortgage or deed of trust that contain a power of sale at foreclosure.

It should be noted that the delinquent unit owner has the right, within 30 days of receiving the notice of intent to create a lien, to file a complaint in the county circuit court seeking a determination that probable cause exists for the establishment of a lien. In that event, the condominium has the burden of proof to show that a lien should attach, and should file an affidavit confirming the amounts due as stated in the notice, along with any additional amounts that have accumulated since notice was provided. If the court determines that probable cause exists to establish a lien, it will order that the lien be imposed.

Once the statement of lien is recorded, or a lien is imposed by court order, the condominium has a right of foreclosure. However, the condominium’s lien has priority over other liens on the property only from the date the statement is filed. That means that a pre-existing lien, such as a mortgage, have priority to be satisfied first. When the real estate market was rising, the condominium could sell a unit at foreclosure, and the mortgage would be paid, with the balance of the proceeds going to the condominium. Now, however, because of depressed real estate prices, a condominium foreclosing on a unit may find that the sale does not produce enough revenue to satisfy the pre-existing mortgage, let alone return anything to the condominium. Similarly, if the unit is subject to a foreclosure by a mortgage lender, the foreclosure sale may not produce sufficient funds to satisfy the entire mortgage balance, nor leave any funds to pay overdue condominium assessments.

The condominium can sue the unit owner for the deficiency, but the likelihood of collection is often problematic, particularly if the owner has no significant assets or files for bankruptcy. But such suit can result in some recovery by an agreed settlement or the imposition of a judgment that will allow for garnishment of wages and assets.

Due to these factors, a condominium needs to properly consider all circumstances surrounding a delinquent account, including the value of the unit; the likelihood of any recovery against the defaulting unit owner; the existence or likelihood of a foreclosure by a mortgage lender; and the cost to condominium of simply absorbing the debt among all of the remaining unit owners. If a condominium chooses to pursue its entitlement to a lien, it should act promptly. It should also notify any foreclosing lender of the lien and fees due. The lender will become responsible for the payment of condominium fees once it takes title at foreclosure until a new owner purchases the property and the sale is ratified by the court. The condominium should also contact any auditor appointed to oversee a foreclosure sale, and inform them of the condominium’s lien and fees that are due. Sometimes, an agreement can be reached with a mortgage lender as to the payment of some portion of delinquent fees. Sometimes, a sale can even be delayed with the hope that the market will improve. And the condominium should exhaust its remedies with respect to seeking to recover any deficiency from the unit owner. Only by pursuing all of these steps in a timely fashion can a condominium hope to obtain any recovery of unpaid fees in the current real estate market. The alternative is to write-off the debt, in which case all of the condominium owners will bear the expense of the fee delinquencies.

The Nuances and Subtleties of the Three-Year Common Element Warranty

rburke — Fri, 30 Oct 2009 15:51:09 +0000

A would be condominium buyer has inquired about having heard that it is possible to buy a condominium unit without having the benefit of the three-year common element warranty, because it has already expired at the time of purchase. What that purchaser heard is absolutely correct. Maryland’s three-year statutory warranty on certain components of the common elements can, indeed, expire before all units in the community are sold, leaving subsequent purchasers without the protection and assurance afforded by the statutory warranty specific to the common elements. This is of particular relevance in slow selling communities, especially as a result of the economic downturn, and in large communities that are built in phases over a long period of time.

The common element warranty under Md. Real Prop. Code §11-131(d) provides that “the developer is responsible for correcting any defect in materials or workmanship” in certain specified common element components, and warrants “that the specified common elements are within acceptable industry standards in effect when the building was constructed.” The applicable components identified in the statute are “the roof, foundation, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural elements.”

The warranty runs for three years. However, it “commences with the first transfer of title to a unit owner.” Accordingly, if the first unit owner purchaser in the complex took title three years before a subsequent purchaser, the warranty would have expired before the subsequent purchase, and would no longer be of any effect.

The only circumstances which cause the three-year warranty to commence at a date later than the date the first purchaser took title is where any portion of the common elements has not been completed at the time of the first closing. In that event, the three-year warranty commences “with the completion of that element, or with its availability for use by all owners, whichever occurs later.” This is particularly applicable in mult-building projects that are built in phases. As each new building is completed, a new three-year warranty commences on the specified common elements that are part of the new building. Nevertheless, the original three-year warranty that arose when the first purchaser in the community took title is still the warranty that is applicable to the earlier completed portions of the complex.

As a result of this, it is entirely possible to purchase in a condominium community and receive the benefit of the three-year common element warranty on only some of the buildings. Moreover, a warranty that commences upon completion of a later building, rather than at the time the first title passed to a unit, can still expire before subsequent purchasers join the community. Depending on the size of the community and the phases of construction, a subsequent purchaser could buy into a community in which the three-year common element warranty has expired as to some, most, or all of the buildings.

That does not mean, however, that later purchasers are entirely without warranty protection for common element defects. The Maryland statute expressly provides that the three-year common element warranty “is in addition to the implied warranties set forth in §10-203 of” the Real Estate Code. The §10-203 warranties are applicable to every sale of a new home in Maryland, including condominiums, unless they have been contractually excluded or modified in accordance with the statute’s requirements. These are broad general warranties that provide that the new home, when delivered, is (1) free from faulty materials; (2) constructed according to sound engineering standards; (3) constructed in a workmanlike manner; and (4) fit for habitation. The Maryland Court of Appeals has expressly held that, in the case of newly purchased condominium unit, the §10-203 warranties apply to both the unit and the common elements, because each owner acquires an undivided ownership in the common elements as well as ownership of their individual unit. Starfish Condominium Association v. Yorkridge Service Corp., 295 Md. 693, 458 A.2d 805 (1983).

Unlike the three-year common element warranty that is enforceable only by the council of unit owners, the §10-203 warranties are personal to each unit owner, and commence when each unit owner takes title, without regard to when an original purchaser took title, or when a common element component was completed. Additionally, they are not limited to the specified common elements identified in §11-131, but, instead, apply to all of the common elements without limitation. However, the §10-203 warranties run for only one year, except as to structural defects, in which case there is a two-year warranty.

An action by the council of unit owners to enforce the three-year warranty must be brought within one year of the expiration of the warranty. Significantly, such a claim cannot be made unless notice of the defect was given to the developer while the warranty was applicable and before it expired. An action by a unit owner, or by the council acting on behalf of two or more unit owners, under the §10-203 warranties must be brought “within two years after the defect was discovered or should have been discovered or within two years after the expiration of the warranty, whichever occurs first.” There is no requirement that notice first be given to the developer during the warranty period.

Purchasers of new condominiums should be certain that they understand the status of the three-year common element warranty at the time of their purchase. They need to know when title passed to the first unit owner in the community. They also need to determine if the common elements were built in phases or if any portions were completed and available for use at varying times. Otherwise, they could find that the warranty they believe they had no longer exists.

Green Buildings

rburke — Thu, 17 Sep 2009 17:23:05 +0000

During 2005, in Maryland’s venerable Eastern Shore seaport town of Crisfield, an ambitious redevelopment project commenced at the City Dock. The Captain’s Galley is a luxury condominium complex consisting of a six-story building with 23 residential units, a heated pool, fitness center, boat slips, and a rooftop restaurant. One notable component of the project specifications called for the construction to result in a “Green Building” that would obtain a “Silver Certification” in accordance with the U. S. Green Building Council’s Leadership in Energy and Environmental Design rating system, popularly known as LEED standards. In doing so, the developer intended to qualify for more than $600,000 in tax credits.

Captain’s Galley became a memorable project, not only because it was one of the first in Maryland to incorporate the LEED rating into the contract documents, but because it became one of first anywhere to result in litigation arising, in part, from the general contractor’s alleged failure to comply with the environmental design standards. In the suit filed in the Circuit Court for Somerset County, the developer, along with other claims, sought damages for the loss of the tax credits as a consequence of the alleged failure of the building to meet the contractually specified LEED standards.

As the contractual adoption of environmentally related requirements becomes more common, as the result of increasing financial incentives, market forces driven by sustainable building benefits, and government mandates, issues as to whether the finished produce comports with the applicable standards will surely follow. Potential liability flowing from green building standards can be expected to become an increasingly important issue in everything from the clarity of design documents, to inspection and supervision responsibilities, to standards of care, to insurance coverage, to warranty obligations, to the propriety of the certification procedure.

The LEED rating system established by the U.S. Green Building Council is the best known and contains the most often cited criteria for sustainable building development. Its credit system covers a wide range of design and construction procedures, and is intended to promote buildings that are both environmentally responsible and provide a healthy environment for occupants. Site credits promote such activities as managing storm water by reducing runoff and conserving natural vegetation, providing alternative transportation, reducing light pollution. Water efficiency credits can be earned by creating a water efficient landscape, adopting innovative wastewater technologies, and reducing overall water usage. Energy credits are aimed at controlling energy waste, atmospheric conditions, and building impact through such methods as on-site renewable energy and enhanced refrigerant management. Materials credits encourage the use of renewable, recycled and recyclable components. And indoor air quality credits apply to such categories as ventilation, monitoring, the use of low-emitting materials, thermal comfort, and the availability of daylight and views.

Another widely recognized program, Green Globes, sponsored by the Green Building Initiative, which establishes a rating and certification system through an assessment protocol, software tools, and use of profession assessors in the categories of energy, indoor environment, site impact, water, resources, emissions, and environmental management.

A project that intends to meet any of the LEED or Golden Globes requirements must have both specificity in the contract documents, and qualified construction oversight and supervision. The consequences of non-compliance can be enormous, especially if the applicable standards are used to determine (1) the availability of a tax credit; (2) comply with a government mandate; or (3) form the basis for the project’s ultimate marketing and representations as to product that will be delivered.

There is also the growing prospect of more government mandated compliance. Last year, the Maryland General Assembly passed legislation which adopted environmental requirements for new state buildings and public schools, and utilizes both LEED and Golden Globes standards. This will result in new contractual obligations and performance standards for contractors involved in state construction.

Finally, the positive image and desirability of sustainable construction continues to grow. From companies wanting to offer competitive work environments to employees, to owners seeking energy efficiency, to simple consumer environmental awareness, market forces are pushing the green building revolution. With that comes the potential for liability based on new and evolving standards of due diligence in ensuring that the design and construction are as green as intended.

Those So-Called “10-Year” Warranty Policies Are Not Always What They Seem

rburke — Wed, 19 Aug 2009 22:47:16 +0000

If you have bought a new home in Maryland during the last several years, including a new condominium, your purchase likely included what are commonly referred to as “ten-year warranty” policies.” But a careful reading of the typical provisions of many of these policies reveals that the suggested coverage benefits are nearly non-existent. In fact, the policies often offer little, if anything, beyond the warranty obligations that the law imposes on new home sellers regardless of whether a warranty policy is offered. The initial coverage under these policies is usually not provided by the warranty company, but is the builder’s obligation alone; an obligation that the builder would have in any event. Only in year three does the policy coverage usually commence, and then only for “structural defects,” and only if one of numerous exclusions does not apply. Indeed, these policies do not provide any meaningful reason for homebuyers to feel assured that building defects in their new home will be corrected for a period of ten years.

In 1990, the Maryland General Assembly enacted legislation allowing new home builders to offer “new home warranty security plans,” and set certain minimum warranty requirements. Md. Real Prop. Code Ann. §10-601 et seq. Builders were authorized to participate in a security plan offered by a warranty company.

For the first year, the law requires, at a minimum, that the plan provide that “the new home is free from any defects in materials and workmanship.” This appears to offer some special benefit, but it really does not. In practice, most of these warranty plans provide that the builder, not the warranty company, is responsible for correcting defects during the first year. But this obligation already exists by virtue of Md. Real Prop. Code Ann. §10-203, which requires a warranty that all new homes are (1) free of faulty materials; (2) constructed according to sound engineering standards; (3) constructed in a workmanlike manner; and (4) fit for habitation. This statutory new home warranty runs for one year for defects in general, and two years for structural defects.

Condominium purchasers receive further statutory warranties in addition to those provided to all new home purchasers. Under Section 11-131 of the Maryland Condominium Act, every new condominium unit is also warranted for one year against “any defects in materials or workmanship in the construction of walls, ceilings, floors, and heating and air conditioning systems;” and it is further warranted that the heating and air conditioning systems will meet certain performance standards for maintaining temperature. And the significant portions of the common elements of a condominium, including “the roof, foundation, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural elements” are warranted by law for three years from the transfer of title to the first unit in the complex.

The warranty plan law also requires that, for two years, there be a warranty against “any defect in the electrical, plumbing, heating, cooling, and ventilating systems.” However, it is expressly provided that, if the mechanical “appliance, fixtures, and items of equipment” are covered by a manufacturer’s warranty, the warranty plan coverage “may not exceed the length and scope of the warranty offered by the manufacturer.” In reality therefore, the warranty plans offer no coverage beyond the applicable manufacturer’s warranties that the homeowner would be entitled to in any event. Moreover, like the first year coverage, most warranty policies make this two-obligation for mechanical systems the responsibility of the builder, and there is no coverage available from the warranty company itself.

Finally, the warranty plan law provides that there must be coverage for five years providing that “the new home is free from any structural defect.” However, a “structural defect” is defined as “any defect in the load-bearing portions of a new home that adversely affects its load-bearing function to the extent that the home becomes or is in serious danger of becoming unsafe, unsanitary, or otherwise uninhabitable.” In other words, it has to be a condition that should cause the homeowner to run for their lives.

Warranty companies have generally extended this coverage to ten years; giving rise to the common reference to ten-year policies. But, as a practical matter, the coverage is quite limited. In addition to the extreme nature of the condition that must exist to establish “a structural defect,” typical policies exclude coverage for building code violations. It is difficult to envision a set of circumstances in which a significant structural defect could exist without the applicable building code having been violated. Most warranty plan policies contain many more exclusions that preclude coverage even where the defective condition rises to the level of a “structural defect” as defined. These include exclusion of specific building components which the policies choose to define as non-structural.

New home buyers, therefore, should be very cautious with the extent to which they place confidence in builder warranty plans. Special attention should be given to the specific terms of the applicable coverage so that the buyer has a clear understanding of whether the warranty plan truly offers any meaningful benefit.

The Council’s Master Insurance Policy Must Insure Both the Common Elements and the Units

rburke — Fri, 07 Aug 2009 16:05:18 +0000

The law governing condominium insurance requirements, which changed in 2008 as a result of a court decision, has changed again as result of amendments to the Maryland Condominium Act effective June 1, 2009. During the last legislative session, the Maryland General Assembly took action on the issue in direct response to a 2008 Court of Appeals decision concerning the allocation of responsibilities for property damage between a condominium council and the individual unit owners. The new law establishes that the condominium master insurance policy must cover all of the building elements, including the units, except for improvements installed in the unit by the owners after construction. However, where the damage originates in a unit, that unit owner is responsible for any insurance deductable under the council’s policy, up to a maximum of $5,000.

Section 11-114 of the Maryland Condominium Act has long imposed a specific duty on a council of unit owners to maintain “[p]roperty insurance on the common elements and units, exclusive of improvements and betterments installed in the units by unit owners,” along with general liability insurance. In response to this requirement, it was common practice for councils of unit owners to obtain insurance coverage for all elements of the condominium as originally constructed by the developer, including the units, with individual unit owners insuring improvements to the unit not provided by the developer, along with insuring personal property in the unit.

Section 11-114 also provided that any deductable applicable under the property insurance policy was a common expense of the condominium, regardless of whether the cause of the damage originated in the common elements or an individual unit. However, it authorized that the condominium’s bylaws could provide for a unit owner to be responsible for the deductible, if the cause of the damage originated in their unit, but only up to a maximum, initially of $1,000, and then increased to$5,000 by a 2008 amendment.

Then along came the Court of Appeals decision in Anderson v. Council of Unit Owners of the Gables in Tuckerman Condominium, 404 Md. 560 (2008).. The Court granted certiorari to consider two consolidated cases, one arising at The Gables on Tuckerman Condominium in Rockville, and the other at the Bridgeport Condominium in Laurel. In the Rockville case, a leaking water heater within a unit had caused damage to the unit, without damage to any other unit or the common elements. In the Laurel case, a kitchen grease fire caused the sprinkler system to activate, damaging the unit, but, again, causing no damage to other units or the structure. In both cases, the unit owners sued the condominium council to recover the costs of repair.

Interpreting Section 11-114, the Court of Appeals noted that Section 11-108.1 of the Condominium Act provides that, unless otherwise specified in the declaration or bylaws, “the council of unit owners is responsible for maintenance, repair, and replacement of the common elements, and each unit owner is responsible for maintenance, repair, and replacement of his unit.” It ruled that the council’s insurance requirements under Section 11-114 applied “only to damage sustained to the common elements or the structure of the condominium.” Specifically, it found that, while Section 11-114 provided that each unit owner was an insured person under the council’s policy, each owner is “insured under the master policy only as to his or her collective undivided interest in the entire condominium property,” and it is “not meant to insure each owner’s property or individual unit.”

Accordingly, the Court held that the council of unit owners was not required to repair or replace property of an individual owner after any casualty loss. The significant impact of the decision was that it meant that Section 11-114 applied only to “damaged property owned by the owners collectively,” and the council was not responsible for insuring or repairing any portion of an individual unit, regardless of the origin of the cause of the property damage; that is, regardless of whether the cause originated in the common elements or the unit. Damage to an individual unit would then become the sole responsibility of that unit owner in all circumstances, and they would be compelled to obtain their own insurance to protect against loss.

This turned what had been customary practice on its head, and prompted the legislature to intervene. The new law amends Section 108.1 to make it specifically subject to the provisions of Section 11-114. It then amends Section 11-114 to make clear that the council of unit owners is required to maintain insurance “[f]or property and casualty losses to the common elements and the units, exclusive of improvements and betterments installed in the units by the unit owners other than the developer.” The new law also imposes the deductable requirement on any individual owner in whose unit the damage originates, regardless of whether the bylaws so provide, up to a maximum of $5,000. Otherwise, the deductable remains a common expense.

The result is that condominium master policies must cover property damage to all of the condominium structure, including both the common elements and units as originally constructed and finished by the developer, with the unit owners providing individual insurance for their improvements and personal contents. If damage originates in the unit, the owner is responsible for the insurance deductible up to a maximum of $5,000. The new law also requires that condominium annually notify each unit owner of the deductable responsibility and the amount of the deductable, and further requires that public offering statements notify potential buyers of the unit owner’s responsibility for the insurance deductable.

It should be remembered, however, that, because the council is responsible for maintenance and condition of the common elements, where a common element defect, such as a water leak, is the source of damage to an individual unit and property, the council is responsible for the consequential damages to the unit and its contents.