Maryland Condo Lawyer Blog » Councils of Unit Owners

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.

Preserving Your Asset

rburke — Mon, 27 Jul 2009 22:54:37 +0000

An important consideration of nearly all purchasers of residential condominium units is the fact that a condominium provides the advantages of home ownership without the time-consuming and laborious tasks that are an expected part of maintaining a house and property. After all, exterior maintenance is taken care of by the association. But that does not mean that maintenance and repair issues are something with which condominium owners need not be concerned. On the contrary, there are several reasons why building issues should be matters of extreme urgency in a condominium setting.

It is important to first understand the condominium form of ownership. The purchaser buys a unit that is owned in the same way that an individual home would be owned, but also receives an ownership interest, in common with all other owners, in the common elements of the complex. Each owner’s property, therefore, includes all of the common elements in addition to their unit. This means that maintenance and repair issues in the common elements effect the value, maintainability, and useful life of every owner’s property.

Moreover, all owners, by virtue of their membership in the council of unit owners, are responsible for the maintenance, repair, and replacement of all of the common element components. And any unit owner, because of their ownership rights in the common elements, may compel the association to properly maintain the common elements and correct any defects.

This ownership and related responsibility applies no matter how many buildings might be involved, or how far removed any common element component might be from any given unit. Indeed, the fact that large buildings or multiple buildings may be involved in a condominium project means that common element maintenance and repair issues are often much more problematic and considerably more expensive than those that would ever be confronted by an individual homeowner.

Additionally, Maryland law requires that condominium owners, at the time of resale, disclose to prospective purchasers any knowledge of conditions in any part of the condominium that constitute violations of applicable building codes. Accordingly, defective conditions in the common elements have a direct bearing on the marketability of an individual unit.

As a result of these factors, building problems in condominiums are a matter that can neither be taken lightly nor ignored, because they effect every owner’s interests and can potentially have enormous financial consequences.

To properly protect themselves, condominium owners need to understand the construction of their buildings. This is necessary even in the absence of specific problems, because condominiums are statutorily required to establish annual budgets for maintenance and replacement reserves. Initial budgets established by the developer are often kept low in order to allow for lower annual fees that are attractive to purchasers. The unit owners need to develop their own realistic figures for maintenance and reserves, and must become familiar with their buildings in order to understand the proper maintenance required and the anticipated useful life of the various components.

In doing so, condominium owners also need to become aware of any defective conditions not in compliance with codes, contract documents, and industry standards. Such issues must be corrected if the condominium council is to meet its responsibilities to the owners, and, if inherent in original construction, may be conditions that the developer is responsible for correcting under warranty and common law obligations. To preserve and pursue any such claims against the developer, the association must know what defects exist, what constitutes a proper method of repair, and the cost of such repair.

In order to gain the information necessary to intelligently maintain the project, as well as identify conditions for which the developer may be responsible, condominiums must engage appropriate consultants. A transition study of the property should be undertaken at the time the owners assume responsibility for the complex from the developer. Such studies establish valid figures for annual maintenance and reserves, and identify conditions that are defective or call for further investigation.

Where problems become apparent, whether by virtue of a transition study or unit owner experience, a forensic engineering investigation should be undertaken so that the true nature of the conditions can be properly identified and an appropriate repair specified. The resulting engineering report also forms the basis for supporting any claim for damages that might be pursued against the developer.

And it is important to be mindful that time is of the essence with respect to preserving claims against the developer. Warranties are of limited duration, and common law claims do not accrue upon actual knowledge, but, instead, commence when the property owner, in the exercise of reasonable diligence, should have been on notice of the need to investigate.

Condominium ownership offers many benefits, but being absolutely carefree is not one of them. Only a diligent and informed unit owner can protect themselves from undue expense and unwanted aggravation.

The Trouble With Mold

rburke — Mon, 06 Jul 2009 13:11:28 +0000

When mold was discovered in part of the Hilton Hawaiian Village in Honolulu, it ultimately resulted in the closing for more than a year of an entire 453-room 25-story tower. It is reported that Hilton spent some $20 Million on consulting and investigation costs, and an additional $35 Million in the remediation. This is one notable example among many of how the presence and growth of mold in homes and commercial buildings has developed into a serious issue that has potentially far reaching consequences for residential and commercial property owners and managers, as well as for the construction and insurance industries.

Several states have established task forces to study mold and its effect on buildings and indoor air quality. However, the intelligent dialogue required for the development of proper standards for mold exposure and remediation has, in large part, been drowned out by extreme voices. On the one hand are those who summarily dismiss the issue as the fabricated product of a conspiracy between tort lawyers and a developing cottage industry of mold remediation consultants. On the other are those readily prepared to broadly attribute a wide variety of medical conditions to the unhealthy environment of “sick buildings.”

While it is true that mold is an ancient life form that has, throughout history, been the constant companion of humanity, its recent prominence as an indoor health issue is explained by two features of modern building techniques – the use of materials containing high concentrations of cellulose and other fibers upon which molds feed, and the employment of insulating materials and methods that restrict ventilation. Given the inviting food source provided by present day building material, all that is required for vigorous mold growth and amplification is the presence of water and a building assembly that prevents the moisture from escaping or drying out.

One need not establish any causal connection between the presence of mold and health issues in order to recognize the need for proper mold removal. Indeed, putting health matters entirely aside, molds deteriorate the building materials on which they feed, necessitating the repair of affected components. Where structural elements are involved, this can become a matter of building stability as well as function. Additionally because of the manner in which they digest materials, molds give off undesirable odors and diminish aesthetic appearance, thereby degrading the indoor environment and decreasing property values.

While the precise health consequences of indoor mold exposure remain the subject of study and debate, particularly as to the effect of its production of mycotoxins, it is undisputed that molds are recognized allergens and reproduce by means of airborne spores. A portion of the population will have some allergic response to certain molds. This may manifest itself as rhinitis, sinusitis or asthma, and highly sensitive individuals, and those with pre-existing respiratory problems, may develop more serious symptoms. Additionally, persons with severely compromised immune systems may be a risk for fungal infections form some pathogenic molds.

Buildings do not have mold problems unless they have water problems. Accordingly, building exterior envelopes and plumbing and mechanical systems need to be designed, constructed and maintained in a manner that protects vulnerable components form moisture. Moreover, once water intrusion results in mold growth, the water source must be eliminated and methodologies need to be in place for mold removal.

In the absence of statutory regulation, various industry guidelines that have been used to govern the scope of mold remediation projects, including the Environmental Protection Agency’s Guideline on Mold Remediation in Schools and Commercial Buildings. In general, it is recognized that hard and non-porous surfaces can usually be cleaned, while absorbent or porous materials, such as wallboard, carpet, and ceilings may require replacement.

Historically, insurance claims for mold were permitted under property damage insurance policies where the infestation arose from the intrusion of rain water as a result of storms, or the discharge of water, steam, or condensation from plumbing or mechanical systems. However, as mold related claims have increased, insurers throughout the country have sought to exclude mold from property damage coverage. In mid-2003, the Maryland Insurance Commissioner reversed a ruling by his predecessor, and made mold exclusions permissible. Where mold exclusions are applicable, coverage is only available through the purchase of separate policies or endorsements.

The deterioration of building components, the diminishment of indoor environmental quality and aesthetics, and the potential for allergic reactions and other health consequences provide reason enough to adopt policies that promote the elimination of sources of indoor mold and provide a protocol for the removal of mold growth.

Rather than allow extremists to define the debate, the more reasoned approach is to adopt standards that ensure watertight buildings, identify unacceptable levels of mold contamination, and establish reasonable remediation criteria that allow its removal while minimizing the spread of the airborne spores. To do otherwise merely perpetuates the current uncertainties and hyperbole, while the costs to property owners continue to accumulate.

Until such standards are in place, property owners need to be mindful of the potential for harm to their investment from water intrusion and mold. It should be part of any due diligence checklist. Where problems occur, competent professionals should be engaged to properly identify the source of the moisture and develop specifications for an effective repair, as well as to determine the need for and appropriate scope of any mold remediation program.

Maryland Condominium Owners Need to be Mindful of Common Element Warranty Requirements

rburke — Fri, 19 Jun 2009 15:07:51 +0000

If you have decided that the condominium lifestyle is for you, and have purchased a sparkling new unit in a recently constructed complex, you probably take comfort in the fact that Maryland law provides for a three-year warranty on major components of the common elements. However, you may not be aware that when you purchased your unit, the three-year warranty was probably already running, and, in fact, may even have expired. That is because the common element warranty, does not begin to run when you settle on your unit, but, instead, commences when the first unit sold in the complex settles. As a result, where the size of the condominium or the slowness of the market results in the project taking a period of years before all units are sold, it is possible that many purchasers may take title when the three year common element warranty has nearly, if not already, expired.

Condominiums are, of course, a unique form of real property ownership, in which the purchaser buys a unit that they own in fee simple as they would own an individual home. Additionally, the condominium purchaser also obtains an undivided ownership interest in the common elements of the complex, which they own in common with all of the other unit owners. By virtue of this ownership interest, all unit owners are responsible for the maintenance, upkeep, and, if necessary, repair of the common element components. The extent of their responsibility is established by a percentage share allocated in the condominium documents, which usually is a function of the size of their individual unit. The important fact to remember, however, is that every unit owner has an ownership interest, and corresponding responsibility, for all of the common elements throughout all of the complex, no matter how many buildings might be involved, or how far removed the common elements may be from any individual unit.

For that reason, it is significant that the Maryland Condominium Act establishes a three year common element warranty, which makes the developer responsible for correcting any defect in materials or workmanship in the roof, foundation, external and supporting walls, mechanical, electrical, and plumbing systems and any other structural elements of the condominium, and must warrant that those components are within acceptable industry standards in effect when the building was constructed. This is in addition to a warranty on components of the individual unit, as well as other statutory warranties that apply to all new housing, including condominiums. The warranty furnishes a means by which condominium unit owners may obtain correction of defective conditions that, because of the components involved and the fact that the conditions may exist throughout a large complex, could otherwise result in costly repairs.

Nevertheless, there are several aspects of the common element warranty that are highly problematic, not the least of which is the fact that the three-year period commences upon the first transfer of title to a unit owner. That means that, for all but the very first purchaser of a unit in a condominium complex, the three year warranty is already running at the time of each purchase, and any unit owner purchasing more than three years after the first purchase in the complex takes an ownership interest in the common elements after the statutory warranty has already expired.

The statute does provide that, for common elements not completed at the time of the first sale of a unit, the warranty does not commence until completion of that element or its availability for use by all of the unit owners. This results in the possibility of several different three year periods being applicable within a given condominium, as well as the likelihood that the warranty may have expired for some common elements while remaining viable as to others.

A further complication arises from the fact that condominiums are governed by a council of unit owners, which is the legal entity comprised of all of the individual unit owners. Until a majority of the units in a condominium complex are sold, the council is under the control of the developer. Only after more than fifty percent of the units have been sold do the unit owners themselves take control of the condominium. Accordingly, because the common element warranty runs to the benefit of the council of unit owners, and not to any individual unit owner, the warranty is running during a substantial period of time when the unit owner purchasers have no ability to require that the council undertake an investigation of the condition of the common elements, let alone enforce the provisions of the statutory warranty.

Additionally, while the statute provides for a one-year period after expiration of the warranty in which a claim can be made, it also requires that notice of any defect be given to the developer within the three-year warranty period. As a result, the unit owners need full knowledge and understanding of the condition of the common elements within the three year warranty in order to be able to provide the required notice that is a prerequisite to pursuing a warranty claim.

For all of these reasons, unit owners need to exercise due diligence if they intend to preserve their rights to enforce the common element warranty. A first order of business before the warranty expires should be for the unit owners to undertake an adequate engineering investigation of the common elements that will identify any conditions that are not within accepted industry standards. Such transition studies are necessary in any event so that the unit owners can establish the proper budgets required by law for maintenance and reserves. When done properly, the investigation may also save the unit owners a huge bill for repairs by alerting them to matters for which the developer should be responsible under the warranty.