Maryland Condo Lawyer Blog » Homeowner Associations

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

The Condominium Phenomenon

rburke — Thu, 18 Jun 2009 14:24:23 +0000

It has been nearly 30 years since I first became involved in the representation of a condominium association that was confronted with construction defect issues. That case was litigated for several years, and eventually grew to engulfing a multitude of parties, including developer entities, the general contractor, design professionals, engineers, numerous subcontractors and suppliers, and all of their law firms and insurers. It ultimately resulted in a resolution that allowed the condominium to repair the significant deficiencies in the exterior envelope of their high-rise building. Since that time, condominium construction defect matters have come to constitute the majority of my work. This has resulted from two phenomena: The first has been the explosion of condominium development since the 1980s, with the wide acceptance of the condo as a desired form of housing. The second is the nature of residential construction and its tight profit margins, in which inspection, supervision and coordination of trades are often the first casualties of budget constraints.

In the years since that first construction defect case, I have litigated, and tried many more equally complex matters, and have resolved still more by other means of dispute resolution. Because condominiums are usually large multi-family housing complexes, they are much more like commercial buildings than they are typical housing, and the impact of design and construction issues are multiplied by the sheer size of the project. As a result, the consequences of failure to act diligently and properly have the potential to be enormous and prohibitively expensive.

This blog is devoted to the things that I have learned from these experiences that can benefit condominium owners, homeowner associations, and property managers in dealing with their ownership and maintenance responsibilities, as well as the means by which developers, designers, builders, and contractors can produce residential projects that do not become a source of liability and unhappy customers. I look forward to our discussions.