In this case, 23 purchasers of units at Tomes Landing Condominium in Cecil County sued the Condominium Council and the management company for alleged misleading resale certificates.  The certificates stated that there were no know violations of the building or health codes.  The subject units were purchased between January 5, 2000 and October 8, 2004.  In December 2004, the owners were notified of a special assessment to fund a $3,921,838 repair project to correct building defects.  An August 1999 Replacement Reserve Study that identified problems with the condominium’s retaining walls had not been disclosed to the owners prior to the purchase of their units.  The suit included a claim that this failure to disclose constituted an unfair and deceptive trade practice under the Consumer Protection Act.  The trial court found that the resale certificate information, as a matter of law, had a tendency to mislead consumers in violation of the Act, and entered summary judgment in favor of the purchasers.  Rather than proceed to trial on the issue of damages, the parties stipulated to a total of $1 million in damages, and the condominium and managing agent took an appeal.

The Court of Appeals granted certiorari before the Court of  Special Appeals ruled, and held that, while the entry of summary judgment was improper, the unit owners had produced sufficient evidence that, if accepted by the trier of fact, “was sufficient to establish that [the council and management] had utterly failed to comply with the disclosure obligation imposed upon them by Section 11-135(a)(4)(x).”  The failure to meet that disclosure obligation tends to deceive the purchaser, and amounts to an unfair and deceptive trade practice under the Consumer Protection Act.

In reaching is decision on the application of the Consumer Protection Act, the Court cited and quoted from a publication of mine, Raymond Daniel Burke, Kathleen M. Elmore and Cynthia Hitt Kent, Developing and Managing Condominium and Homeowners’ Associations, National Business Institute (2007), in which I wrote:  ”Md. Com. Law Code Ann. Sec. 13-408(a) establishes a private cause of action for damages sustained as a result of an act prohibited by the Consumer Protection Act.  The Act is specifically applicable to ‘consumer realty,’ and, accordingly, representations made in connection with the sale of real property may constitute unfair and deceptive trade practices where they are misleading.”

 The complaint filed on behalf of the unit owner included a cause of action under the Maryland Consumer Protection Act, which provides for the award of attorney’s fees.  The Court accepted our argument that, because the damages that can be awarded under the Consumer Protection Act could not be awarded in arbitration, the Consumer Protection Act claim was not subject to the arbitration agreement, and can proceed in Court before a jury.

In the case of Avalon Court Six, in addition to the fact that the council of unit owners had the duty to maintain the common elements, its board of directors had the exclusive right to bring a suit relating to the common elements.  Suit was filed against the developer in August 2006.   However, it was held that the claim was not filed within the applicable statute of limitations.  The Circuit Court for Baltimore County found that the council’s board of directors was on notice of the existence of defects in the common elements, at the latest, in June 2002 when it received responses to a memorandum sent to all owners by its property manager requesting information concerning water leaks.  As a result, the Circuit Court held that the general three-year period of limitations expired in June 2005.  It was found, in fact, that the board did not retain an engineering firm to undertake a proper investigation of leakage until September 2005.  The report of that investigation was received in December 2005.

Unable to recover from the developer or its insurer, in order to effectuate the necessary repairs, increased assessments and special assessments were imposed on the unit owners.  In January 2008, a group of individual unit owners filed suit against the council for the board’s failure to maintain the common elements by pursuing a timely claim against the developer.  The unit owners claimed damages in the form of the increased and special assessments.  The condominium’s insurer provided a defense to this action through the board of director’s liability policy.  The Circuit Court for Baltimore County entered summary judgment in favor of the council, finding that the individual owners had no right of action against the council, and/or that suit was filed too late, since the owner knew of the defects in 2002.  I was then retained to pursue an appeal from this ruling.

In an opinion filed on August 17, 2011 in Case No. 0485, Sept. Term 2009, the Court of Special Appeals reversed, expressly holding that the individual unit owners have a right of action against the council of unit owners for the board’s failure to properly execute its duty to pursue a timely claim against the developer for defects in the common elements.  It also found that their action had been timely filed.  This is the first Maryland appellate decision recognizing the right of individual condominium unit owners to file suit where the board of directors has failed to pursue a timely claim relating to defects in the common elements.

Section 11-131(c) of the Condominium Act provides “an implied warranty on an individual unit from a developer to a unit owner” that is expressly in addition to the warranties provided by Section 10-203. Indeed, the Court of Appeals has held that the Title 10 warranties and the condominium warranties under Title 11 run concurrently, and aggrieved purchasers may proceed under either or both. This additional implied warranty is limited to specifically identified components, commences with the transfer of title to that particular unit, and extends for a period of one year. The warranty makes the developer “responsible for correcting any defects in materials or workmanship in the construction of walls, ceilings, floors, and heating and air conditioning systems in the unit,” and further warrants that “the heating and air conditioning systems have been installed in accordance with acceptable industry standards.” The stated standards are “[t]hat the heating system is warranted to maintain a 70°F temperature inside” and “[t]hat the air conditioning system is warranted to maintain a 78°F temperature inside” when the outdoor temperature and winds are “at design conditions established by the Energy Conservation Standards Act … or those established by the political subdivision” in which the condominium is located. This establishes what is, essentially, a strict liability standard; i.e., if the existence of a defect is proven, the developer is responsible for damages consisting of the cost of correction.

Section 11-131(d) provides for “an implied warranty on the common elements from developer to the council of unit owners,” that is also expressly in addition to the implied warranties provided in Section 10-203. Like the warranty on the units, this common element warranty is also applicable only to specific components, consisting of “the roof, foundation, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural components.” The reference to “external and supporting walls” encompasses not only the wall framing members, but cladding systems as well. The inclusion of “structural components” broadens the application of the warranty to any common element component that is part of the building’s structure and framing, as well as community amenities that have a structural capacity, such as paving, pools, sport courts, curbs, steps and sidewalks, and drainage areas. Arguably, the specification of these components as being subject to the common element warranty requires that such components be defined as part of the common elements in any condominium regime. Otherwise, the full scope of the Legislature’s intent in providing the warranty could be negated by excluding some of these components from inclusion in the common elements. Indeed, the statute presumes that these specified components will be among the common element in every condominium.

The common element warranty provides “that the developer is responsible for correcting any defect in materials or workmanship, and that the specified common elements are within acceptable industry standards in effect when the building was constructed.” Like the warranty on the unit, this is a strict liability standard that applies once a defect is demonstrated.

The common element warranty “commences with the first transfer of title to a unit owner.” As to any common element “not completed at the first transfer of title,” the warranty commences “with the completion of that element or with its availability for use by all unit owners, whichever occurs later.” The warranty generally extends for a period of three years from the date of commencement. However, this provision gave rise to problems in enforcing the warranty in circumstances where a majority of the units, and, therefore, a majority of the condominium’s board of directors, remain in the control of the developer for an extended period of time. As a result, during 2010 session, the General Assembly amended the statute to provide that the common element warranty run for a period of 3 years, or “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, whichever occurs later.”

Significantly, a suit for enforcement of the common element warranty may only be brought by the council of unit owners, and is not actionable by an individual or group of individual unit owners. Nevertheless, if the council of unit owners is controlled by the developer, and the time for filing a claim may expire, it is arguable that unit owners may be entitled to preserve the claim by acting on behalf of themselves and all unit owners.

Both the warranty on the units and the common element warranty are subject to a prerequisite notice requirement that is not applicable to the implied warranties under Section 10-203. In order to be enforced, the Condominium Act warranties require that notice of any defect must be given to the developer “within the warranty period.” Suit for enforcement must be brought within one year of the end of the warranty period. Accordingly, as to the warranty on the unit, this creates a maximum period of two years from the date of possession for bringing a claim. As to the common element warranty, the maximum period is four years in the event that the three-year warranty is applicable, or, if the two-year warranty is applicable, a maximum period of two years from the date that the independent unit owner board of directors is elected.

It is important to note that the Section 10-203 implied warranties, as they apply to condominiums, and the Section 11-131 implied warranties have separate and distinct periods of limitations. In Antigua Condominium Ass’n. v. Melba Investors Atlantic, Inc., the Court of Appeals held that the Title 10 warranties applied to newly constructed condominiums independent of Title 11, and therefore, limitations for condominium claims under Section 10-203 are governed by the two year period of limitations established in Section 10-204.

Unlike the Title 10 warranties, the Title 11 condominium warranties “may not be excluded or modified” by any action or written document. This recognizes that a condominium purchaser is buying an interest in the common elements of a building, or perhaps a number of buildings, and is not have the same ability as a purchaser of an individual home to inspect the entire premises. Therefore, the condominium warranties apply regardless of any agreement to exclude them or modify the content. However, the Title 11 condominium warranties are expressly limited so as not to apply “to any defects caused through the abuse or failure to perform maintenance by a unit owner or the council of unit owners,” and are also inapplicable to non-residential condominium regimes.

Under current law, a purchaser of a new condominium unit has an absolute right to rescind their sales contract within 15 days after receiving the documents and information required to be provided to all new condominium purchasers.  The purchaser is not required to state any reasons for the rescission.  Section 11-126(b) contains the long list of materials that must be furnished to a new condominium purchaser, which are normally part of the Public Offering Statement for the condominium.  Under Section 11-126(d), the material provided cannot be amended “without the approval of the purchaser if the amendment would affect materially the rights of purchaser.  There is are exceptions for amendments required by a governmental authority or public utility, or “if the amendment is made as result of actions beyond the control of the vendor or in the ordinary course of affairs of the council of unit owners.”   In the event of an amendment, the purchaser has a right to rescind the contract with 5 days of receipt of the amendment.

Under the new law, purchaser maintain their right to rescind after receiving the required documents, and may still do so without stating a reason.  However, a purchaser seeking to rescind after an amendment of the documents must state reasons in writing showing that (1) that they have approval right; that is, that the amendment is not within one of the exceptions that do not require purchaser approval; and (2) that “the amendment affects materially and adversely the rights of the purchaser.

Recognizing that restrictions on leasing are common in condominium communities, and are intended to promote stable property values, on March 18, 2011, the FHA issued a waiver.  The waiver, which runs for a period of one year, removes “lease” from the definition of conveyance contained in the regulation.  Accordingly, mortgages on condominiums with lease restrictions will qualify for FHA financing until March 18, 2012.  The following requirements are applicable:

     All leases must be in writing and subject to the declaration and by-laws of the condominium project.

     The condominium association may request and receive a copy of the sublease or rental agreement.

     The condominium association may not require that a prospective tenant be approved by the condominium association and/or its agent(s), including, but not limited to, meeting creditworthy standards.

     The condominium association may request the name(s) of all tenants, including the tenant’s family members who will occupy the unit.

     Unit owners are prohibited from leasing their units for an initial period of less than 30 days.

     The condominium association may establish a maximum allowable lease term, e.g., six months, twelve months, etc.

     The condominium association may establish a maximum number of rental units within the project; however, the percentage of rental units may not exceed the current FHA condominium project owner-occupancy requirement.  (The FHA requires that at least 50% of units be owner-occupied).

Section 11-131(c) provides “an implied warranty on an individual unit from a developer to a unit owner” that is expressly in addition to the warranties provided by Section 10-203. This addition implied warranty is limited to specifically identified components, commences with the transfer of title to that particular unit, and extends for a period of one year. The warranty makes the developer “responsible for correcting any defects in materials or workmanship in the construction of walls, ceilings, floors, and heating and air conditioning systems in the unit,” and further warrants that “the heating and air conditioning systems have been installed in accordance with acceptable industry standards.” The stated standards are “[t]hat the heating system is warranted to maintain a 70°F temperature inside” and “[t]hat the air conditioning system is warranted to maintain a 78°F temperature inside” when the outdoor temperature and winds are “at design conditions established by the Energy Conservation Standards Act … or those established by the political subdivision” in which the condominium is located.