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.

            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.

            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.

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.

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.

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.