Maryland Condo Lawyer Blog » Statutes

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 Nuances and Subtleties of the Three-Year Common Element Warranty

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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