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.

            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.

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.