CONDOMINIUM RESALE CERTIFICATES -- USE CARE OR BEWARE!
by Thomas C. Schild and Craig F. Wilson, Jr.
To aid condominium purchasers in making informed decisions about the rights, responsibilities and risks of condominium ownership, the condominium statutes in Maryland, Virginia, and the District of Columbia require the condominium association, upon written request, to issue a resale certificate disclosing information about the financial, physical, and, legal condition of the condominium.
In Maryland and Virginia, the contract for the resale of a condominium unit must inform the purchasers of their right to obtain a resale disclosure certificate.
The condominium acts in the three Washington-area jurisdictions require disclosure regarding the condominium budget and reserves, assessments, covenant violations, insurance coverage, and pending litigation among other things. In Maryland, statements regarding health or building code violations and a description of recreational facilities are also required. And, in Virginia, information on occupancy limitations and master homeowner associations must be disclosed.
The specific disclosure requirements vary and are set forth in Section 11-135 of the Maryland Condominium Act, Section 55-79.97 of the Virginia Condominium Act and Section 45-1871 of the District of Columbia Condominium Act. The certificate must also be accompanied by the association's declaration, bylaws, and rules.
In Maryland, the certificate must be completed within twenty days. It must be done within fourteen days in Virginia and within ten days in the District of Columbia.
In completing the resale certificate, the condominium board of directors and manager should be careful to complete it fully and accurately. By failing to disclose to the purchasers any assessments due or covenant violation by the seller, for instance, the condominium would likely be prevented from taking action on these items against the new owner. In addition, failure to provide complete and accurate information regarding the condominium's financial or legal liabilities and physical condition could prompt legal claims against the condominium and its manager. Although the condominium statutes in Maryland, Virginia and the District of Columbia do not give purchasers a legal remedy against the condominium for providing an inaccurate resale certificate, the Maryland Court of Appeals recently ruled that a Maryland condominium association may be liable to the purchaser of a condominium based upon false or misleading information in a resale certificate prepared by the condominium.
In Swinson v. Lords Landing Village Condominium, the owner of a condominium unit contended she should not have to pay a special assessment for the cost of wood and painting repairs to common elements because the Condominium allegedly furnished false and misleading information in the resale certificate regarding such repairs.
The resale certificate provided by the Condominium stated that the Condominium had no knowledge of any violation of the health or building code with respect to the common elements. When the resale certificate was issued, the condominium had been cited by Prince George's County for alleged violation of the county housing code in connection with the need to replace rotted and exposed wood.
The resale certificate also disclosed the existence of litigation against the condominium developer concerning common area defects, including deteriorating wood and water penetration problems. The certificate identified the case number and invited prospective purchasers to review the court file. No information was provided about the then-current status of the litigation.
Although the trial court ruled that the resale certificate provision of the Maryland Condominium Act imposed no liability on the condominium for providing erroneous or incomplete information, the Court of Appeals concluded that the condominium did have potential common law tort liability to a prospective purchaser for fraudulent or negligent misrepresentations. The court reasoned that the Condominium had a statutory duty to a unit owner to provide resale information for the owner to transmit to a prospective purchaser and, therefore, the duty of care in furnishing accurate and non-misleading information extended to the prospective purchaser as well.
However, the appeals court concluded that the information in the resale certificate was not false or misleading. With regard to the pending housing code violation, the court found that the required resale certificate disclosures related only to known violation of the health or building codes and not to violations of the housing code. The court noted the distinction that building code specified construction requirements while housing codes principally concerned the maintenance and habitability of residential structures.
With regard to the pending litigation against the developer, the court found that disclosure of the existence of pending litigation-not the status of the litigation-is all that is required to be disclosed.
Therefore, although the court found a condominium has potential liability in making resale certificate disclosures, which are false or misleading, the court concluded that the Condominium had made no fraudulent or negligent misrepresentation in the resale certificate in this instance.
In an earlier unreported case, the Court of Special Appeals reached a similar conclusion and also recognized potential liability under the Maryland Consumer Protection Act. In this case, also involving resale disclosure concerning building code violations and pending litigation, the Court's opinion indicated that the issue of who knew what and when was a factual matter to be decided by a jury.
These Court rulings illustrate the potential liability of a condominium association and its manager where resale certificates allegedly contain false or misleading information.
The accurate completion of a resale disclosure poses some practical difficulties for boards and managers. For example:
- How would a board of directors or management company know, for certain, that there are health or building code violations, particularly if there hasn't been a citation issued by a regulatory body?
- How is a board of directors or management company supposed to know for certain about any litigation that my be filed but not served?
- How much detail must be disclosed about litigation relating to collection actions for delinquencies or against homeowners for rules violations?
The reality is that, even if you do not know all, your disclosure must still be accurate to the extent that you have actual knowledge and are not misleading. You may not know at any given point in time whether there are any health or building code violations or whether any lawsuits have been filed against the Council of Unit Owners. There is language that can be used to mitigate liability exposure, such as "There may from time to time be violations of health or building codes, but the Council has not received a citations from any governmental or regulatory body and, therefore, has no knowledge of any specific violations as of this date." or "The Council may, from time to time, be involved in litigation with unit owners for unpaid assessments…" Ultimately, however, the Council of Unit Owners (board of directors) and management agent are exposed to some degree of liability if the information is misleading or incorrect.
In a recent situation, a board of directors received a draft of a reserve study performed by an engineering company. The report indicated that there were a number of observed violations of building codes. Should these be disclosed even though no governmental citation has been issued? Yes, because you now have knowledge. They should be reported until such time as the problems have been corrected.
In another case, a management agent received the quarterly report from the sprinkler maintenance/inspection company indicating that "the following maintenance needs and code violations have been observed." Should these be disclosed? Maybe. Management should promptly communicate with the sprinkler company to determine the exact nature of the problems and to identify which, if any, problems are code violations. These must then be disclosed until such time as they have been corrected.
To minimize liability, a condominium should consider the following. First, the certificate should be completed and provided to the requestor by the specified statutory deadline. Additionally, the association's responses should be thorough and accurate while providing only the required information. Also, each response given should be prepared as of the date of issuance. Pre-prepared responses may become inaccurate or outdated and should be reviewed carefully to make sure that they are still accurate when the resale certificate is completed. The board of directors should periodically review the information being disclosed to insure its accuracy.
If there is a question about whether certain information must be disclosed, it is better to err on the side of disclosure. Finally, if in doubt, the association should consult with its attorney
Reprinted with permission from Quorum Magazine, March 2001, Washington Metropolitan Chapter of the Community Associations Institute.
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