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Wednesday, December 11, 2013

Condo Association May Violate Consumer Protections Acts

Condo Association May Violate Consumer Protections Acts
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Although they differ in form and substance, many States have enacted Consumer Protection Laws. Their purpose, in the words of the Virginia law, for example, is "to promote fair and ethical standards of dealings between suppliers and the consuming public."

When we analyze these laws, even practicing attorneys consider them as protecting the consuming public from bad acts from merchants - car dealers, grocery stores and even mortgage brokers and lenders.     
However, on April 30, 2012, the Maryland Court of Appeals ruled that even a condominium could be held to violate the Maryland Consumer Protection Act. (MRA Property Management v Armstrong).
The case is complex and goes back many years. Twenty five condominium unit purchasers sued their association and its property manager, claiming that the resale packages each plaintiff received violated the Consumer Protection Act because the budgets spelled out in those packages "had the capacity, tendency and effect of misleading" the potential purchasers."

The Plaintiffs brought the lawsuit when their association imposed a special assessment to pay for water damage to the buildings. The Plaintiffs alleged, among thirteen counts, that even though the budget in the resale package they received reflected that repair expenses were declining, the association and management knew - as far back as 1996 - the extent of that damage.

In the majority of states, if you plan to buy a condominium unit from a current owner (not the developer) your seller (and the association) is required to provide you with a package of information, called a "resale certificate". This would include, for example, the association’s legal documents, insurance information, and an updated budget which contains the income and expense of the association for the coming year, a statement of how much money in held in reserves, and in some jurisdictions, a statement of any planned expenditures and assessments.

The trial judge found for the Plaintiffs, issued a million dollar judgment against the defendants, basing the ruling that the association and management violated the Maryland Consumer Protection Act.

The Maryland High Court issued a 34 page opinion, which can be instructive to condo owners, managers as well as attorneys. The court reaffirmed an earlier decision that there "simply does not exist contractual privity between the condo association (called ‘council of unit owners in Maryland) and the buyer of a unit." The buyer has a contract to purchase a unit from a unit owner, not from the association.

However, the court went on to state that the association does have a duty - imposed by the Maryland condominium act - to provide buyers with the "resale certificate". One of the items required to be disclosed is "the current operating budget of the condominium including details concerned the reserve fund for repairs and replacement and its intended use, or a statement that there is no reserve fund."

And the Consumer Protection Act prohibits "false, ...misleading oral or written statement... which has the capacity, tendency, or effect of deceiving or misleading consumers..."

Why is the association and the manager considered a "supplier"? According to the opinion, the statutory obligation under the condo act "injects (the manager and) the association into the sales transaction as central participants because where they to have failed to provide these materials, the contract for sale would not have been enforceable." In the words of the court, both the manager and the association are "sufficiently involved" in the sale.

The Court sent the case back to the trial judge. Having determined that the consumer protection act could apply, the lower court now has to decide if the statements contained in the resale package were, in fact, deceptive. Unless the case is settled, that’s yet another round in a court of law.

The resale certificate is an important document, and unfortunately is not always taken seriously by either boards of directors or their management company. The laws in each of the three jurisdictions differ slightly as to what must be disclosed.

For example, In Maryland, the buyer must receive the package no later than 15 days before closing, and has the right to cancel within 7 days of receipt. In the District, the buyer must be provided the package 10 days after the contract is signed, and has 3 days to cancel. In Virginia, the package must be given to the buyer within 14 days after a contract is signed. If the package is hand-delivered or emailed, the contract must be cancelled within 3 days from receipt. However, if it is mailed, the rescission right is extended to 6 days.

If the resale package is not complete, and does not comply with applicable state law, a potential buyer can walk away from a sales contract, and get a full refund of the earnest money deposit. And in today’s economy, where buyers are having second thoughts about buying real estate, it’s easy to back away from a contract if the resale certificate is not complete.

But more importantly, it also has to be accurate. The laws require that the association - not the property manager - provide the certificate. Accordingly, while management should review the form at least once a year, it should be signed only by a board member.

We are a litigious society. Make sure your resale certificate complies with your state law and that it is absolutely accurate.

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