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Maryland Court Decisions Bring Uncertainty To Resale Disclosure Requirements

The interpretation of condominium resale disclosure requirements remains unclear as a result of certain Maryland court decisions and the Maryland General Assembly’s failure to provide clarification  during the 2013 Session.  Those disclosure requirements are intended to provide prospective condominium purchasers with sufficient information about potential expenses so as to permit them to make an informed purchase decision.  Uncertainty arose when the Maryland Court of Appeals, in a footnote concerning an issue not even before the Court, offered the opinion that the required disclosure of known code violations, at the time of resale of a unit, under Section 11-135 of the Maryland Condominium Act, refers only to “charged violations.”  While this observation was offered in dicta, and is not binding law, it suggested that knowledge of building or health code violations, that ultimately could lead to expensive repairs, need not be disclosed to a would-be purchaser unless the condition had been formally cited by the local code authority.  During the 2013 session, legislation was considered that would have touched on this issue by requiring disclosure of “potential” special assessments, but the proposed new law was never enacted.  Subsequently, in at least one unreported opinion, the Maryland Court of Special Appeals relied on the Court of Appeals statement to hold that knowledge of a violation requires “notice or citation from an official enforcement agency.”  While the unreported opinion is also not binding law, the two decisions have clearly suggested a limited disclosure requirement that may not provide the level of information intended by the statute.

As condominium boards and property managers should well know, Section 11-135 of the Maryland Condominium Act imposes a duty on councils of unit owners to provide unit purchasers with a resale certificate whenever a unit is being re-sold.   These include the disclosure of fees payable, approved capital expenditures, balance sheets, and a detailed operating budget showing any reserve fund for maintenance and reserves.  It also requires “[a] statement as to whether the council of unit owners has knowledge of any violation of the health or building codes with respect to the unit, the limited common elements assigned to the unit, or any other portion of the condominium.”  All of this is intended to give potential buyers a reasonable understanding of the condition of the common elements, and the maintenance, repair and replacement costs that they may incur if they purchase a unit.  It recognizes that purchaser of a condominium unit, unlike the buyer of an individual home,  purchases not only a unit, but an undivided percentage interest in the common elements, and cannot be expected to undertake an inspection of all of those building components.  Accordingly, where condominium councils have had information about building conditions that require correction, such as in transition studies and engineering reports, the best course has been to disclose that information to potential purchasers to avoid a claim that they withheld material facts relevant to an informed purchase decision.

Then along came the Maryland Court of Appeals decision in MRA Property Management, Inc. v. Armstrong,  426 Md. 83, 43 A. 3d 397 (2012).   While the issue was not actually before the Court, it, nevertheless, took the unusual step of considering the question of what constitutes knowledge of a code violation so as to require disclosure.  In a footnote, the Court opined that the disclosure requirement involves only “charged violations;” that is, only violations as to which a formal violation notice has been issued by the code authority.  It can certainly be argued that “knowledge” of a code violation includes knowing that a deviation from a code requirement exists, such as in the form of an engineer’s report, and that such information is highly relevant to a consideration of what maintenance and repair costs may confront the unit purchaser.  However, the Court’s voluntary discussion of this issue, while only dicta, certainly indicates the direction and narrow reading of the statute the Court may take if the issue were to be placed squarely before it.

The Court in the MRA case was primarily concerned with whether a misleading resale certificate could provide the basis for a claimed violation of the Maryland Consumer Protection Act.  It held that the statutory duty to provide disclosure information required under Section 11-135 of the Condominium Act “sufficiently implicated [the council and the property manager] in the entire transaction so as to impose liability under the Consumer Protection Act.”  Specifically with regard to the disclosure  code violations, the Court was clear in pointing at that the issue as not part of the basis on which judgment had been entered in the trial court, and, therefore, was not at issue on appeal.  In fact, the Court expressly noted that the claimants had abandoned the issue of known but uncharged code violations in the lower court.  Despite this, the Court went on to declare what it would rule if the issue were before, concluding that “it is knowledge of of a charged violation thereof, rather than the conduct underlying the violation, that requires disclosure under Section 11-135(a)(4)(x).  Because they were never issued a notice of any such violations, MRA and the Association could not have violated Section 11-135(a)(4)(x).”

In support of this conclusion, the Court cited its prior decision in Swinson v. Lords Landing Village Condominium, 360 Md. 462, 758 A. 2d 1008 (2000).  In that case, the buyer claimed that the condominium had improperly failed to disclose violations of the Prince George’s County Housing Code that had been issued by the County.  The Court held that, because the statute referred only to disclosure of violations of the health and building code, and not housing code violations, a resale certificate is not required to disclose housing code violations.  That case, however, did not address the issue of whether knowledge of a health or building code violation required disclosure in the absence of a violation notice having been issued, and does not directly support the conclusion reached in the MRA case footnote.

The MRA decision did expressly note that, at oral argument, counsel for the claimants “conceded that a condominium association’s omission of conditions amounting to a potential, but not charged, building code violation would not violate the Condominium Act.  The quoted language from the oral argument demonstrates that counsel at least conceded that, in the absence of a violation notice having been issued, the condominium could “technically comply” with statute by stating that there were no “known” code violations.  All of this, however, seems to miss the point.  The resale disclosure provisions are intended to provide condominium unit purchasers with meaningful information with regard to the expenses that can reasonably expect to face if they complete the purchase.  Knowledge that code violations exist, through an engineering report or otherwise, regardless of whether a citation has been issued, could be highly relevant to determining what maintenance costs the unit owners can expect in the coming years.  In the MRA case, there was evidence that the council knew of building leakage and potential repair costs well before the complaining unit owners purchased their units.

The issue of whether knowledge of potential assessments for repairs should be disclosed to potential condominium unit buyers took the form of legislation when House Bill 23 was introduced in the Maryland General Assembly during the 2013 session.  It would have required information concerning “potential” special assessments to be included in resale contracts for both condominium units  and properties subject to  a homeowners association. The proposed legislation would have amended Section 11-135 of the Maryland Condominium Act, as well as Section 11B-106 of the Maryland Homeowners Association Act, to require that any resale contract include a notice of “any potential special assessment that is referenced within the preceding 12 months in” (1) the agenda or minutes of any meeting of the board of directors of a condominium, or the governing body of a homeowners association; or (2) a vote at a meeting of a condominium’s council of unit owners or a homeowners association.  As proposed, the new requirement would apply to a mere reference to the possibility of a special assessment, and not to just actual special assessment proposals or enactments.  However, the the bill never got out of committee by the time the session ended.

Shortly thereafter, the Maryland Court of Special Appeals issued an unreported opinion in the case of Clark v. Zalco Realty, Inc, No. 0277, Sept. Term 2012.  That case concerned claimed misrepresentations in a condominium resale certificate concerning the source and extent of water leakage into the unit.  It was alleged that the council had failed disclose information contained in an engineer’s report, failed to disclose knowledge of past leakage, and failed to reveal that it intended to replace the building’s roof.  The suit included a claim that that the conditions amounted to code violations that were required to be disclosed under Section 11-135 of the Condominium Act.  The Court, relying directly on the non-binding dicta of the Court of Appeals in the MRA case, held that the council must have first received “notice or citation from an official enforcement agency” before it was required to disclose the violation in a resale certificate.  While this opinion, because it was designated as unreported, cannot be cited or serve as binding precedent, it nevertheless reinforces the notion the only code violations that must be disclosed in a resale certificate are those that have been cited by the local code authority.

This begs the question of whether a council of unit owners can withhold information from qualified professionals that identifies the presence of a code violation.  Moreover, if that knowledge includes the need for repairs and potential costs, is it not pertinent information with regard to the accuracy and reliability of the financial disclosures being made?  If the council knows, from, for example, an engineers report, that repairs will ultimately be required to building conditions, including code violations, and also know the costs that will be associated with those repairs, is such knowledge the type of disclosure intended by Section 11-135?  These matters must be carefully considered by condominium councils and their property managers when they develop the content of resale certificates.