Maryland Condo Law Blog
An online resource for condominium and homeowner associations and their members, and for developers, builders, contractors, architects, engineers and others in the building industry.
FHA Issues Waiver On Leasing Restrictions
Condominiums have previously been disqualified from FHA financing as a result of leasing restrictions contained in the community’s governing documents. FHA regulations have provided that a mortgatge is not eligible for FHA insurance if the mortgaged property is subject to legal restrictions on conveyance, which includes a restrtiction on leasing found in many condominium declarations or by-laws. 24 CFR 203.41(a)(3). The intent is to promote housing opportunities without undue restrictions. Condominium governing documents often permit leasing of units, but prohibit short term leases of less than six months. Such provisions, which are intended to protect marketability and stability, have run afoul of the FHA requirement that there be no legal restriction on conveyance.
Recognizing that restrictions on leasing are common in condominium communities, and are intended to promote stable property values, on March 18, 2011, the FHA issued a waiver. The waiver, which runs for a period of one year, removes “lease” from the definition of conveyance contained in the regulation. Accordingly, mortgages on condominiums with lease restrictions will qualify for FHA financing until March 18, 2012. The following requirements are applicable:
All leases must be in writing and subject to the declaration and by-laws of the condominium project.
The condominium association may request and receive a copy of the sublease or rental agreement.
The condominium association may not require that a prospective tenant be approved by the condominium association and/or its agent(s), including, but not limited to, meeting creditworthy standards.
The condominium association may request the name(s) of all tenants, including the tenant’s family members who will occupy the unit.
Unit owners are prohibited from leasing their units for an initial period of less than 30 days.
The condominium association may establish a maximum allowable lease term, e.g., six months, twelve months, etc.
The condominium association may establish a maximum number of rental units within the project; however, the percentage of rental units may not exceed the current FHA condominium project owner-occupancy requirement. (The FHA requires that at least 50% of units be owner-occupied).
Maryland General Assembly Again Considers Limited Relief For Unpaid Assessments In Foreclosure Actions
Associations continue to suffer from an epidemic of unpaid assessments. Such delinquent owners are often also behind in their mortgage payments, which can lead to the lender foreclosing. Once the lender forecloses and takes title, it becomes responsible for assessments going forward, but not for past due assessments. As in last year’s session, the legislature is again considering a means of providing some relief to associations in these circumstances. The Residential Association Sustainability Act of 2011 is pending as Senate Bill 946 and House Bill 1246. It would provide that, in the case of a foreclosure on a mortgage or deed of trust on a condominium unit, the portion of a lien on the condominium unit that represents up to six months of specified unpaid assessments, including specified fees and costs, has priority over a first mortgage or deed of trust under specified circumstances. Accordingly, if the condominium has obtained a lien on the unit for unpaid assessments, six months of those assessments would constitute a priority over the mortgage or deed of trust. In other words, six months of assessment would be paid first out of a foreclosure sale before payment of the mortgage debt. read more…
Associations May Have The Means To Force Lenders To Act With Regard to Delinquent Units
When a lender fails to move forward with foreclosure on a delinquint unit, the association can be left with both a vacant property and no means to collect its assessements. However, the law may give condominiums and homeowner associations a way to fight back against lenders that have liens on delinquent properties in their communities, but refuse to take title and assume responsibility for unit owner oblgations to the association. A “quiet title” action may be the answer.
Condominium and homeowner associations continue to be impacted by the recession and depressed real estate values. Unit owners who are unable to keep up with their mortgage payments often become delinquent in their fee assessment payments as well. This, of course, damages the association, whose ability to operate is entirely dependent upon timely payment of assessments by all unit owners. And even when an association pursues all of it available statutory remedies, including placing a lien on the unit, the properties are usually subject to a mortgages, home equity lines, and other secured loans from banks and lending institutions that have first priority. This prevents the association from foreclosing and taking ownership for purposes of selling the unit. But a further complication arises when the lender holding the superior lien fails to move forward with it own foreclosure on such properties. read more…
Title 11 Implied Warranties On Condominium Units
Section 11-131 of the Maryland Condominium Act provides significant warranty protections to the purchasers for new condominium units. Section 11-131 (a) codified the ruling in Starfish, and established that new home warranties under Section 10-203 “apply to all sales by developers” of condominiums, and that “a newly constructed private dwelling unit means a newly constructed or newly converted condominium unit and its appurtenant undivided fee simple interest in the common areas.” Specific warranties are applicable to certain specified components of both individual units and the common elements, and they are the obligation of the condominium’s developer.
Section 11-131(c) provides “an implied warranty on an individual unit from a developer to a unit owner” that is expressly in addition to the warranties provided by Section 10-203. This addition implied warranty is limited to specifically identified components, commences with the transfer of title to that particular unit, and extends for a period of one year. The warranty makes the developer “responsible for correcting any defects in materials or workmanship in the construction of walls, ceilings, floors, and heating and air conditioning systems in the unit,” and further warrants that “the heating and air conditioning systems have been installed in accordance with acceptable industry standards.” The stated standards are “[t]hat the heating system is warranted to maintain a 70°F temperature inside” and “[t]hat the air conditioning system is warranted to maintain a 78°F temperature inside” when the outdoor temperature and winds are “at design conditions established by the Energy Conservation Standards Act … or those established by the political subdivision” in which the condominium is located.
Montgomery County Jury Awards Construction Defect Damages and Substantial Attorney’s Fees
I recently tried a construction defect case in which I was able to secure a significant jury award on behalf of the owners of a townhome in Montgomery County in a claim involving faulty construction and unfair and deceptive trade practices under the Maryland Consumer Protection Act. I represented Subhash and Rita Dhawan in a suit against the builder of their home, Churchill Group at Maxwell Square, Inc. The suit alleged construction defects discovered several years after the purchase, and was based on claims of negligence, breach of contract, and violations of the Maryland Consumer Protection Act (CPA). They were awarded more than $400,000 in damages which included expert consultant costs and more than $300,000 in legal fees. read more…
Implied Warranties On All New Home Sales Including Condominiums
Pursuant to Md. Real Prop. Code Title 10, certain implied warranties are applicable to the sale of every newly constructed home in Maryland. These warranties are applicable to all “improvements,” which are defined as “every newly constructed private dwelling unit, and fixture and structure which is made part of a newly constructed private dwelling unit at the time of its construction.” Section 10-201(b). They are enforceable against a “vendor,” defined as “any person engaged in the business of erecting or otherwise creating an improvement on realty, or to whom a completed improvement has been granted for resale in the course of his business.” Section 10-201(e). The broadly worded implied warranties provide that the improvement is: (1) Free from faulty materials; (2) constructed according to sound engineering standards; (3) constructed in a workmanlike manner; and (4) fit for habitation. read more…
Warranties and Rights of Action
For most individuals, the purchase of a new house or condominium unit is the largest investment that they will have ever made. Moreover, that investment is also a home and place of refuge and relaxation that they share with family and friends. Few things, therefore, have the potential to be more disturbing than the discovery of construction defect issues that diminish both the enjoyment of the home and its value. For that reason, new home purchasers in Maryland are afforded various protections in the form of statutory warranties. They also may receive specific warranties from the seller as part of their purchase agreement. Additionally, homebuyers may have other statutory and common law rights of action that arise as a result of construction deficiencies. However, none of these possible remedies provides a certain or easy path to relief. All such claims are governed by strict statutes of limitations that require considerable diligence or order to preserve the intended benefits. Pursuing claims is also an expensive and often protracted process that, in addition to the retention of capable legal counsel, also requires the involvement of building consultants who can identify defects, recommend repairs, and offer opinion evidence to support the claim.
In response to various comments and questions some of you have been kind enough to share on this blog, I am going to be authoring a series of posts that address some of these issues, as they relate to condominium and new home warranties, homeowner association warranties, seller’s warranties, contract claims, and common law causes of action. These matters will be addressed from the standpoint of both associations and individual owners. In the meantime, if there are any issues along these lines that are of particular interest, please feel free to send a comment.
Fannie Mae and Freddie Mac Financing
Like the FHA, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) have specific requirements when providing financing for condominium sales or refinancing. Fannie Mae involves the FHA, because it was established for the purpose of purchasing FHA loans from loan originators to provide liquidity for government-insured loans. Freddie Mac is a federally charted corporation established to purchase mortgages in the secondary market with the intent to stabilize the nation’s residential markets and expand home ownership. Each have restrictive policies as to condominium projects that qualify for financing that must be considered in conjunction with the applicable FHA requirements. read more…
New FHA Regulations Effect Condominium Unit Sales and Financing
Like all housing, the sales of condominiums have been significantly impacted by the state of the housing market. Also effecting sales are new rules and regulations applicable to government backed loans, as well as those adopted by conventional lenders. In particular, new requirements for FHA financing directly concern condominium sales. As of February 1, 2010, the FHA now requires that an entire condominium project be FHA approved, discontinuing the prior “spot approval” for the sale individual units. Significantly, these regulations preclude FHA financing where 15% or more of the units are delinquent in paying fees and assessments. Additionally, only 50% of the units in a project may receive FHA financing, and that ratio will be reduced to 30% after 2010. read more…
LEGISLATURE PASSES NEW WARRANTY PROVISIONS BUT NO FORECLOSURE RELIEF
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. read more…
ABOUT
The Maryland Condo Law Blog is written by Raymond Daniel Burke. One of the region's top construction and real estate development lawyers, Ray has more than 35 years of experience in matters relating to condominium and other multi-use development matters.