Condo associations can be liable under consumer protection law, Md. court rules

May 18, 2012

The District, Maryland and Virginia all have consumer protection laws on the books, though they differ in form and substance. 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.”

Many would assume the type of bad actors falling under the jurisdiction of that law to be car dealers, grocery stores and even mortgage brokers and lenders. But condominiums?

Yes, according to the Maryland Court of Appeals, the state’s highest court, which ruled last month (in MRA Property Management v. Armstrong) that even a condominium could be held to violate the Maryland Consumer Protection Act.

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 filed the lawsuit when their association imposed a special assessment to pay for water damage to the buildings. The plaintiffs alleged, among 13 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 all three jurisdictions, if you plan to buy a condominium unit from a current owner (not the developer), your seller and the association are 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 that contains the income and expense of the association for the coming year, a statement of how much money is held in reserves and, in some jurisdictions, a statement of any planned expenditures and assessments.

The trial judge found for the plaintiffs, issued a $1 million judgment against the defendants, ruling that the association and management violated the Consumer Protection Act.

In a 34-page opinion, the Maryland high court ruled that the association has a duty — imposed by the state 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 concerning 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 statements which have “the capacity, tendency, or effect of deceiving or misleading” consumers.

Why are the association and the manager considered a supplier, even though they weren’t the seller? 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 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 but 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 seven days of receipt. In the District, the buyer must be provided the package 10 days after the contract is signed and has three 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 e-mailed, the window to cancel the contract is within three days of receipt. However, if it is mailed, the right to rescind is extended to six 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 important, it also has to be accurate. The laws require that the association — not the property manager — provide the certificate. Accordingly, although 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.

Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining legal counsel. For a free copy of the booklet “A Guide to Settlement on Your New Home,” send a self-addressed stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036.

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