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Disclosure papers can derail condo sale

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You have just signed a contract to sell your condominium unit. You are excited and happy. Your buyer also seemed to be pleased, but then she decides she wants to cancel the contract. Can she do this once she has signed a binding real estate contract?

There are many things that can derail the sale, such as having a financing contingency and not being able to get a loan, or having an appraisal contingency and the lender’s appraiser low-balls the value of the unit.

There is another way for a buyer to get out of a contract, but it is (or should be) in the control of the seller. When a potential buyer signs a contract to buy a condominium unit, whether in Maryland, Virginia or the District of Columbia, the buyer is entitled to receive what is known as the “resale package.”

There are minor differences in the requirements between the three jurisdictions, but all have the same message: the buyer has a number of days after receiving the package in which to cancel the contract.

What is contained in the package? Again, the state condominium laws differ but all require such disclosures as: a breakdown of how much money the association has in reserve, the most recent financial statement including the association’s current budget, and any judgments or pending lawsuits against the association.

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 contract must be canceled within three days from receipt. However, if it is mailed, the rescission right is extended to six days.

The condominium association is primarily responsible for preparing the documents and information contained in the package. Typically, the association’s property manager compiles everything, but many times, the information is either incomplete or missing. For example, in the District, the package must contain a copy of the condominium instruments. This is a defined term in the D.C. Condominium Act meaning “the declaration, bylaws, plats and plans and any recorded amendments.”

Accordingly, if the package does not contain all three items, this will give a skittish buyer the absolute right to cancel the contract. I recently saw a situation in which a buyer wanted out of the contract. She had received the resale package and her time to cancel had expired. However, she advised the seller that the plats and plans were not included. Although the seller immediately arranged to get those documents to her, this reopened the right to terminate, and the buyer opted to cancel the contract.

It should be noted that a buyer does not need a reason to cancel a contract, as long as he is within the statutory time. It is a true “cooling-off” period.

When you buy a condominium unit, it is important to understand what you are getting involved with. There are a lot of questions to answer: Are there lots of foreclosures in the complex? Does the association have sufficient reserves? And when was the last reserve analysis study done by the association? Is the association planning major expenditures that will require a large special assessment? Is this a mixed commercial/residential complex? If so, how does this affect residential owners?

I found it interesting that although the District requires all condominium instruments to be included, it does not require that the rules and regulations be given to potential buyers. In Virginia, although the rules and regulations and the bylaws are part of the package, there is no requirement that the declaration be included. And in Maryland, the declaration, bylaws, rules and regulations are to be given to the buyer, but not the plats.

Although the association’s property manager is primarily responsible for preparing the resale package, it is important that the board — and the association’s legal counsel — carefully review the package at least once a year. In fact, since all three jurisdictions require that the “association” provide the material, I have consistently recommended that a board member physically review — and sign — each package before it is transmitted to the buyer.

If a seller loses a potential buyer because of a faulty or defective resale package, does the seller have a case against the board and the property manager? To win such a court case, the seller would have to prove that he has incurred financial damages. For example, that would be the case if the original sales contract were for $350,000 and despite diligent efforts on the part of the seller and his real estate agent, the best new contract they could get was only for $300,000 — thus creating a $50,000 loss. In addition, had the original contract gone to settlement, the seller would no longer have had to pay real estate taxes, insurance and mortgage interest. These expenses would also be components of the seller’s loss.

In good market conditions, when sales were hot, the seller would probably be able to get another contract within a short period of time, and thus suffer no financial loss. However, now that the economy is weak — and in many parts of the Washington metropolitan area condo sales are sluggish — I can see such lawsuits being filed if the resale package is flawed.

Benny L. Kass is a Washington lawyer. This column is not legal advice and should not be acted upon without obtaining your own 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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