A commission appointed by Maryland Gov. Harrry R. Hughes called this week for a tough new state law to regulate homeowners associations.
The Governor's Commission on Condominiums, Coooperatives and Homeowners Associations, directed by Hughes earlier this year to look into problems with such groups, endorsed a wide-ranging draft bill that would require them to make extensive disclosure of association documents to prospective buyers and allow anyone buying a house in a subdivision with such an association five days to change their minds.
Roger D. Winston, chairman of the commission's subcommittee on homeowners associations, said the proposed bill will be submitted to the state legislature when it convenes in January. If passed, Maryland would become one of the first states to regulate homeowners associations.
A number of Maryland residents testified before the commission last summer and complained about the lack of specific laws regulating the creation and operation of homeowners associations. Problems have ranged from home buyers who were surprised to find they were members of a homeowners association after settling on a house, to lawyers and association officers concerned over the "grey" areas of the laws governing associations.
The number of homeowners associations in Maryland has been increasing rapidly over the past several years, particularly in suburban areas around Baltimore and Washington. Winston said that almost every new subdivision in the Maryland suburbs around Washington have had associations, primarily because counties are unwilling to accept maintenance responsibility for roads inside subdivisions, so the developer is required to set up some sort of organization to own and maintain the roads.
For the purpose of the proposed bill, a homeowners association is defined as any scheme or organization that imposes fees or assessments for the privilege of owning a house in a subdivision. Winston said that the commission decided not to include organizations that impose only covenants on homeowners, such as architectural restrictions, because the requirements of the law would be too burdensome to such groups.
While the draft bill would not require homeowners associations to register with the state, as required of condominium associations, it would require disclosure of an association's documents to prospective buyers. The bill also would allow such purchasers five days in which to rescind a sales contract after viewing the documents.
The draft bill calls for requiring that developers make available to prospective buyers a copy of all the organizing documents of the association, including the rules and regulations of the association, a description of any streets, pools, paths, sidewalks, streetlights or other common elements owned, maintained or expected to be bought by the association, and a copy of the association's proposed or actual budget.
The bill would also require that contracts or agreements obligating the association to current and future responsibilities be disclosed, along with a full description of any restrictions imposed by the association on owners of lots such as architectural changes, restrictions on renting, number or use of vehicles, or restrictions on occupancy density.
It would also require that prospective buyers be informed as to when association fees would first be levied and what the procedures would be for collecting unpaid assessments. If any of the disclosure requirements were not met by the time a contract was entered into, the contract would be void.
The bill would establish an "implied" warranty on improvements to the common areas owned by a homeowners association, starting with the day the first lot was sold, and continuing for one year. Such a warranty would cover defects in materials or workmanship but not defects caused through abuse or failure on the part of the homeowner or association to maintain the property.
Homeowners associations would be required, under the proposed law, to carry property insurance on any common area improvements that would cost at least $5,000 to replace. The insurance would have to cover all risks of direct physical loss and liability insurance. If such insurance was not available, the association would be required to notify each association member.
The bill includes a sunshine provision requiring homeowners associations to hold open meetings, except in cases of personnel matters, privacy issues, legal counsel, investigative proceedings concerning possible criminal misconduct or in a case where two-thirds of the board or committee members present vote to close a meeting for some "exceptional reason so compelling as to override the general public policy in favor of open meetings."
A statement of the time, place and purpose of any closed meeting, along with the record of any votes during such meetings, would have to be included in the association minutes.
The bill would require that all associations make its books and records available for examination and copying by any lot owner or mortgage-holder. It would allow associations to impose reasonable charges for copying books and records.
The bill would allow an association to extend to mortgagees or beneficiaries of deeds of trust encumbering the lots the right to approve specified actions of the association, but not if such a requirement for approval would give mortgage-holders control over general administrative affairs of the association.
The proposed bill would require less extensive disclosure of documents for associations of 12 houses or less or in the case of a homeowner offering his home in a subdivision for resale. In those cases, the law would require that prospective buyers be given the name, address and telephone number of the management agent of the homeowners association and that any questions of the prospective buyer be answered.
In the case of resales, the seller would also have to give the prospective buyer a statement as to whether the lot is located within a development, how much monthly dues or assessments imposed by the association had been over the last 12 months and a statement on the seller's knowledge of any unsatisfied judgments or pending law suits against the homeowners association.
The provision for implied warranties would only be applied to homeowners associations created after the effective date of the law, or for developments that had not yet sold 50 percent of the homes that would be in the association. The open meetings and open records requirements would not be applied to associations with fewer than 12 homes.
All the other provisions, including the right of rescision, the requirement for open meetings and books, the rights of secured lenders and the insurance requirements, would be applied to all existing homeowners associations in Maryland.
Under the proposed bill, local jurisdictions would not be allowed to enact additional regulations for homeowners associations, as commission members said they believe the bill provides adequate consumer protections. Winston said, however, that the commission might add a provision to the proposed bill later this month that would allow localities to enact regulations specifically requiring a homeowners association to use dispute resolution before taking cases to court, as Montgomery County now requires for such groups.
Winston said the commission decided against requiring homeowners associations to register with the state because of the workload it would place on the state and because the commission felt that registration requirements would be overly burdensome.
"We felt that going from no regulations to requiring registration would be heavy-handed," said Winston. "Instead, the bill provides fairly substantial consumer protections and we want to see if this will solve the problems. If it doesn't, we might suggest at a later date that homeowners associations be required to register."