| DISCLOSURE |  |
| by Stephen M. Marcus, Esq. | |
| Recently a series
of discussions on the Internet, among those involved with community
associations, has brought to light an issue which has perplexed industry
professionals for years. The issue relates to what disclosures should be
made to a new purchaser in a community association and perhaps more
importantly, who should be required to make the disclosures. If one is
purchasing a single-family home in a typical single-family home
subdivision, the problems are easy to resolve. The purchaser obtains a
home inspection and the real estate broker presumably discloses
information which he or she knows or should have known to the purchaser.
The purchaser then precedes with the purchase or backs out of the deal.
Unfortunately, the same steps should not be taken in the purchase of a
condominium unit. Certainly one could have a building inspector inspect
the unit being purchased and certain comfort may be derived from a
satisfactory inspection. However, if you are purchasing in a 500 unit
complex made up of townhouses spread out over 50 acres, the reality is
that each unit owner is responsible for the common areas and facilities
of the entire complex. Therefore, there is little consolation in knowing
that your unit and the roof above it are in good condition if you are
not aware of the condition of the complex as a whole. If major
expenditures are needed for replacements, it is highly unlikely that a
building inspector will discover this in a typical home inspection. In
addition, unless the seller or real estate broker is aware of special
assessments which have been levied, neither is in the position to
disclose information which they do not have.
What has made this issue much more fascinating over the past year has been that courts have continuously found the real estate brokers and sellers in these types of situations not responsible for disclosure. Part of the reasoning, of course, is that a condominium is made up of a few elected volunteer unit owners who are responsible for the operation and management of the association and most other unit owners are not aware of many of the issues facing the association. The conclusion of the courts, therefore, appears to be quite reasonable in that one could not possibly disclose that which he or she does not know. However, feeling wronged, the innocent purchaser has started bringing actions against the volunteer board and the association as a whole under the theory that the board has some obligation to disclose this information to purchasers. However, this novel approach fails to recognize that, unlike the seller or real estate broker in the transaction, the association has no financial interest in the outcome of the transaction. Most courts, understanding that the association has no financial interest in the outcome of the transaction, have recognized that the association has no duty to disclose. However, many boards and property managers wishing to be helpful do provide certain information to unit purchasers and their banks. Ironically, although the courts will find no affirmative duty to disclose, once a disclosure is voluntarily made, courts have found that the information provided must be accurate. Therefore, the association and property manager are left in a position whereby they are better off providing no information to a new buyer than to provide any information. Furthermore, lenders have become quite accustomed to associations filling out certain affidavits which provide the lender with information related to special assessments, capital expenditures, owner occupancy ratios, and pending litigation. Based upon a few court actions, associations have begun to balk at providing this information. The reality is that somehow, although there is no affirmative obligation of the association to provide this information, that resales and refinancings will not take place unless the bank is made aware of the operations of the association. Based upon the foregoing, associations have begun to use a standard form of their own to provide to lenders which is provided only after payment of a fee by the lender and which provides that the form may be relied upon by no party other than the lender. In addition, the form indicates that while the information is believed to be correct, that the lender should independently verify all information contained in the affidavit. If this were the final result, we would be left with a ludicrous procedure whereby no purchaser would ever be able to retain any information relating to the community association which they wish to purchase. Fortunately, at least some associations, property managers, and brokers have been able to devise a procedure which provides information to the buyer while protecting the association. The concern of the association is if they provide information to the buyer, that they will be sued by the seller if the sale falls through since the association's fiduciary duty is the seller and not to the prospective purchasers. Therefore, several associations have instituted a procedure whereby the association agrees to provide the information which it has to the best of its ability, but only if the seller and buyer authorized the release of this information and agree to indemnify the association for any information contained therein. For example, if the information discloses that there are numerous lawsuits brought against the association or brought by the association against the developer relating to construction defects, the association is protected in knowing that the dissemination of this information will not be grounds for the seller to sue the association for providing the information. If the seller refuses to sign the authorization and indemnification, then the purchaser makes their decision based upon their inability to see any information from the association. The information provided by the association to the lenders is on a form of proof by the association and at a cost to be borne by the lender with a proviso that such information will not be disseminated to any third party. While this procedure may seem unworldly, in reality it really is not. A motivated seller wants to sell and a motivated purchaser wants to purchase and therefore, it is highly likely that the seller will authorize the association to provide information to the buyer. In addition, many states allow the buyer to obtain by the seller a resale certificate paid by the association which discusses various questions which would be of interest to a prospective purchaser. If ordered early on in the process, the purchaser can make an informed decision as to whether to purchase. In my experience, the ideal method for having the buyer obtain information is to allow the buyer to talk with and obtain information from both the property manager and the board members. In this manner, information which would otherwise not be obtainable at any cost is easily obtainable through some conversations with the board or its property manager relating to issues facing the association. In addition, this process gives the buyer the ability to gain some comfort level with the board which is operating the association. Finally, although a little unorthodox, I typically suggest to purchasers that they go to the complex on a Saturday or a Sunday and simply talk to some of the folks who are living at the complex. Perspective purchasers have found that they can learn more about a complex by chatting with one or more owners for an hour or so then they could ever learn in any other manner. When one is making the biggest purchase of their lives, it is fair that they be able to obtain adequate information to make an informed choice. The question still remains who should provide this information. While we wait for the results of that question, a little creativity on the part of the perspective purchaser should get him or her all of the information which they need to know to decide whether to purchase.
|
|