(See Hartford Accident and Indemnity Company v. Scarlett Harbor Associates Limited Partnership, et al., 674 A.2d 106 Md. App. 1996 summarized in the Fall 1996 Common Interest.)
In light of Scarlett Harbor it is critically important to carefully scrutinize all purchase agreements and other public offering statement materials to insure that they do not contain language that creates additional sources of liability for the seller. In addition, sellers are well advised to be proactive with respect to all potential sources of liability. This article summarizes certain of the measures that we have taken to address potential liability concerns.
Preferred Language While it is necessary that the purchase agreement for the sale of a condominium unit contain some provisions describing the unit that is to be constructed, preferably by reference to a specific exhibit attached to the purchase agreement, any representations beyond those necessary to adequately describe the unit should be avoided. For example, representations that the unit will be constructed in conformity with any "model" or "display" unit may form the basis of an express warranty claim and should be avoided. In addition, any discussion in the purchase agreement or public offering statement materials regarding warranties should be limited to language specifically required to be included by applicable statutes.
While it is fairly arguable that the developer should be entitled to seek waivers of a number of the implied warranties applicable under state law to the sale of a condominium unit, the Secretary of State's office has traditionally refused to accept such waivers based on its position that such waivers violate public policy. Nevertheless, the Secretary will accept language disclaiming the existence of any express warranties that might be applicable in addition to such implied warranties. Such a disclaimer, when used in conjunction with sales materials that have been "cleansed" of the language that would otherwise be troublesome under Scarlett Harbor, should be of great benefit. The developer has thereby limited its warranty exposure to only those warranties that it is actually required to give under State law (as applied by the Secretary of State).
We have over the years been successful in persuading the Secretary of State's office to allow provisions in the condominium documents that limit the authority of the board of directors of the condominium to expend or to obligate the council of unit owners to expend large sums of money without unit owner approval. The potential for such expenditures arises because condominiums are generally organized along corporate lines with a board of directors, which is granted broad authority to oversee and direct the affairs of the council of unit owners. This can lead to situations in which boards of directors consisting of as few as three individuals can make decisions with significant and adverse financial consequences to the unit owners without broad based unit owner support and approval. Thus, without adequate controls, there is always a risk that "over zealous" boards of directors will take actions or incur association obligations that are not in the best interests of the unit owners as a whole, and that may be in fact opposed by a significant number of such unit owners.
We typically recommend including a provision in the condominium documents identifying a class of "extraordinary actions" that the board of directors of the condominium may undertake only with the approval of a specified percentage of unit owners. We define extraordinary actions to include all actions taken by or on behalf of the council of unit owners that would reasonably require the expenditure of funds in excess of a specified dollar amount, usually set at $15,000.00. This provision ensures that any decision by the board of directors to undertake significant costs, including potentially costly litigation, will at least be subject to approval by the unit owners who will be asked to pay such costs.
The Role of ADR As we have reported in prior issues, members of our practice group have been very active in connection with advocating revisions to the Maryland Condominium Act to establish a procedure for alternative dispute resolution ("ADR") regarding claims between the council of unit owners and the developer. If enacted the ADR legislation will benefit both parties by avoiding the considerable expenditures of time and money that litigation necessarily involves. Although efforts to include such ADR provisions in the Maryland Condominium Act have not yet been successful, we have had success in persuading the Secretary of State's office to allow the inclusion of ADR provisions in the governing documents of condominiums. Some of the more significant features of the ADR provisions that we now include in condominium documents are as follows:
- The council of unit owners is required to provide a claim notice to the developer that includes details regarding the claim asserted by the council of unit owners. The developer is provided an opportunity to inspect the condominium with regard to the claims identified in the claim notice.
- The developer is provided with an opportunity to submit a proposed settlement of the claim identified in the claim notice, and the documents specifically provide for a settlement conference at which such proposed settlement is to be considered.
- In the event that the parties are not able to reach a mutually agreeable settlement of the claims identified in the claim notice, the council of unit owners is required to provide the unit owners with certain disclosures regarding its claim and the proposed settlement by the developer before the council of unit owners can file suit against the developer.