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Washington DC Attorneys

6/13/11: Don’t Lose That Condo Sale Because of the Resale Package

Housing Counsel

By: Benny L. Kass

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

Yes, there are many avenues she can take, 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 one additional way to get out of a contract, but this one 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 states, 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: how much money does the association have 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 7 days of receipt. In the District, the buyer must be provided the package 10 days after the contract is signed, and has 3 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 emailed, the contract must be cancelled within 3 days from receipt. However, if it is mailed, the rescission right is extended to 6 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 that is required, 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 DC 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. In a recent situation, 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; 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, so long as she is within the statutory time. It is a true "cooling off" period. When someone buys a condominium unit, it is important to understand what you are getting involved with. 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, and if so how does this impact on residential owners.

All of these questions can be found in the resale package. I found it interesting that while 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, while 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? In order to win such a court case, the seller would have to prove that he has incurred financial damages. For example, the original sales contract was 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 to pay real estate taxes, insurance and mortgage interest; these are also 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.

There is an interesting court opinion from a 2001 Minnesota Court of Appeals dealing with the disclosure requirements. A condominium association levied a special assessment against each owner in the amount of $8,000. However, when a potential unit owner received the required resale package, the assessment was not disclosed, despite the clear statutory requirement that such assessments must be included in any resale package.

The potential buyer was, however, orally advised by the property manager that he would have to pay an assessment - but only in the amount of $6,000.

After the buyer took title to the unit, under protest he paid the $8000 assessment and then sued for its return. The court found that the association did, in fact, make a mistake by not disclosing the special assessment. However, the court said "nevertheless,we are not unmindful of the windfall that (the owner) stands to receive" were we to order that he get back the full $8,000. Since the owner was orally advised before closing that he would have to pay $6,000, the court - using its equity powers - ordered that the owner get back $2000, the difference between what he knew and what was not disclosed.

Bottom line: buyers should read all the information contained in the package carefully, and condominium boards of directors must make absolutely sure that all of the legal requirements are included in the resale documents.

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