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RESOLVING CONDOMINIUM CONSTRUCTION DEFECT WARRANTY CLAIMS IN MARYLAND A Guide for Maryland Condominium Associations Newly constructed and newly converted condominiums in Maryland often contain concealed or “latent” construction defects. Left undetected and unrepaired, latent defects stemming from the original construction of a condominium can cause extensive damage over time, requiring associations to assess their members for unanticipated repair costs that could have been avoided by making timely developer warranty claims. This article provides a general overview of how Maryland condominium associations transitioning from developer control can proactively identify and resolve construction defect claims with condominium developers and builders before warranty and other legal rights expire. This proactive approach typically results in an amicable resolution without the need for litigation. I. CONDOMINIUM ASSOCIATION RESPONSIBILITY FOR TIMELY EVALUATION OF COMMON ELEMENT CONSTRUCTION FOLLOWING PERIOD OF DEVELOPER CONTROL Condominium associations are responsible for overseeing and maintaining condominium common element facilities (e.g., roofs, exterior walls, foundations, lobbies, common hallways, elevators, surrounding grounds, and common mechanical, electrical, and plumbing systems). Following the period of developer control, it is incumbent upon a condominium association’s first unit owner elected board of directors to evaluate the construction of the condominium common element facilities to identify construction deficiencies so they can be brought to the developer’s attention for repair while warranty and other legal rights are still in effect. An early identification of construction defects also assists the condominium association in determining whether the original budgeted reserve fund established by the condominium during the period of developer control is adequate to cover the future cost of maintaining, repairing, and ultimately replacing the common element facilities. A reserve fund is based on an underlying assumption that the common element facilities of the condominium are constructed properly and will have a normal life expectancy (e.g., a 30 roof, 45-year exterior siding, etc.). An evaluation of construction allows a transitioning condominium association to independently verify these assumptions in the original reserve budget created by the developer. For example, if the roof of a newly constructed condominium is found to be leaking and in need of immediate replacement due to a defect in the original construction, then a budget based on a projected roof replacement in thirty (30) years is grossly insufficient. II. THE TRANSITION DEFICIENCY STUDY – EVALUATING CONSTRUCTION AND IDENTIFYING CONSTRUCTION DEFECTS Following transition from developer control, condominium associations should hire an engineering or architectural firm to perform a “transition deficiency study” (also known in the community association industry as a “transition study,” “transition report,” “deficiency report,” “warranty analysis,” “construction analysis,” or “construction defect report”). The purpose of the transition deficiency study is to evaluate the construction of the common elements, identify construction defects, and set forth the findings in a written report. The transition deficiency study is intended to provide a useful and comprehensive list of construction defects prepared by a construction expert, citing specific violations of building codes, approved plans and specifications, and other applicable industry standards. The condominium association’s attorney can then use the study to put the developer on notice of the defects and request warranty repairs. When construction defects are identified early in this manner, before they can cause serious damage to the building, the repair expense is typically substantially less, making it easier to negotiate an amicable resolution with the developer. Ideally, at the end of the transition process, all construction defects will be identified and properly corrected by the condominium developer so that the condominium association can then establish an accurate reserve fund based on common element facilities that have a normal life expectancy. Retaining the services of a qualified consultant to inspect construction of common element facilities is important because some construction defects that occur during the original construction or conversion of a condominium are concealed behind a building’s exterior facade or may simply not be recognized as a problem to average homeowner purchasers when they acquire their units. Left undiscovered and unrepaired, latent construction defects can result in extensive hidden building damage over time, resulting in unanticipated repair expenses that can wreak havoc on an Association’s financial condition, requiring it to borrow money and assess unit owners. For example, the failure to properly flash windows, balcony beam penetrations, and other openings in a building envelope can cause extensive and insidious water damage within the exterior building walls of a condominium causing rotting of wood sheathing and structural framing. The damage may only come to light when mold or water stains begin to appear years later within the interior living space of units. A properly performed and utilized transition deficiency study greatly reduces the risk that a condominium association’s unit owner members will be assessed significant amounts for unexpected repairs caused by hidden or “latent” construction defects caused during construction. III. MEETING NOTICE DEADLINES AND PRESERVING WARRANTY CLAIMS – THE IMPORTANCE OF EARLY CONSULTATION WITH AN EXPERIENCED CONDOMINIUM CONSTRUCTION DEFECT ATTORNEY In addition to seeking proposals for conducting a transition deficiency study, the first unit owner-elected board following transition from developer control should also obtain a complimentary consultation with an experienced condominium transition attorney with substantial experience representing condominiums in construction defect matters. Such an attorney can advise the board of applicable deadlines necessary to avoid waiving warranty rights and other legal claims and will provide a timeline for the association to follow that will ensure that the transition deficiency study is obtained in a timely manner, well within applicable notice, warranty, and statute of limitations time periods, so that any serious construction defects identified in the study can be brought to the developer for repair within the applicable warranty periods. IV. CONDOMINIUM ASSOCIATION STANDING TO BRING REPRESENTATIVE CLAIMS ON BEHALF OF UNIT OWNERS A condominium association in Maryland has the legal authority to assert warranty and other construction defect legal claims in its own name and in a representative capacity on behalf of two or more of its unit owner members with regard to construction defects affecting the condominium. Maryland Condominium Act (“MD Condo Act’) § 11-109(d)(4) and (19). Developers often insert language into governing documents that purport to deprive the association of its ability to pursue common element defect claims on behalf of unit owner members. As a practical matter, it is the continuing ability of a condominium association to assert these legal claims that motivates condominium developers and builders to repair construction defects. Therefore it is important to have experienced construction defect legal counsel review governing documents to identify such issues early in the transition process and to take necessary counter-measures to preserving the legal claims. V. LEGAL CLAIMS FOR CONSTRUCTION DEFECTS THAT CAN BE ASSERTED BY A CONDOMINIUM ASSOCIATION Below is an overview of some construction defect legal claims that can be asserted in Maryland by a condominium association in its own name or on behalf of its unit owner members against condominium developers and/or other responsible parties. In the event it should ever become necessary to litigate, each of these legal claims will have its own legal strengths and weaknesses. Some legal claims may cover certain construction defects or afford monetary damages that others claims do not. It is the ability to assert claims that enables an association to bargain from a position of strength, thereby increasing the likelihood of a favorable resolution without litigation Therefore, it behooves the association to make sure it does not waive any viable legal claims while negotiating with a developer by allowing the statute of limitations to run or by failing to give proper notice. a. The Statutory Implied Warranty on the Common Elements In Maryland, there is an implied warranty created by the Maryland Condominium Act that runs from the developer to a condominium association. MD Condo Act § 11-131(d). The common element warranty applies to the roofs, foundations, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural elements. MD Condo Act § 11-131(d)(1). The warranty is implied by statute and need not be in writing. The statute requires that the developer be responsible for correcting any defect in materials or workmanship, and that the specified common elements are within acceptable industry standards in effect when the building was constructed. MD Condo Act § 11-131(d)(2). The Maryland Condominium Act expressly gives a condominium association authority to assert the warranty on the common elements in its own name. MD Condo Act § 11-109(d)(19). A suit for enforcement of the warranty on the “general” common element warranty can be brought only by the council of unit owners. MD Condo Act § 11-131(d)(4). A suit for enforcement of the warranty on the “limited” common elements may be brought by the condominium association or any unit owner to whose use it is reserved. MD Condo Act § 11-131(d)(4). Notice of common element construction defects must be given to the condominium developer within the warranty period. MD Condo Act § 11-131(e). The warranty period extends for three years and in some cases longer (discussed below) There is a one year statute of limitations such that a lawsuit for enforcement of the warranty on the common elements must be brought within one year of the expiration of the warranty period if the developer fails to correct the defects. MD Condo Act § 11-131(e). In order to determine the deadline for giving notice and when the one year statute of limitations commences, one must first determine when the warranty period expires. As a general rule, the warranty period expires on the latest of the following three alternatives: (i) Three years from the first transfer of title to a unit at the condominium; (ii) As to common elements that are not completed at the transfer of title, three years from the completion of the common element in question and/or its availability for use by all unit owners, whichever occurs later; or (iii) Two years from the date on which unit owners, other than the developer, take majority control over the association board of directors. The statute is designed so that the warranty period can never expire shorter than two years after the developer turns over control of the association to non-developer unit owners. b. Title 10 Implied and Express Warranties in the Sale of New Homes In Maryland there is an implied and an express warranty in the sale of a newly constructed home that is created by Title 10 of the Maryland Real Property Article (“RP”) (a/k/a “Title 10 Implied Warranties”). See RP § 10-203 (implied warranty) and RP § 10-202 (express warranty). These warranties apply to condominium developers and are applicable to both units and common elements, also apply to newly converted condominiums (i.e., older buildings that have been renovated and converted into condominiums.) MD Condo Act § 11-131(b).. Title 10 Implied and Express warranty claims belong to each unit owner individually (as do the rest of the claims discussed below), but can be asserted on behalf of two or more unit owners by the condominium association if the claim involves “matters affecting the condominium.” Under the Title 10 Implied warranty, the builder/seller of a condominium unit warrants that the unit and its common element improvements are free from faulty materials, constructed in accordance with sound engineering standards, constructed in a workmanlike manner, and fit for habitation. RP § 10-203(a). The warranty is implied by statute and need not be stated in writing. The Title 10 Express Warranties are not implied and must be based on written statements about the condominium or a sample or model that is made as part of the basis of the bargain to purchase a condominium unit. Typically, these express warranties refer to written promises contained in a contract, but also can arise from written statements in sales brochures, public offering statements, advertisements, model home depictions, drawings, and other written or pictorial descriptions of the condominium. A typical express on warranty might be a promise to construct a condominium in accordance with applicable building codes or a promise to build a clubhouse with swimming pool, or some other important part of the decision to purchase a unit at the condominium. The express warranty is breached if the unit or common elements fail to conform to the written promise or description, or fail to sufficiently conform to a model or sample. RP § 10-202(a). The Title 10 Implied and Express warranties do not expire on the subsequent sale of a condominium unit by the original purchaser to a subsequent purchaser. Instead, these warranties continue to protect the subsequent purchaser until the warranty for the original purchaser would have otherwise expired had the original purchaser not sold their unit. RP § 10-204(c). Determining when the warranty period for each unit owner commences and the statute of limitations expires can be an extremely complex and requires a fact-based analysis. In very general terms, however, the time for asserting Title 10 Implied or Express Warranty Claims in a court of law (including calculation of both warranty period and statute of limitations) can be as short as two years and as long as four years from the date of a unit owner settlement, depending on a number of factors, such as the date on which the defects were discovered, whether they are structural defects or non-structural defects, and when the unit owner took possession of the unit. RP § 10-204. The warranty period for a Title 10 Express warranty can be longer than a Title 10 Implied warranty if the express warranty specifies a longer period of time (e.g., a “five-year roof”). c. Negligent Construction Condominium developers, building contractors and subcontractors, and, in some cases, their officers, members and employees, can be held liable for negligently constructing or converting a condominium building. A negligent construction claim usually arises out of the use of improper construction methods that deviate from applicable building codes, approved plans and specifications, manufacturer’s instructions and other industry standards. Use of faulty or defective materials, failure to supervise, failure to inspect and defective design can also be a basis for a negligent construction claim. Maryland’s version of the so-called “economic loss rule” bars many negligent construction defect claims where a party seeks only the cost of repairing a construction defect. However, there are exceptions. In general terms, the rule does not apply in the following situations: (1) where both parties are in a close business or transactional relationship or other “special relationship” akin to a contractual privity (a/k/a “an intimate nexus between the parties”); (2) where the defect in question creates “a serious risk of death or personal injury;” or (3) where the damages resulting from the negligence do not fall within “the defined definition of economic loss.” The statute of limitations for a negligent construction claim in Maryland is three years. Maryland Courts & Judicial Proceedings Article (“CJ”) § 5-101. Under the discovery rule adopted by Maryland Courts, the three-year statute of limitations on a negligent claim runs from the date when a claimant actually knows, or by the exercise of reasonable diligence should know, of the injury, or damage giving rise to their legal claim (hereinafter referred to as “discovery”). d. Breach of Contract and Common Law Implied Warranties Maryland recognizes a legal claim for breach of express contractual promises, such as a promise in a contract of sale to repair construction defects brought to the developer’s attention. Maryland also recognizes a legal claim for breach of implied common law contractual warranties, such as the “implied warranty of good faith and fair dealing.” A party may be liable for breach of the implied covenant of good faith and fair dealing when it evades or defeats the spirit of the contract in connection with its performance or enforcement, such as where one party fails to perform unfinished work or promised repairs. It is also implied in a contract for the construction and sale of a condominium unit and appurtenant common elements that the construction will conform to applicable law, including building codes. This failure to construct substantially in accordance with applicable building codes can be a breach of contract even if such compliance is not expressly set forth in writing within the contract. The statute of limitations for a breach of contract claim is three years, CJ § 5-101, and runs from the date of discovery of the breach under the “discovery rule.” e. Violation of the Maryland Consumer Protection Act The Maryland Consumer Protection Act (“MCPA”) creates a private cause of action which can be asserted by a condominium association on behalf of its unit owner members who are deceived or otherwise misled by “unlawful trade practices” in connection with the sale and purchase of a condominium. MCPA § 13-408(a) and 13-303. The MCPA defines various unlawful trade practices that include misrepresentations about the characteristics and quality of construction, a failure to state material facts regarding problems with the condominium common elements, and other conduct which is misleading to consumers of condominiums. MCPA § 13-303. For example, if it is represented that a condominium will be built in accordance with the county-approved plans and specifications, it is a violation of the MCPA if there is substantial deviation from the applicable plans and specifications that results in defective conditions. A condominium developer who engages in such unlawful trade practices can be held liable for an Association’s reasonable attorney’s fees in pursuing construction defect claims. MCPA § 13-408(b). In one Maryland construction defect case, a condominium association was awarded $500,000 in attorney’s fees under the MCPA following a $6.6 million verdict against the developer and builder of the condominium, as well as against its president personally. See Milton Company v. Council of Unit Owners of Bentley Place Condominium, 121 Md App. 100, 121 (1998), aff’d 354 Md 264 (1999). See also article entitled: “Condominium Entitled to Attorneys Fees in Addition to Construction Defect Damages.” A claim under the MCPA has a 3-year statute of limitations under CJ § 5-101, which runs from the date of discovery under the “discovery rule.” f. Negligent Misrepresentation and Fraud Negligent misrepresentation and fraud are common law legal claims that provide a remedy when a defendant, including a condominium developer, makes a false representation or omits a fact when there is a duty to disclose. The difference between negligent misrepresentation and fraud is that negligent misrepresentation does not require an intent to deceive on the part of the defendant in making the representation. Rather, the representation can be based on careless/reckless behavior, such as making untrue statements to unit owners about the condominium without knowledge as to whether or not they are true or not. In the case of both fraud and negligent misrepresentation, the untrue statements or misleading omission must be material and reasonably relied upon by the Association and/or its members to their detriment, such as entering into a contract of sale and obtaining long-term financing based on a misrepresentation that the building was constructed in accordance with the plans and specifications approved by local County or City building authorities. The statute of limitations for a negligent misrepresentation or fraud claim related to the quality or condition of construction is generally three years under CJ § 5-101, running from the date of discovery under the discovery rule. In the case of fraud, the statute of limitations can be extended if the construction defect legal claim is intentionally concealed. g. Misleading Statement in Public Offering Statement The Maryland Condominium Act creates a private cause of action against a condominium developer who makes a false or misleading statement in a Public Offering Statement (“POS”) or omits material facts in a manner that is misleading. MD Condo Act § 11-126(f). A claim under § 11-126(f) of the MD Condo Act has a one year statute of limitations for misleading representations in a POS from the date of discovery under MD Condo Act § 11-126(f). VI. NOTE ON STATUTE OF LIMITATIONS Although the statute of limitations period for some typical construction defect claims are set forth above, a condominium association should not make any decisions based on its own determination of when the statute of limitations expires without consulting with an experienced condominium construction defect attorney. Determining when the statute of limitations expires as to any construction defect claims is fact-based analysis and will always be different for every condominium depending on many factors, including the specific legal terms of documents pertaining to the condominium (e.g., governing documents and sales contracts), the nature of construction defects at issue and when they were discovered, the dates of common element completion, the dates of original unit owner settlements, the date control over the association is transferred from the developer to non-developer unit owners, etc. The statute of limitations analysis must also take into account the numerous unit owner members, each of whom has legal claims relative to the common elements that can often be asserted on their behalf by the condominium association. In each case, different legal claims will have different statute of limitations periods that commence at different times, and those periods can vary as to the defect in question, the unit owner involved, and the time of discovery. Condominium associations should consult with an attorney before taking or not taking action in reliance on the information set forth in this article. VII. TOLLING AGREEMENTS – PRESERVING CONDOMINIUM ASSOCIATION LEGAL CLAIMS The legal claims discussed above are of limited duration and will expire if not brought in a court of law by filing a lawsuit within the applicable “statute of limitations.” The statute of limitations is the time period within which a legal claim must be brought in a court of law or it shall be forever barred. In general, there are two ways to stop the statute of limitations from running on a party’s legal claims: (1) file a lawsuit asserting those legal claims in court before the statute of limitations expires; or (2) have the responsible parties sign a tolling agreement before the statute of limitations expires. A tolling agreement is a private contract that courts will enforce under which the parties (for example, a condominium association and a developer) agree that the statute of limitations time period will stop running, or be “tolled,” while they attempt to negotiate a resolution of their construction dispute. However, the statute of limitations will only stop as to those parties who agree to “toll” the running of the statute of limitations. A tolling agreement does not affect claims against any person or entity who does not agree to toll the statute of limitations. Likewise, when filing a lawsuit, the statute of limitations is only tolled as to the persons or entities against whom the suit is filed. Before negotiating serious construction defects claims with developers, builders, and other responsible parties, an association should first obtain a tolling agreement from them in order to preserve legal claims and prevent them from becoming time-barred by the statute of limitations while attempting to reach an amicable resolution. A tolling agreement allows a condominium association to focus on negotiations without having to be concerned about filing a law suit in order to prevent those claims from becoming time-barred by the expiration of the statute of limitations. A tolling agreement preserves the condominium’s bargaining power and benefits both the developer and the association by giving them a “time-out” so that they can resolve their claims without litigation. It is important to retain experienced legal counsel to draft a tolling agreement. In our law firm’s review of cases, we find that many attorneys representing condominiums enter into tolling agreements fail to include important construction defect legal claims and responsible parties. As a result, the statute of limitations continues to run and even expires on these important legal rights during negotiations. Although a condominium association can agree to enter into a limited tolling agreement, attorneys unfamiliar with construction defect litigation on behalf of condominiums often do not understand and thus do not explain to their association clients what legal rights they are giving up and what the alternatives are. As a result, associations are unable to make informed decisions about excluding legal rights in a tolling agreement until it is too late. VIII. NEGOTIATING PROPER REPAIR OF CONSTRUCTION DEFECTS Once a condominium association has notified the developer of construction defects and obtained a tolling agreement, it should work with its transition engineering consultant to ensure that the developer performs repairs that properly address the underlying construction deficiency. In many cases, developer repairs prove ineffective and fail to address pervasive problems. This typically occurs when condominium associations simply accept whatever repairs are offered by the developer without involving their construction consultants to ensure that a proper repair is being offered and without documenting repair agreements to ensure accountability as to the method and scope of repair. Condominium associations should be careful about accepting verbal offers from developers and builders to make unspecified “repairs” in response to complaints about construction problems. The informal nature of such an agreement may be appropriate in some circumstances, however, in most cases, problems will arise when the developer’s definition of “repair” differs from that required by code, contract, or industry standard. For example, when a developer agrees, informally, to repair a window or roof leak, the “repair” as far as the developer is concerned may consist of merely sending out a worker with a caulk gun to seal gaps that should have been protected with a solid flashing material during the original construction. Caulk is generally not an appropriate substitute for flashing. In this example, caulk is a temporary and inappropriate fix that may actually conceal the underlying absence of flashing until the caulking seal breaks or is bypassed by water infiltration at another location and the leak reappears six months later. This example demonstrates the need for written clarity, as well as the necessity of seeking the assistance of the association’s construction expert to review and approve the offered repairs. A condominium association does not have to accept whatever undefined repair the developer is offering. Instead, it should request a detailed description, preferably in writing, of the proposed repair being offered by the developer. The developer’s proposed repair can then be evaluated by a construction consultant working for the condominium. The consultant can review the applicable construction drawings and field conditions and advise the association whether the offered repair is reasonable and appropriate to address the underlying construction defect. If not, the consultant can suggest alternative repair approaches, request additional information, or suggest modifications to the developer’s repair proposal. In some cases, additional joint invasive inspections may be proposed to determine the appropriate repair and/or the extent, or “scope,” of repairs needed throughout the community. In this manner, the association can make informed decisions based on its construction consultant’s expertise rather than accepting whatever the developer is offering without understanding the appropriateness and effectiveness of the repair being offered. All repairs negotiated in this manner should be documented so as to avoid misunderstanding and create an objective standard by which the repair can be judged. If the repair should fail the association has a written reference by which to judge whether the repair was performed properly as agreed. This framework for negotiating the method and scope of repair promotes accountability and finality. It can be employed on a larger scale when a condominium association is negotiating repair of multiple defects discovered during a transition deficiency study. Each repair agreed upon by the parties can be specified in writing and become part of an agreement under which the developer agrees to perform specified repairs pursuant to a specific method and at all the specific locations where the defect exists in accordance with applicable construction standards. In some cases, it is appropriate to incorporate these agreed-upon repairs into a larger repair agreement that can also provide for future repair related activities and contingencies, such as resolution of disputes over repairs that arise during the repair work, unforeseen conditions discovered during repairs, provisions for having the association’s consultant inspect and approve the developer’s repair work, reimbursement of construction defect related expenses incurred by the condominium association, including consultant inspection fees, attorney’s fees, and defect evaluation and defect-related repair costs previously incurred by the condominium association. IX. LEGAL OBLIGATION TO PURSUE TIMELY CONSTRUCTION DEFECT CLAIMS A Maryland appellate court has held that a condominium association can be sued by its unit owner members for failing to timely investigate and bring a lawsuit against the condominium developer for construction and design defects causing water leaks into the condominium buildings. See, Greenstein v. Council of Unit Owners of Avalon Court Six Condominium, 201 Md. App 186 (2011) (“Greenstein”). In Greenstein, the condominium association complained about building water leak problems for many years. Ultimately, the association filed a lawsuit against the developer of the condominium when it failed to make effective repairs to stop the leaking. The court dismissed the condominium association’s suit because it was filed after the statute of limitations had expired. The association then assessed the unit owners for the cost of repairing the developer’s construction defects that cause the water leaks. In response to the assessment, some unit owners sued the association for negligence in failing to bring a timely lawsuit. The Maryland Court of Special Appeals held that the unit owners’ lawsuit against the condominium association could go forward because the association had a duty to timely pursue recovery from the developer on behalf of unit owners for damage to the common elements caused by the developer’s negligence, breach of contract, and other applicable law. Greenstein 201 MD App at 205. It is important to note that the condominium association in Greenstein could have avoided these legal problems and liability had it consulted with an experienced condominium construction defect attorney and been advised of the pending expiration of the statute of limitations and filed a timely lawsuit, or, alternatively, entered into a tolling agreement when it first began negotiating with the developer. X. CONCLUSION – EARLY CONSULTATION WITH QUALIFIED LEGAL COUNSEL THAT UNDERSTANDS APPLICABLE LEGAL CLAIMS AND STATUTE OF LIMITATIONS IS KEY TO CONDOMINIUM ASSOCIATION MAKING INFORMED DECISIONS RELATIVE TO CONSTRUCTION DEFECT RESOLUTION The most important step a transitioning association can take toward successfully identifying and amicably resolving construction defect claims is to seek an early, complementary consultation from an attorney with substantial experience in representing condominiums in construction defect matters. Such a consultation, tailored to the community in question, will provide an association with a road map and a timeline for proceeding each step of the way so that it can protect its warranties and other legal rights before they expire, thereby giving it the opportunity to negotiate proper repairs to be performed by the developer. NOTE ABOUT TERMINOLOGY: The term "condominium association” is used in this article to describe the organization or entity that governs the affairs of the condominium in accordance with the condominium bylaws and declaration, and whose members consist of all condominium unit owners. Although "condominium association" is the terminology commonly used for this purpose, the Maryland Condominium Act refers to a condominium association as a "council of unit owners." NOTE ABOUT AUTHOR: Nicholas D Cowie is a partner in the law firm of Cowie & Mott, P.A. and is licensed to practice law in Maryland and Washington DC (District of Columbia). Mr. Cowie has been resolving construction defect disputes on behalf of condominium associations for over 29 years. He has been involved in some of the major litigation that has shaped the condominium construction defect law in Maryland. Mr. Cowie has served as adjunct law school professor of construction law and drafted legislation enacted into law that protects and preserves the rights of condominium associations, homeowners associations, and their members in construction defect disputes by extending time periods for bringing common element condominium warranty claims and preventing condominium developers from shortening statute of limitations on warranty and other legal claims that condominium associations and their members can assert for construction defects. The law firm of Cowie & Mott, P.A. consists of attorneys who are versed and experienced in both construction law and condominium law, and who are known for representing condominiums in construction defect claims, financial disputes, developer collection and allocation of unit owner assessments and fees, and other developer contractual and legal obligations occurring prior to transition. Maryland and DC Condominium Construction Defect Attorneys https://cowiemott.com/resolving-condominium-construction-defect-claims-in-maryland/ #Condominium #Warranty #CondominiumWarranty #ConstructionDefects #CondominiumConstructionDefects #CondominiumConstructionDefectLaw #ComdominiumConstructionDefectLawyer #CondominiumAttorney #ConstructionAttorney #CondominiumConstructionDefectAttorney #WashingtonDCConstructionDefectAttorney #WashingtonDCConstructionDefectLaw #WashingtonDCCondominiumConstructionDefectLawyer #DistrictofColumbiaWarrantyLaw #WashingtonDCCondominiumLawyer #WashingtonDCConstructionLawyer #WashingtonDCConstructionDefectLawyer #ConstructionDefectLaw #WashingtonDCCondominiumLaw #WashingtonDCConstructionDefects #DistrictofColumbiaCondominiumWarranty #DistrictofColumbiaCondominiumLawAttorneys #WashingtonDCCondominiumConstructionDefectLaw

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marylandconstructionlaw · 6 years

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ASSESSMENT COLLECTION FOR CONDOMINIUM ASSOCIATIONS IN MARYLAND AND WASHINGTON DC

Guidelines for adopting assessment collection policies in Maryland and the District of Columbia.

The Legal "dos and don'ts" of assessment collection.

The timely payment and collection of condominium assessments is essential to the financial well-being and efficient operation of a condominium association. The association’s Board of Directors has a fiduciary responsibility to stay on top of assessment collection so that delinquent condominium assessments do not accumulate. Excessive delinquencies not only deprive a condominium association of needed operating capital, but also affect its ability to borrow money and obtain FHA approval. This article provides an overview of the assessment collection process for condominium associations in Maryland and the District of Columbia. Information is provided to help associations adopt their own assessment collection policies and procedures that work best for their communities within the framework of Maryland and Washington DC condominium law.

ANNUAL ASSESSMENTS AND SPECIAL ASSESSMENTS

Condominium assessments are the means by which a condominium association board of directors funds the annual budget. Each year, the condominium association adopts a budget to cover its operating expenses and an amount to be set aside for anticipated future expenses. The total budget cost is divided among the unit owners in the form of an annual assessment typically due and payable in equal monthly installments on the first day of each month.

Sometimes condominium associations are faced with unanticipated major expenses in excess of the funds raised by the annual assessments. In such cases, governing documents give the board of directors the power to levy a “special assessment,” subject to restrictions imposed by applicable laws. Unit owners may be given the option to pay the special assessment in monthly installments.

PAYMENT OF ASSESSMENTS

Condominium assessments are traditionally paid by check using payment coupons and envelopes provided by the condominium association’s management company. More frequently, management companies send electronic coupons and/or assessment invoices by email and offer online payment by E-check, credit card or recurring ACH payment (direct debit). Coupons and invoices are often used as an opportunity to remind the unit owners that they can avoid late fees and interest by making timely payment on or before the specified due date.

ASSESSMENT COLLECTION POLICIES & PROCEDURES

It is recommended that all associations establish written assessment collection policies and procedures based on governing documents and applicable law. Written policies and procedures can be created under the rulemaking authority of the association and provide an objective framework under which the condominium association can treat all unit owners equally.

Written policies and procedures are a useful aid in the collection of assessments because they can be published and distributed on a regular basis so that all unit owner members have ample notice of, and opportunity to understand, what is expected (e.g., due date and manner and method of payment) and the consequences for nonpayment (e.g., late fees, interest, returned check fees, acceleration, suspension of common element privileges, referral to legal counsel, and court costs and attorney’s fees if legal action is taken).

Written policies and procedures promote the timely collection of assessments by establishing a timeline for collection actions to be taken once a payment is missed. Written procedures instruct when an association should send out late notices and when to refer unresolved delinquencies to legal counsel. A timetable of deadlines for actions to be taken by legal counsel can also be specified, including sending demand letters and commencing proceedings to establish and/or enforce assessment liens, or pursue civil suits when assessments remain unpaid.

ASSESSMENTS PAYMENT INCENTIVES IN GOVERNING DOCUMENTS

1. Late Fees and Interest

When assessments become past due, a condominium association can charge late fees and interest as permitted by governing documents and applicable law. Late fees and interest are not only an incentive to make timely payment, but also to help defray costs associated with delinquencies.

Under Maryland law, where a delinquency in the payment of condominium assessments has continued “for at least 15 calendar days,” the condominium’s governing documents may provide for the imposition of a one-time “late charge” of $15 or 10% of a delinquent assessment, whichever is greater. Maryland Condominium Act (“MD Condo Act”) § 11-110(e)(2). Additionally, whenever an assessment is not timely paid, a condominium association board of directors may charge interest from the due date until paid at a rate of “18% per annum,” unless a lesser amount is specified in the condominium’s governing documents. MD Condo Act § 11-110(e)(1). Governing documents may further define parameters for late charges and interest.

In the District of Columbia, the Condominium Act does not regulate the amount or timing of late fees imposed for nonpayment of condominium assessment. Thus, reference should be made to the governing documents. A condominium association in Washington DC can charge interest after an assessment payment is 15 days late, unless the governing documents provide otherwise. District of Columbia Condominium Act (“DC Condo Act”) § 42–1903.12(e). Interest runs from the due date at either 10% per year or the maximum first mortgage loan rate in DC, whichever is less. DC Condo Act § 42–1903.12(e).

2. Acceleration of The Annual Assessment Upon Non-Payment

Acceleration is another incentive for unit owners to make timely payments. Most governing documents permit a condominium association to accelerate the entire balance of the unpaid annual assessment following nonpayment of a monthly installment. This means that the board of directors may declare the entire balance of the unpaid annual assessment immediately due and payable, such that monthly installments will no longer be accepted. Any attempt at acceleration by a condominium association must be permitted by governing documents and consistent with applicable laws.

In Maryland, the governing documents can provide for acceleration after one unpaid installment, but only if the association demands payment of the remaining annual assessment and notifies the non-paying unit owner within 15 days of nonpayment that the entire annual assessment will become due and constitute a lien on their unit if the monthly installment is not paid within 15 days of the notice. MD Condo Act § 11-110(e)(3).

In Washington DC, governing documents can provide for acceleration after one unpaid installment, which can be automatic or at the option of the association, board, or manager. DC Condo Act § 42–1903.12(d)

3. Suspension of Common Privileges

Suspension of a unit owner’s privileges within the community can also be an incentive to make timely assessment payments. The condominium governing documents often authorize the Board of Directors to suspend a delinquent unit owner’s common privileges such as use of common elements (e.g., swimming pool, exercise facilities, recreational amenities and parking), voting rights and/or ability to serve on the board of directors. Before suspending a unit owner’s privileges, the condominium association must comply with any notice or hearing requirements set forth in the governing documents and/or as require by statute.

In Maryland, a condominium association may only suspend a delinquent unit owner’s use of communally held common elements facilities for failure to pay assessments if the specific suspension in question is expressly authorized in the recorded condominium declaration. In the case of Elvaton Towne Condominium Regime II, Inc. v. Rose, 453 Md 684 (2017) (“Elvaton”), the Maryland Court of Appeals struck down a condominium policy that suspended a delinquent owner’s right to use the pool and parking facilities. The court found that Section 11-108(a) of the Maryland Condominium Act only permits a condominium association to restrict a unit owner’s use and enjoyment of the common elements if such restriction is expressly authorized by the condominium declaration. Elvaton, 453 Md. at 701-06. In Elvaton, the declaration did not expressly authorize suspension of pool and parking privileges; instead, the suspension policy was based solely upon general rule making authority under governing documents, which was insufficient. Elvaton, 453 Md. at 705-06. The court did acknowledge that a condominium board has authority to generally adopt reasonable rules for parking, assessment collection, and use of the common elements. However, when it comes to suspending a specific unit owner’s right to use the common elements generally available to others, the authorization for such action must be expressly set forth in the condominium declaration, which is, in essence, an agreement of all unit owners who become members of the association. If not spelled out in the declaration, then such a suspension constitutes “an impermissible taking” and an unlawful “revocation” and “infringement of [an] owner's property rights.” Elvaton, 453 Md. at 703-06.

The Maryland condominium Act contains a statutory “dispute settlement mechanism” that also must be taken into consideration when suspending a unit owners common privileges. Unless the governing documents state otherwise, the statue sets forth the procedure for providing notice and a hearing to a delinquent unit owner before the condominium association may “impose a fine, suspend voting, or infringe upon any other rights of the unit owner or other occupant for violation of rules….”.MD Condo Act § 11–113.

The District of Columbia Condominium Act does not have a statutory provision like Maryland’s Section 11-108(a), and, therefore, the rationale in Elvaton (i.e., authority to suspend use of common elements must be expressed in the declaration) would likely not apply. In fact, a Washington DC condominium association has general rule making authority under § 42-1903.08 of District of Columbia Condominium Act to established a policy that provides for the suspension of a delinquent unit owners common element privileges, even if not specifically set forth in the recorded condominium declaration. However, in order to avoid a successful constitutional argument of unlawful taking of property rights without due process, a Washington DC condominium association should adopt, publish and regularly distribute written policies and procedures regarding the suspension of common area privileges so that all unit owners have prior notice. These procedures should also ideally include written notice and an opportunity for the non-paying unit owner to attended or request a hearing before the board within a specified time (even if not required by the governing documents), before a final decision to suspend common element privileges is imposed.

In the District of Columbia, a board of directors has the statutory “power to suspend the voting rights … of any unit owner who is in arrears in … payment of … assessments by more than 30 days.” DC Condo Act § 42-1903.12(j).LATE NOTICES

A typical first step in the collection procedure is to send out a late notice to any unit owner who has not paid an assessment installment within a specified time following the due date. The late notice is a reminder that the assessment payment is overdue and specifies the amount and any late charges and/or interest due as a result of non-payment. If payment is not forthcoming, follow-up late notices may be sent depending on the association’s collection policy.

DEMAND LETTER (REFERRAL TO LEGAL COUNSEL)

If one or more late notices do not result in a payment, the second step in the typical collection procedure is to refer the assessment delinquency to legal counsel for collection. Legal counsel will attempt to resolve the matter amicably by sending a demand letter to the unit owner. In addition to itemizing the current amount due and requesting payment by a certain date, the demand letter provides notice of any immediate or pending acceleration of the entire remaining balance of the annual assessment and describes other legal actions that may be taken, such as: (1) recording an assessment lien against the non-paying unit owner’s condominium unit that can be enforced by way of foreclosure (i.e., forced sale of the unit to obtain funds to pay the amount due); and/or (2) filing a lawsuit seeking a personal monetary judgment against the unit owner in the amount due, including late fees, interest, costs, and reasonable attorneys’ fees as permitted by governing documents and applicable law.

1. Required Lien Notice to be Provided in Maryland Demand Letter

In 1985, the Maryland General Assembly enacted the Maryland Contract Lien Act (“MD Contract Lien Act”) to govern, among other things, liens arising from unpaid condominium assessments under the terms of governing documents recorded in the land records. Demand letters sent on behalf of condominium associations in Maryland must comply with this Act as a precondition to establishing and enforcing an assessment lien against a delinquent unit (discussed below). A unit owner must be provided with specified information about the basis, nature, and amount of the lien owed, as well as the unit owner’s right to contest the establishment of a lien by filing a complaint in the circuit court where the lien is sought to be established within 30 days after receiving notice. MD Contract Lien Act, § 14-203 (b)(1) – (7). The Demand Letter containing this information must be served upon the unit owner as specified in Section 14-203(a) of the Maryland Contract Lien Act (e.g., certified or registered mail, personal delivery, and some cases posting on the property).

2. Required Information to be Provided in Washington DC Demand Letter

In 2017, the District of Columbia enacted amendments to the Condominium Act known as the “Condominium Owner Bill of Rights and Responsibilities Act of 2016.” Under this Act, condominium associations must provide specified information whenever notifying a unit owner of its intention to take legal action to collect any past due amount. DC Condo Act § 42–1903.12a. Therefore, a demand letter sent on behalf of a Washington DC condominium that notifies a unit owner of pending or potential legal action for nonpayment of past due assessments must contain the following information: (1) a statement of account showing the total amount past due, including a breakdown of the categories of amounts claimed to be due and the dates those amounts accrued; (2) contact information for a representative whom the unit owner can contact to settle the past due amount; and (3) information regarding resources which the unit owner may utilize at the District of Columbia Department of Housing and Community Development and the United States Department of Housing and Urban Development (form language is provided by the statute). DC Condo Act § 42–1903.12a.

COMPLIANCE WITH DEBT COLLECTION AND LICENSING LAWS

Demand letters and many late notices constitute an attempt to collect a delinquent debt and, to the extent applicable, must comply with debt collection conduct and notification requirements imposed by the Federal Fair Debt Collection Practices Act, Maryland Consumer Debt Collection Act, and/or the District of Columbia Fair Debt Collection Act.

In Maryland, persons who fall within the definition of a “collection agency” (e.g., those who collect consumer debt on behalf of another) must be licensed. Maryland Collection Agency License Act (“MCALA”) § 7–301(a). The United States District Court for the District of Maryland has held that a management company is a “collection agency” as defined in Section 7-101(c)(1)(i) of MCALA whenever it seeks to collect a debt on behalf of a homeowner’s association. Fontell v. Hassett, 870 F. Supp. 2d 395, 409 (D. Md. 2012) (“Fontell”). The same rationale applies to condominium associations. Therefore, any management company sending demand letters to unit owners or otherwise seeking to collect an assessment debt for a condominium association in Maryland must have a collection agency license or it will expose itself to criminal misdemeanor imprisonment, fines, or both (MCALA § 7-401(b)), and also subject itself to civil liability under the Maryland Consumer Debt Collection Act, the Maryland Consumer Protection Act, and possibly the Federal Fair Debt Collection Act. Fontell, 870 F. Supp. at 409.

Moreover, in addition to the management company entity itself, an employee of an unlicensed management company can be held personally liable for seeking to collect a debt on behalf of an association without a collection agency license in Maryland. Fontell v. Hassett, 891 F. Supp. 2d 739 (2012) (motion to amend earlier court order holding individual management company employees liable was denied). However, once a management company has a collection agency license, its “regular employees” do not require a license, while “acting within the scope of [their] employment.” MCALA § 7-301(b)(2).

There is currently no collection agency license in the District of Columbia, however, management companies doing business in the District of Columbia are required to obtain a general business license with the Department of Consumer and Regulatory Affairs. D.C. Code 47-2851.03d.

ASSESSMENT LIENS AGAINST A CONDOMINIUM UNIT

If demand letters do not result in payment of the delinquent assessment, a condominium association’s board of directors has the power to establish and/or enforce an assessment lien against the non-paying unit owner’s condominium unit. Once an assessment lien attaches to the unit, it places a “cloud on title,” by encumbering the ability to sell the unit, similar to a mortgage, such that the lien must be paid off in connection with any future sale before the unit owner receives any part of the remaining sale price. A title company representing the purchaser of the delinquent unit will likely discover the assessment lien before settlement and require that it be paid as a condition to issuing a title insurance policy. Without a title insurance policy, an institutional lender will not provide funding for the purchase of a unit. Additionally, a unit owner with an assessment on their unit will have difficulty obtaining financing. Thus, an assessment, lien, to this extent, serves to secure an association’s assessment debt.

Additionally, once an assessment lien attaches (and providing that required notices have been provided), it can be used by the condominium association to immediately force the sale of the unit as a source of funds to pay the past due amount (the “enforcement and foreclosure of the lien”), without having to wait for a purchaser to come along and acquire the unit.

Foreclosures are expensive and used as a last resort when they make economic sense. However, the prospect of having a lien established against one’s unit, or the desire to have the lien removed, is often enough to resolve any dispute over past due assessment payments without the need for further legal action.

1. Creation of Assessment Liens and Foreclosure in Maryland

a. What’s included in a Maryland assessment lien? In Maryland, assessment liens may consist of unpaid assessments, “together with interest, late charges, if any, costs of collection, and reasonable attorneys’ fees.” MD Condo Act § 11-110(d). If permitted by the governing documents (and provided 15 days’ notice of acceleration has been given), a failure to pay a single installment will result in the remaining annual assessment coming due (“acceleration”) upon demand of the condominium association. MD Condo Act § 11-110(e)(3). In such a case, the full amount of the remaining unpaid annual assessment for the balance of the fiscal year also becomes part of the assessment lien. MD Condo Act § 11-110(e)(3).

b. How is a Maryland assessment lien created? In Maryland, unlike the District of Columbia, a condominium assessment lien does not automatically attach to a unit upon non-payment of an assessment installment. Rather, an assessment lien must be established or “created” in favor of the condominium association by the filing of a “Statement of Lien” in land records of the county where the unit is located in accordance with the procedures set forth in the Maryland Contract Lien Act. Select Portfolio Servicing, Inc. v. Saddlebrook West Utility Company, LLC, 455 Md. 313, 336 (2017). Only then will an assessment lien attach to the delinquent unit. A form Statement of Lien is provided in Section 14-203(j) of the Maryland Contract Lien Act. As a precondition to seeking to create a lien, the unit owner whose property is affected must be given the notices as required by the Maryland Contract Lien Act § 14-203 (a) and (b) (described above), within 2 years of a nonpayment in violation of the governing documents. MD Contract Lien Act § 14-203(a)(1).

In cases where the assessment is uncontested, the lien is created non-judicially by simply filing of the Statement of Lien in land records. MD Contract Lien Act § 14-203(g). In cases where the assessment is contested in court, the lien is created judicially by the filing of a Statement of Lien in land records, upon the order of a court that a lien be imposed. MD Contract Lien Act § 14-203(h).

c. How is a Maryland assessment lien foreclosed upon? In Maryland, a residential unit may be foreclosed upon to satisfy an assessment lien in the same manner and subject to the same requirements as the foreclosure of mortgages or deeds of trust on property containing a power of sale or an assent to a decree. MD Contract Lien Act § 14-204(a). See Maryland Real Property § Article 7-105 and Maryland Rules § 14-201 et seq. An action to foreclose on an assessment lien must be brought within 12 years following recordation of the statement of a lien, MD Condo Act 14-204(c), or within a shorter time period required by the governing documents. However, unlike other real property foreclosures, a foreclosure sale involving a condominium unit in Maryland may only be pursued to the extent that damages secured by the lien consist of: (1) delinquent periodic assessments or special assessments and any interest; (2) reasonable costs and attorney’s fees directly related to the filing of the lien that do not exceed the amount of the delinquent assessments, excluding any interest; and (3) do not include fines imposed by the governing body or attorney’s fees or costs related to recovering the fines. MD Contract Lien Act § 14-204(d)(2). Ironically, although a condominium association in Maryland may impose fines for late payment (the “late fees” discussed above under MD Condo Act § 11-110(e)(2)) which may be made part of the lien itself under MD Condo Act § 11-110(d)(1), such late fees may not constitute the basis of a condominium association’s foreclosure sale action.

2. Creation of Assessment Liens and Foreclosure in Washington DC

a. What’s included in a Washington DC assessment lien? In the District of Columbia, an assessment lien may consist of “the assessment levied against the condominium unit … along with any applicable interest, late fees, reasonable expenses and legal fees actually incurred, cost of collection and any other reasonable amounts payable by the unit owner under the condominium instruments.” DC Condo Act § 42-1903.13(a). If condominium assessments are paid in installments, governing documents can provide for acceleration of the entire assessment after one or more unpaid assessment installments. DC Condo Act § 42–1903.12(d). However, whether or not monthly installments are accelerated, the full amount of the annual assessment becomes part of the assessment lien “from the time the first installment becomes due and payable.” DC Condo Act § 42-1903.13(a).

b. How is a Washington DC assessment lien created? In the District of Columbia, unlike Maryland, an assessment lien in favor of the condominium association attaches to the unit automatically “from the time the assessment becomes due and payable,” DC Condo Act § 42-1903.13(a), and lasts for a period of three years, DC Condo Act § 42-1903.13(e). Unlike Maryland, no recording of a statement of lien in the land records is required in the District of Columbia to create the lien because “the recording of the [original governing documents in the land records] shall constitute record notice of the existence of such lien.” DC Condo Act § 42-1903.13(b). Nonetheless, a condominium association can choose to file a notice of lien in the land records to put prospective purchasers, lenders and others on notice of the existence and or subsequent release of an assessment lien. The Recorder of Deeds publishes forms online for this purpose entitled “Notice of Condominium Lien for Assessments Due” and “Release of Condominium Lien."

Even if no formal action has been taken to record or enforce the lien, any unit owner or contract purchaser of a condominium unit can find out whether there are unpaid assessments by requesting that the condominium association provide “a recordable statement setting forth the amount of unpaid assessments levied against that unit.” DC Condo Act § 42-1903.13(h). Failure of the condominium association to provide such a statement within 10 days of receipt of the request “shall extinguish the lien.” DC Condo Act § 42-1903.13(h).

c. How is a Washington DC assessment lien foreclosed upon? The District of Columbia Condominium Act sets forth the procedure for foreclosing on a condominium unit to satisfy an assessment lien. The board president of the condominium association (also known as the “chief executive officer of the unit owners’ association) is deemed by statute to be a “trustee” for purposes of exercising the power to sell and transfer title to a delinquent unit owner’s condominium unit. DC Condo Act § 42-1903.13(c)(1) and (3). However, such a foreclosure sale cannot be held until at least 31 days after a “Notice of Foreclosure Sale of Condominium Unit for Assessments Due” (a/k/a “NFSCUAD”) is recorded in the land records and served upon the unit owner. DC Condo Act § 42-1903.13(c)(4)(A). The NFSCUAD must contain information specified by the statute, including detailed information about the amount due, the amount being foreclosed on, and assistance that may be available to the unit owner from the District of Columbia Department of Housing and Community Development and the United States Department of Housing and Urban Development. DC Condo Act § 42-1903.13(c)(4)(B) and (D). The NFSCUAD must also be provided to the mayor or the mayor’s designated agent, any and all junior lienholders of record, any holder of a first deed of trust or first mortgage of record (including successors, assigns, and trustees), and the Mortgage Electronic Registration System (“MERS”). DC Condo Act § 42-1903.13(c)(4)(E).

3. Super Priority Assessment Liens

Assessment liens in Maryland and Washington DC have priority, up to a specified amount, over the liens created by a lender’s earlier-filed first mortgage or deed of trust. This is referred to as a “super priority lien” and references the fact that in the event of a foreclosure sale, the super priority portion of the assessment lien must be paid to the condominium association from the sale proceeds before satisfying the lien amount of an earlier-filed lender’s mortgage or deed of trust.

In Maryland, the super priority lien is limited to four months of unpaid assessments or $1,200.00, whichever is less, and may not include interest, collection costs, late charges, fines, attorneys’ fees, or special assessments or any other costs. MD Condo Act § 11-110(f)(3). The super priority lien in Maryland only provides priority over “a holder of a first mortgage or deed of trust recorded against the unit on or after October 1, 2011.” MD Condo Act § 11-110(f)(2). An association’s super priority lien does not provide priority over mortgages or deed of trust recorded before October 1, 2011,nor does it provide priority over liens or secured interest held by the state, county, or municipality such as a tax lien. MD Condo Act § 11-110(f)(1) and (2).

In the District of Columbia, the super priority lien is limited to the most recent six months’ worth of common expense assessments. DC Condo Act § 42-1903.13(a)(2). The super priority lien in Washington DC only provides priority over first mortgages or first deeds of trust recorded after March 7, 1991 for the benefit of an institutional lender. DC Condo Act § 42-1903.13(a)(1)(B) and (a)(2). An association’s super priority lien does not provide priority over mortgages and deeds of trust recorded before March 7, 1991, a lien for real estate taxes or municipal assessment charges, nor does it affect the priority of a mechanics’ or materialmen’s lien. DC Condo Act § 42-1903.13(a)(1)(C) and (2).

When faced with a foreclosure proceeding, a lender may offer to pay off the super priority lien amount on behalf of the delinquent unit owner in order to prevent the foreclosure and thereby protect its mortgage or deed of trust.

CIVIL LAWSUIT TO OBTAIN PERSONAL JUDGMENT

A condominium association can also file a civil lawsuit seeking a personal monetary judgment from a court in its favor and against the delinquent unit owner in the amount of the unpaid assessment, together with authorized late fees, interest, court costs and reasonable attorneys’ fees. A lawsuit seeking a personal judgment can be filed in addition to or in place of a lien foreclosure action, or can be used to make up any deficiencies remaining after foreclosing on the assessment lien. Once the court enters a personal monetary judgment against a delinquent unit owner, the association can seek to collect on the judgment by garnishing the unit owner’s wages or bank accounts and/or rent (if the unit is being rented), subject to restrictions imposed by applicable laws. Additionally, a personal judgment entered against unit owner by the court and recorded in the courthouse will create a judgment lien not only against the unit in question, but also as to and any other real property located in the county or jurisdiction of filing. The judgment can also be recorded among the land records of a different county or jurisdiction thereby extending the judgment lien to any real property located within the boundaries thereof. As with an assessment lien, a judgment lien also creates a “cloud on title” such that property cannot be transferred “free and clear” of the lien unless it is paid off by prior to transfer of title.

PAYMENT PLANS

During the collection process, it may be appropriate to agree upon a payment plan with unit owners who fall behind on their assessment payments. Payment plans can save the association the time and expense of pursuing legal action and provide a unit owner member with time needed to bring their account current. Payment plans should be reserved for those cases where timely repayment of a past due amounts under the proposed plan is feasible and likely, such as where a unit owner is able to pay assessments going forward but needs help catching up on missed payments. Payment plans can also be used as a means of resolving a payment dispute by allowing a unit owner to pay off an accelerated annual assessment together with interest, late fees, costs and attorneys’ fees, if any. Payment plans should be made part of a contractual agreement between the association and the unit owner that sets forth the amount of each payment, its due date, and the mutually agreed-upon consequences of failure to make a scheduled payment. A hierarchy for application of payments pursuant to the association’s collection policy can also be included to specify which fees are paid first (e.g., court costs, return check charges, interest, late fees, and lastly unpaid assessments).

NOTE ABOUT TERMINOLOGY:

The term “condominium association” is used in this article to describe the organization or entity that governs the affairs of the condominium in accordance with the condominium bylaws and declaration, and whose members consist of all condominium unit owners. “Condominium association” is the terminology commonly used for this purpose. However, the Maryland Condominium Act refers to a condominium association as a “council of unit owners” and the District of Columbia Condominium Act refers to a condominium association as a “unit owners’ association.”

The term “board of directors” is used to refer to the administrative entity made up of board members that have authority under the condominium bylaws and declaration to act on behalf of the condominium association. The District of Columbia Condominium Act refers to a board of directors as an “executive board.”

The term “governing documents” is used to refer to the condominium declaration and bylaws. The District of Columbia Condominium Act refers to the condominium bylaws and declaration as “condominium instruments.”

NOTE ABOUT AUTHOR:

Nicholas D. Cowie is a partner in the law firm of Cowie & Mott, P.A. and has been representing condominiums for over 29 years. The law firm of Cowie & Mott, P.A. provides general counsel legal services to condominiums throughout the State of Maryland and the District of Columbia, including assessment collection, drafting resolutions, developing assessment collection policies, contract negotiation, legal opinions, foreclosure actions, litigation, arbitration, mediation services, bylaw amendments and other general counsel services tailored to condominiums associations and homeowners associations. The law firm of Cowie & Mott, P.A. offers flat fee assessment collection services with deferred billing. Please contact our firm for references.

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