Click the title to go directly to the article:

Proposed Lis Pendens Changes Include Rights for Condominium-Conversion Tenants 
Burden of Amending Condominium and Homeowners Association Documents Eased
Court Decision Adds Risk to Changing Condominium Disclosure Materials
Additional Condominium Conversion and Registration Requirements Voted Down
New Law on HOAs and Condominiums Will Significantly Affect Developer Costs
Decisions May Limit Use of Exemptions under Interstate Land Sales Full Disclosure Act
EPA Issues Final Rule on Lead Paint
Awareness of Current FNMA and HUD Policies Critical for Condominium Projects

WASHINGTON, D.C.

Proposed Lis Pendens Changes Include Rights for Condominium-Conversion Tenants

In disputes involving real property, parties may file a lis pendens against the property to protect their interests or gain an advantage. Developers should be aware that although the Lis Pendens Amendment Act of 2010 limits the scope of such actions, it also makes clear that a lis pendens may be filed when certain tenants' rights are at issue.

The doctrine of lis pendens prohibits a change in the status of real property during litigation. The Lis Pendens Amendment Act of 2010 narrows application of the doctrine to properties directly at issue in the litigation. At the same time, it also makes clear that a lis pendens may be filed when there are disputes over the legitimacy of a condominium conversion or compliance with the Tenant Opportunity to Purchase Act.

A lis pendens may be filed if the underlying action or proceeding directly affects title or tenancy interest in a property. A “tenancy interest” includes a tenant’s rights in the conversion of rental housing to condominiums or cooperative housing or the purchase of rental property. The current law enables tenants to file a lis pendens on the theory that the dispute affects their leasehold interest in a property; the new law simply clarifies that right.

The bill also permits affected property owners to obtain a court order canceling the lis pendens before the litigation is resolved, imposes a fine of up to $500 for failure to timely cancel a lis pendens notice, and provides a process for a property owner to ask the court to cancel a lis pendens notice. The new law would apply to existing as well as future lis pendens. It should serve as a reminder that compliance with the D.C. conversion and Tenant Opportunity to Purchase law remains critical.

The bill is currently before the Mayor. Should he approve it, it would go to Congress for a mandatory 30-day review before becoming law.

^ back to top 


VIRGINIA

Burden of Amending Condominium and Homeowners Association Documents Eased

Thanks to new legislation passed in Virginia, amending condominium and homeowners association documents just got easier. This law is timely, as many developers are faced with updating documents to comply with new Fannie Mae, Freddie Mac, and HUD guidelines.

The new law clears the way for amendments to condominium and homeowners association documents to be made by way of the most advanced technology available. The only exemptions are cases in which other methods for obtaining signatures, votes, consents, or approvals are mandated.

Acceptable methods are defined as any technological means “providing sufficient security, reliability, identification, and verifiability,” including, without limitation, “electronic transmission over the Internet or the community or other network, whether by direct connection, intranet, telecopier or electronic mail.”

The Virginia Senate amended the original proposed bill to exempt any notices related to an enforcement action by the unit owners association, an assessment lien, or foreclosure proceedings in enforcement of an assessment lien.

It is also worth noting that the new law would not permit the use of technology where the association’s documents require approvals to be obtained in person, by proxy, or by original signature.

^ back to top


MARYLAND

Court Decision Adds Risk to Changing Condominium Disclosure Materials

During the real estate downturn, buyers’ lawyers have advanced many arguments seeking to cancel clients’ contracts and recover deposits from sellers. In Herlson v. RTS Residential Block 5, LLC, the Maryland Court of Special Appeals issued a decision that may have serious implications for condominium developers seeking to change public offering statement materials for their projects.

Condominium developers perhaps should be most concerned with Herlson’s finding that Section 11-126(d) of the Maryland Condominium Act provides the purchaser five days to rescind a sales agreement―regardless of the effect of amendments. Before this decision, many, including the Secretary of State’s Office, which administers condominium registration and amendments, construed the section to provide a five-day rescission right only if POS changes materially affected a purchaser’s rights.

In Herlson, the purchaser plaintiff entered into a contract prohibiting the purchaser from leasing or reselling the unit without penalty for one year. The seller later provided notice of several POS updates, including to remove the leasing prohibition and change the ability to resell without penalty from one year to two years. The day after receiving notice, the buyer tried, in writing, to cancel the contract, arguing that removing the rental restriction constituted a material change. The seller countered that the purchaser had no right to cancel because the POS updates did not materially affect the contract.

The seller initially prevailed, but the Maryland Court of Special Appeals overturned the trial decision, holding that the POS changes materially affected the buyer’s rights, even though they related to future contracts to which the purchaser would not be party.

As a result of this decision, it is critical that condominium POS materials be drafted to provide as much flexibility as possible in anticipation of future changes and that developers carefully evaluate the risks of changing such materials.

^ back to top

Additional Condominium Conversion and Registration Requirements Voted Down

Ballard Spahr attorney Marc DeCandia successfully testified before the Maryland General Assembly against a bill that would have amended the Maryland Condominium Act regarding the conversion of residential rental facilities and the expiration of a condominium’s registration. The legislation would have made the already onerous conversion process even more difficult for developers. 

Under current law, tenant conversion rights do not apply to tenants who enter a lease after an owner or landlord has initially notified tenants of an intention to create a condominium. House Bill 1081 and Senate Bill 692, both of which failed to pass, would have required that such rights be extended to those who rent property in the facility after the owner has made that initial notice. Tenant conversion rights include rights of purchase, extended lease terms, and moving expenses.

The legislation also attempted to limit the validity of a registration for a conversion from a rental facility to a condominium to five years. If the conversion were not completed within five years, the registration would have expired and a new public offering statement and registration application would have been required.

^ back to top

New Law on HOAs and Condominiums Will Significantly Affect Developer Costs

The Maryland General Assembly has enacted a bill regarding condominiums and homeowners associations that would significantly affect developer costs and present serious consequences for master condominiums and mixed-use condominiums. The bill mandates that certain components of a condominium will be common elements, regardless of how they are designated in the documents and their intended use. It also extends the developer’s warranty on condominium common elements and on HOA common area improvements. 

To read an earlier legal alert that addresses the Maryland legislation on condominiums and HOAs, please click here.

^ back to top


NATIONAL

Decisions May Limit Use of Exemptions under Interstate Land Sales Full Disclosure Act

Two recent court decisions may limit the use of some exemptions under the Interstate Land Sales Full Disclosure Act (ILSFDA). The antifraud statute requires developers to register a project with HUD unless the development falls within certain exemptions. If a developer fails to comply, a purchaser has certain remedies, including the right to revoke the purchase agreement or compel the seller to buy back a unit after settlement. 

Two of the more common exemptions are the 100-lot exemption, for projects with fewer than 100 lots, and the improved lot exemption, which applies to completed dwellings or dwellings that will be complete within two years of the purchaser executing the sales contract. HUD has established that developers may "piggyback" the 100-lot exemption and the improved lot exemption. This allows for 99 lots to be sold that are not subject to the two-year delivery obligation and all lots beyond the 99 lots to be under the improved lot exemption. ILSFDA also provides that an exemption will not apply if the disposition method is adopted for the purpose of evading registration requirements.

In a recent case before the U.S. District Court for the Southern District of Florida, the plaintiff asserted that the developer had stacked two exemptions to avoid ILSFDA's disclosure and antifraud requirements. The Court focused on whether the developer had any legitimate business purpose in structuring the development to fall within the exemptions. Citing a case decided in the Southern District of Florida last year (Genrty v. Harborage Cottages-Stuart, LLLP, 602 F. Supp. 2d 1239), the Court noted that "the threshold for establishing a legitimate business purpose sufficient to qualify for an exemption may be low, but it requires some factual evidence demonstrating that the method of disposition has some bone fide, real world objective that manifests a legitimate business purpose."

In this case, the Court found that the developer's assertion that it had structured the purchase agreements to save time and money was a legitimate business purpose and so ruled that the developer had not illegally circumvented ILSFDA.

In another recent case, the U.S. District Court for the Eastern District of Virginia held that the developer of a subdivision with more than 100 lots could not rely on the 100-lot exemption until enough sales had been made under another ILSFDA exemption to reduce the number of lots being offered to fewer than 100. The Court noted that the 100-lot exemption is written in the present tense ("the sale or lease of lots in a subdivision containing fewer than 100 lots which are not exempt under subsection (a)"). The goal of making enough sales to builders to qualify for the 100-lot exemption was not acceptable, as potential sales are speculative, the Court found.

The decision, although not binding outside the Court's jurisdiction, is notable. It denies a developer the ability to claim both the 100-lot exemption and the improved-lot exemption in a high-rise condominium because all units beyond 99 would have to be sold under a contract requiring completion within two years before any units could be sold in reliance on the 100-lot exemption.

^ back to top

EPA Issues Final Rule on Lead Paint

New EPA rules on lead paint will require new certifications. Developers should confirm that new certifications have been obtained before starting renovations.

The EPA’s final rule on Lead Paint: Renovation, Repair and Painting became effective on July 6, 2010, requiring that all renovations that disturb painted surfaces be performed by certified firms with certified renovators on staff. Remodelers are scrambling to obtain firm certification, which requires a $300 fee, and to become a registered certified renovator, which requires eight hours of lead paint training. Both certifications are good for five years.

The rule exempts buildings constructed after 1978, those determined by a risk assessor or a lead paint inspector to be lead-free, and renovation projects that affect less than 6 square feet of interior or less than 20 square feet of exterior. The EPA also intends to remove the current provision allowing owners of single-family homes without children or a pregnant woman to waive the demands of the rule.

The EPA anticipates enforcing this new rule by requesting renovations records for review. According to the National Association of Home Builders, fines for noncompliance are expected to be $37,000 per infraction per day.

^ back to top

Awareness of Current FNMA and HUD Policies Critical for Condominium Projects

Recent changes to FNMA and HUD requirements could affect the structure and marketability of many new and existing condominium projects. Awareness of the requirements is critical to formulating a viable marketing strategy. Some of the more commonly encountered issues are:

  • Pre-Sales. FHA generally requires at least 50 percent of the units to be sold or under contract. Through the end of 2010, FHA has reduced the pre-sale requirement to 30 percent if the lender or developer meets certain requirements to verify that the sales have occurred. FNMA requires 70 percent of the units in the project or subject legal phase to be sold or under contract, and for each phase, the 70 percent is calculated on a cumulative basis counting prior phases.

  • Owner-Occupancy and Concentration. FHA requires 50 percent owner-occupancy or sales to owners who intend to occupy. FNMA requires 70 percent owner-occupancy or second-home purchasers or owners under contract who intend to occupy as a primary or second home. In addition, FHA places a 30 percent limit on the concentration of units that can be financed using FHA-insured loans, which has been increased to 50 percent through December 31, 2010.

  • Budget Requirements. FHA requires the mortgagee to review the budget to determine that it is adequate to maintain all amenities, contains reserves for capital expenditures and deferred maintenance in an account representing at least 10 percent of the budget, and provides adequate funding for insurance and deductibles. FNMA requires an adequate budget, with a reserve of a least 10 percent of the budget. In certain instances the 10 percent budget reserve requirement can be waived.

  • Delinquencies. FHA and FNMA both provide that no more than 15 percent of the total units can be in arrears more than 30 days past due of their condominium assessments.

  • Investor Ownership. FHA and HUD both prohibit one investor owning more than 10 percent of the units. This limitation also applies to developers who have rented vacant or unsold units and represents a hurdle for a developer of a stalled project that has rented out a significant percentage of the units.

  • 10-Year Structural Warranty. HUD no longer requires a 10-year warranty for projects where the local jurisdiction issues a building permit and certificates of occupancy.

  • Other HUD Changes. HUD is taking additional measures that will make it more difficult for purchasers to obtain a HUD-insured mortgage. HUD has increased the upfront mortgage premium from 175 to 225 basis points. FHA is also implementing a “two-step” FICO floor for FHA purchase borrowers, requiring borrowers with FICO scores of 580 and above to make a minimum 3.5 percent down payment and those with FICO scores between 500 and 579 to make a minimum down payment of 10 percent. Applicants below a 500 FICO score are ineligible. Finally, permitted seller concessions will be reduced from 6 percent to 3 percent. These changes could make FNMA loans more attractive in certain instances. Accordingly, steps should be taken to make sure a project is also FNMA compliant.

^ back to top