Less Is sometimes More -
Question: How should the association handle a prospective buyer’s requests for association records? What records, if any, are we required to provide and who pays any costs involved in producing them?
Answer: Let’s start with the simplest part of this question: If a buyer requests information about a community association, is the association required to provide it? The simple answer, provided by Ellen Shapiro, a partner in Goodman, Shapiro & Lombardi, LLC, is: “No.”
“The association’s relationship is with owners,” she explains. ‘It has no relationship at all with a prospective buyer and is under no obligation at all to respond to the buyer’s inquiries.”
Owners, on the other hand, are entitled to obtain the association records buyers are most likely to want ― financial information, meeting minutes, covenants, rules and regulations, and reserve studies – and are free to share that information with buyers, Shapiro says. Associations should follow their normal protocols for responding to owners’ information requests. There is certainly no reason to make the process different or more complicated for owners who are selling their units , and nothing wrong with making it easier if you can – for example, by expediting the response to meet a closing deadline. If there are any charges for copying records, retrieving older ones, or providing expedited service, the owner should pay them. If the owner thinks the seller should pay, the two of them can work that out.
Because they have a relationship with owners, board members and managers understandably want to help them, and so may instinctively want to respond when buyers ask what seem to be innocuous questions: “Do residents like it here?” “Are any dues increases likely over the next year or so?” “Are any major renovations planned?”
Shapiro’s advice is clear: Don’t. Advise buyers, politely, to get any information they need from the seller. This isn’t a matter of being cooperative or nice, she emphasizes. It’s a matter of self-defense. Managers and boards face potential liability if the information they provide a buyer is misleading or incorrect, or if the owner deems it to be somehow prejudicial to the sale.
Disclosure Risks and Liability
A 2003 decision by a Massachusetts Appeals Court (Eisenberg vs. Phoenix Association Management, Inc.) established that precept as a precedent. The manager in this case completed a disclosure form submitted by the lender providing the buyer’s mortgage. Although the form – a questionnaire that lenders customarily submit to condominium associations – wasn’t intended for Eisenberg (the buyer), he saw it accidentally at the closing.
In response to one question, the manager had replied, erroneously, it turned out, that the association was not planning any special assessments. When Eisenberg received notice a few months later of a special assessment to correct construction defects, he sued the management company. The Appeals Court upheld a trial court decision awarding Eisenberg nearly $25,000 in damages and attorneys’ fees.
That decision has made managers and association boards skittish about completing lender questionnaires and careful about the information they provide – understandably so, Shapiro says, noting that the penalties for errors (up to $1 million) are steep. She thinks the decision and the potential for liability should also make managers and board members adamant in their refusal to provide information directly to buyers.
Those concerns spill over onto the 6(d) certificates associations are required to issue before a sale, certifying that the unit is not subject to any outstanding fees or assessments. To reduce association liability risks, Shapiro, like most condominium attorneys, advises clients to include language specifying that the certificate covers only expenses “due and payable” as of the date the certificate is issued, to make it clear that the ’all clear’ assurance does not apply to assessments the board may have discussed or even approved, but has not yet billed to owners.
Sale-related disclosure issues are not uncommon, Shapiro says. In a recent example involving one of her association clients, the manager knew the board was discussing a possible roof replacement and wanted to disclose that fact on the 6(d) certificate. The lender balked, fearing that the detail could raise a red flag, impeding the sale of the mortgage in the secondary market. “It became a real brouhaha,” Shapiro says. To resolve it, the manager (“wisely,” in Shapiro’s view) required the seller to provide a letter certifying that he (the seller) had notified the buyer of the roof replacement discussion.
The hope, Shapiro says, is that if the board eventually approves an assessment for this roofing project, “this buyer won’t start complaining about it.”