The Secret to Disclosures in Community Associations, Part 2: Practical Pointers Concerning Disclosure Requirements
As mentioned in last week’s submission, associations are frequently confronted with whether something must be disclosed, could be disclosed or should be disclosed. Some questions are easy. For example an Oregon Condo must disclose to prospective purchases, the existence of car charging stations and the owner’s related responsibilities. That’s a black-and-white question and answer, but consider the following hypothetical situation:
XYZ Association received a report recommending full replacement of the roof but doesn’t yet know how much it will cost. They are getting currently obtaining bids for the work. What must the Association disclose as part of a resale certificate or other disclosure?
Without more information, we don’t know whether a special assessment is anticipated or if the association’s reserves are adequate to cover the replacement expense. The Association might not know either. As mentioned last week, Washington condos have pretty clear direction found in RCW 64.34.425: Disclosure is required if the “anticipated repair or replacement costs” are greater than “5% of the annual budget of the association that has been approved by the board of directors.” Without knowing how much the roof will cost, this statute probably doesn’t require disclosure. However, what if the Association’s reserve study estimates replacement of the roof will cost $30,000 and the Association’s has an annual budget of $300,000. Someone might argue the Association has knowledge of an anticipated repair in excess of 5% of the Association’s annual budget. What if the Association doesn’t have a reserve study and has no idea what the roof will cost, but knows that the Association has inadequate reserves to pay for the repair. In other words, the Board knows a special assessment is likely. These are the types of situations that require deeper consideration. Here is some practical advice for dealing with the more difficult disclosure issues:
1) Choose your plaintiff: Claims from an owner/seller based on their belief that the association “over disclosed” are rare and almost always less concerning than claims from actual purchasers who argue the association had knowledge of material facts and failed to disclose them. So, if facing a close decision on whether to disclose or not disclose, we typically advise in favor of disclosure. Wording of a disclosure, especially one that falls into the “grey” area, is very important. In general, trouble for an association is unlikely when providing a factual disclosure, without commentary.
2) Involve the board: Board approval of disclosures is important. It’s a good idea for boards to regularly review and approve the disclosures for their community. This protects the association from liability that might stem from undisclosed information known by a director. It also helps protect the management company, because disgruntled purchasers will often go after managers in addition to the owner’s association.
3) Communicate with the owner/seller: If the association is being asked to offer a disclosure, it might consider providing that disclosure to the owner/seller along with a cover letter explaining that the association believes the information accurate but inviting the owner/seller to review the disclosure prior to disclosing it to any potential purchaser. This may help limit liability by giving the owner/seller an opportunity to review and object to the disclosure before it goes to the potential buyer.
Real estate disclosures are an area of potential liability for everyone involved in the process. Communication and common sense are a good start but legal advice is sometimes needed. Please give us a call if we can be of assistance.