Community Association’s Disclosure Obligations Complicated and Often Unclear

Published on: November 21, 2010

To disclose or not to disclose. That is the complicated and often murky question confronting community associations in their dealings with both current community residents and prospective buyers who are considering purchasing dwellings in the community.

Current owners, as members of the community association, are entitled to know almost everything about its finances, its management, and its problems. There are some exceptions, of course. Privacy concerns dictate that boards should not publish the names of delinquent owners in a newsletter or other public location, although owners should be allowed to see those records on request. Privacy considerations also should bar access to the personnel files of association employees, although their salaries should be disclosed to owners, just as the salaries of local government officials are, and ought to be, a matter of public record.

Pending litigation represents another area where boards should limit the information they disclose to avoid divulging the association’s strategy and possibly undermining its position. But apart from these relatively limited circumstances, disclosure to the owner-members of a community association is more often indicated than not.

Legal Cover

The legal and ethical landscape becomes more complicated when it is occupied by prospective buyers who are thinking of purchasing units in the community but do not yet own them. The Uniform Condominium Act and the Uniform Common Interest Ownership Act require community associations to issue a resale certificate to buyers providing essential information about the community association, including its budget, reserves, special assessments, insurance coverage, and current or pending litigation. The resale packet must also include the condominium declaration as well as the association’s by-laws and rules. But in Massachusetts, which has not adopted the Uniform Condominium Act, associations do not have this disclosure guidance or the legal cover it provides, which leaves them in an uncomfortable no man’s land, caught between the often conflicting interests of buyers and sellers.

In an ideal world, everyone would disclose everything they knew, good and bad, abut an individual unit and about the community as a whole. However, in the real world, where litigation is a constant threat, concerns about legal liability govern and limit how much community associations should disclose to whom.

The courts have ruled consistently that a contract for the purchase of a condominium unit is between the seller and the buyer exclusively. The community association (encompassing the board and the management company acting as the board’s agent) is not a party to the transaction. As a result, it has no relationship with the buyer, and absent a specific statutory disclosure requirement (like that in the uniform condominium statute), the association has no legal obligation to provide information the buyer requests. On the other hand, associations do have a legal relationship with the seller, and they would incur significant potential liability by disclosing adverse information that led a buyer to reject a planned purchase.

Managing the Risks

Associations face a similar potential conflict in dealing with requests for information that lenders require — about owner-occupancy ratios, reserves, budgets, and special assessments — before they will approve a mortgage on a condominium unit. We have advised associations to provide certain disclosures on the association’s form, not the lender’s, and to specify that the information is intended for the lender only and is not to be shared with the buyer. We also suggest that they add a disclaimer stating that while the association believes the disclosures to be accurate and complete, the lender should verify the information independently. A similar approach can manage the risks of disclosing information to buyers as well.

Sellers have an obvious interest in providing, or making available, the detailed information buyers demand, or ought to demand, before they purchase a unit. A pre-purchase home inspection will identify problems in an individual unit, but it can’t possibly tell buyers everything they need to know, or much of anything they need to know, about the condition of the common areas, the stability of the association’s finances, or the quality of its management.

That information can come only from the community association. To protect themselves, board should have sellers sign a statement authorizing the association to answer the buyers’ questions and relieving the association of liability if buyers don’t like the answers. Associations should seek similar indemnification from buyers, in the form of a statement asserting that they understand the need to verify the information independently and will not hold the association liable for disclosures it makes or fails to make.

Don’t Tell if They Don’t Ask

Under this structure, the association has an obligation to respond accurately and truthfully to all questions asked, but it has no obligation to volunteer information the buyer does not request. While this approach addresses the legal liability concerns, it doesn’t address the ethical and practical problems that can arise if the association is aware of serious problems but the buyer does not ask specifically about them. For example, what if the association knows the sellers are moving because they can’t tolerate the noisy and offensive neighbor living above them? Or what if the association is planning to file a construction defect suit against the developer – something even the seller may not know? The disclosure issues are troubling, but they are equally troubling on both sides.

The discovery that the association withheld relevant adverse information won’t make for particularly cordial relations between the new owners and the association in the future. And a belief that they have a moral obligation to “do the right thing,” or simply a fear that the disgruntled buyers may file suit against them, may lead some boards to conclude that they should tell all. But if a board kills the sale by gossiping about issues beyond the scope of the disclosures the seller has authorized, it breaches the association’s duty to the seller, and that is the only duty the courts have recognized.

Associations can deal with extraordinary situations – and an abusive neighbor might qualify – by putting the seller on notice that if the buyer asks an open-ended question, such as, “Is there anything else I should know,” the association will be compelled to mention the problem. But absent a specific query and knowledge of an extremely serious, material issue, associations should answer only the specific questions buyers ask. They should answer those questions honestly, but they should not volunteer information that buyers don’t request.

Lead Paint Exception

Actually, there is one little-known and probably little-heeded exception to this general rule. The Department of Housing and Urban Development adopted regulations in 1996 requiring condominium and cooperative associations to inform potential buyers or renters of the presence of lead paint in individual units or common areas, and to provide federally approved pamphlets describing the dangers of lead poisoning in children. But this is the only unsolicited disclosure associations should provide.

Unsatisfactory though these constraints may be for some boards in some circumstances, associations run a far greater risk of being sued successfully by a seller for disclosing too much than of being sued successfully by a buyer for failing to disclose information they had no legal duty to provide.

Disclosure issues are complicated, to say the least. What is interesting and unsettling is how infrequently they arise. I can’t remember the last time an association board asked for advice about disclosing information to a buyer, which suggests to me that condominium buyers aren’t demanding the information they need to make an informed purchase decision. And the fact that buyers aren’t asking these important questions is far more disturbing than any answers they might receive.