D.C.’s “Post-Condominium” Era?

Has the District of Columbia’s real estate market entered a “post-condominium” era?  Could be, according to testimony at the D.C. Council’s December 2015 hearing on proposed legislation to strengthen the rights of condominium owners vis-a-vis Condominium Boards (“The Condominium Owners Bill of Rights Amendment Act of 2015,” 2015 Bill Text DC 443).  Although the condo form of home ownership was originally intended to expand affordable housing options in D.C., the drive for profit-taking through the mechanism of non-judicial foreclosure of condo liens has created opportunities for abuse.  So much so that, at the December 2015 hearing, a D.C. Council Member emphasized that one of the Council’s purposes for the hearing was to determine whether the condominium form of home ownership remained a viable one for the District.

A steady stream of condo owners testified at the hearing about intimidation tactics by Condo Boards (such as exorbitant penalties for technical infractions, illegal lock-outs, filing false liens, insider profit-taking through non-judicial foreclosures, votes conducted in secret, contracts awarded to relatives, etc.).

The hearing was conducted in the shadow of the D.C. Court of Appeals’ landmark ruling in Chase Plaza Condominium Ass’n v. JPMorgan Chase Bank, 98 A.3d 166 (D.C. 2014).  In the Chase Plaza case, D.C.’s highest municipal court held that foreclosure of a condo association’s “super-priority lien” for a mere 6 months’ worth of condo assessments extinguished a first mortgage (or deed of trust).  JPMorgan Chase had argued that allowing the condo associations’ “super-priority” liens to extinguish bank liens would cripple mortgage lending on condo properties in D.C.

At the D.C. Council hearing, the competing interests were portrayed as “condo owner vs. condo association,” despite the fact that an owner is a member of the association, as well.  The owner isn’t always a member of the Board of Directors, however.  The Board, which is comprised of Officers (President, Vice President, Treasurer, and Secretary, in most condominiums), governs the rest of the association.  During the hearing, numerous condo lawyers who represent “condo associations” (but who report to Condo Board Members) attempted to portray the divide as one between “owner vs. association.”  Such antics demonstrate why the proposed legislation is so necessary to protect the rights of individual condo owners.

Among the bill’s provisions is the imposition of a fiduciary standard of conduct (the highest ethical standard under the law) for Board Members.  The bill would require Board Members to (1) “uphold their fiduciary duty to refrain from promoting personal interests, gain, or biases, and shall only use the power and resources of their position to advance the interests of the members of the unit owners’ association”; (2) “ensure that the governance of the unit owners’ association is conducted openly, transparently, efficiently, equitably, and honorably”; (3) “governance shall be in a manner that permits unit owners to make informed judgments, and to be able to hold officers and members of the executive board accountable for their actions”; (4) neither request or grant to, or withhold from, any person any special consideration, treatment, or advantage or disadvantage different from that which is available to every other unit owner in similar circumstances”; and (5) “always remain mindful that the appearance of impropriety can be as corrosive of a unit owners’ confidence in the unit owners’ association as an actual impropriety ....”

But to hear Condo Boards tell it, individual owners who don’t pay their condo assessments are the culprits.  Because assessments remain unpaid, so the assertion goes, basic services (such as garbage collection, snow removal, maintenance, cleaning, etc.) can’t be provided.  Allegedly that’s why Condo Boards are cracking down, despite the fact that basic services don’t cost very much (and therefore overpriced assessments are a huge factor when people forego paying assessments).  Many condo lawyers at the hearing advocated that the Council vote down the bill’s requirement that a mandatory mediation be conducted before a Condo Board can non-judicially foreclose its super-priority lien and obtain clear title to a condo property worth several hundreds of thousands of dollars without ever having to explain the validity of the lien to a judge or mediator.

On the alleged exorbitant costs of basic services:  One public witness testified that a prohibition against “self-management” is written into the bylaws of some condominiums, to prevent unit owners (even in very small communities of 4 units) from soliciting bids for competitively-priced garbage collection, maintenance, snow clearing, etc.  Such small communities may be forced under their bylaws to hire a management company, which uses vendors with whom they have cozy relationships.  Many condominium associations operate on the erroneous assumption that basic services must be exorbitantly priced.  As the witness emphasized, “[The provision of overpriced services through the management company] is a racket ....”

The proposed legislation also would require the establishment of an Advisory Council, reporting to the Mayor, the Council, and District agencies.  The Advisory Council would include community members and appointees.  Such an Advisory Council could be very beneficial to D.C. condo communities, if empowered to provide education to D.C.’s Condo Board Members on how to solicit competitively-priced basic services, how to avoid ethical conflicts, how to establish procedures for transparency, how to keep financial and other records, etc. 

Foreclosure of D.C. Condo Lien Extinguishes First Mortgage

Residential real estate lenders are still reeling from the August 2014 ruling of the D.C. Court of Appeals in Chase Plaza Condominium Association v. JPMorgan Chase Bank, 98 A.3d 166 (D.C. 2014), in which D.C.'s highest municipal court held that foreclosure of a condo association’s “super-lien” (a super-priority lien for 6 months of unpaid assessments) extinguishes all junior liens, including a bank's lien for a first mortgage (or first deed of trust). 

JPMorgan Chase had argued that the condo association’s “super-lien” (which was enacted by statute in 1991 as an amendment to the D.C. Condominium Act) was entitled only to priority of payment.  But a three-judge panel of the D.C. Court of Appeals held that the “super-lien” was a true senior lien, which, under common-law principles of lien priority, extinguishes all junior liens in a foreclosure sale.

Reversal of the ruling is unlikely, despite the unease of banks regarding (1) the statute's lack of a notice requirement, until the 2017 amendment,* and (2) the assertion that the “super-lien” might be considered an unconscionably low purchase price for a condominium unit (the unit at issue was mortgaged for $340,000, while the purchase price was a mere $10,000; the amount of the super-lien was $9,415). 

JPMorgan Chase had argued that extinguishment of the bank’s lien under such circumstances would cripple mortgage lending in D.C., while the condo association had argued that it must be permitted to enforce its super-lien to prevent the condo community from falling into disrepair due to unpaid assessments.  As to such competing policy considerations, the Court of Appeals indicated it would take no position, deferring to the D.C. Council on matters of policy.

While Chase Plaza Condo Association did send notice of the scheduled foreclosure sale to the record beneficiary of the first deed of trust (Washington Mutual, a.k.a. WAMU), that interest was subsequently acquired by JPMorgan Chase.  The evidence is unclear as to whether the condo association knew that JPMorgan Chase had subsequently acquired the first deed of trust after WAMU filed for bankruptcy (apparently the issue of who succeeded WAMU as the beneficiary had been litigated extensively in the bankruptcy courts, and so JPMorgan Chase’s claim was on the public record). 

The condominium association would have faced practical difficulties attempting to send notice to a lienholder whose interest was unrecorded, in any event.  Constitutional Due Process does not require a party to do the impossible, that is, send notice to an unknown entity whose name and address are not "reasonably ascertainable through the exercise of reasonably diligent efforts."  Small Engine Shop, Inc. v. Cascio, 878 F.2d 883 (5th Cir. 1989) (citing Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983)).  Furthermore, "state action" would have to be established for Due Process protections to attach.  A footnote in the Court of Appeals’ opinion questions whether the lack of a notice requirement in the Condominium Act might render that portion of the statute unconstitutional, either facially or as applied to JPMorgan Chase, but the Court declined to consider the issue since the parties had made no constitutional arguments in the trial court.*

The Court of Appeals opinion also expresses doubt that an association could waive its statutory right of priority by contract.  As the Court of Appeals observed, the Condominium Act, D.C. Code § 42-1901.07, states that “[e]xcept as expressly provided by this chapter, a provision of this chapter may not be varied by agreement and any right conferred by this chapter may not be waived.”  See Chase Plaza, supra, at 178.

* UPDATE: On February 9, 2017, the D.C. Mayor signed into law an amendment to the D.C. Condominium Act requiring among other things notice to a first mortgage holder before an association forecloses its lien for unpaid assessments. 

Duty To Disclose “Non-Discoverable” Defects Before Selling Your Condo

There is a duty to disclose “non-discoverable” defects in an old condo unit.  If you’re planning to sell real estate with defects that you know about (such as recurring water damage), it is unlawful to fix the defects just for the purpose of sale and fail to disclose the recurring damage to the potential buyer.  Such actions may be construed as “active concealment,” and subject you to liability for misrepresentation and fraud.

It’s also unlawful to remain silent in the face of a known misunderstanding by the potential buyer, or to omit information that a reasonable person would consider important.  Special duties also are imposed upon agents toward their principals.  For instance, if a sales agent represents a buyer, the sales agent cannot conceal defects or fail to disclose defects in the hope of making a sale.  Such action would subject the sales agent to additional liability for breach of fiduciary duty, not to mention potential disciplinary action by the Real Estate Board.

The statute of limitations for fraud in D.C. is three years.  A buyer who finds himself or herself the owner of a defective property should ask neighbors whether the previous owner suffered the same type of damage.  If so, the buyer could investigate further and consider filing a lawsuit against the previous owner for the cost of the damage, as well as punitive damages. 

Was a home inspection conducted before the purchase? If the inspection revealed no major defects, it may be an indication of “concealing” repairs by the seller for the purpose of sale, or a negligent home inspection that failed to discover defects that a reasonably diligent inspection would have discovered.  The home inspection report will contain disclaimers and limitation of liability provisions. Review those provisions carefully, as you may have a cause of action against the home inspector as well.

Move-In And Move-Out Fees: Are They Legal?

The Condo Association generally has broad authority to regulate the internal affairs of the condominium, but such power is not without limit.  Move-in and move-out fees are assessments against individual unit owners, and, as such, are over and above the condo fees paid by unit owners each month according to their pro rata share of the condominium's expenses.

In Westbridge Condo. Ass'n, Inc. v. Lawrence, 554 A.2d 1163 (D.C. 1989), the D.C. Court of Appeals invalidated a $150 move-in fee imposed by the Condo Association because the condominium’s governing documents did not authorize it.  The governing documents limited assessments against individual unit owners for use of the common elements to situations involving owner negligence, misuse, and neglect.

The Condo Association argued that the move-in fee was justified because the loading dock, doors to the entryway, elevator, and common area floor were all used during move-in.  However, the evidence at trial showed that move-in involved merely temporary and non-exclusive use of the common elements.  No resident was denied access to the common elements during the move-in, and no damage to the common elements resulted.  The trial court held that the move-in fee was an invalid double charge for services already paid for by monthly condo fees.

In Westbridge, the Court determined that the Condo Association acted beyond the legal powers granted to it by the condominium’s governing documents and by statute.  The statute limited the power of Condo Associations to those expressly granted by the governing documents, or those not prohibited by the governing documents and subject to any limitations therein.

“Owner Occupied” Condo Communities: Unreasonable Restrictive Covenants?

A condominium's governing documents frequently prevent condo purchasers from renting their units to tenants for a period of one year or so after the initial sale of a new unit.  Beyond the typical one-year period, rules and regulations of the Condominium Association may require owners who want to lease their units to place their names on a waiting list, with only a small percentage of units permitted to be rented at any one time. 

Such restrictive covenants may or may not be reasonable.  Some Condominium Boards are vigilant about maintaining primarily "owner-occupied" communities, on the theory that owners exercise greater care over their property than renters.  However where those restrictions go beyond what is necessary to maintain a well-cared for community, such restrictions may violate the property rights of owners, and the civil rights of prospective tenants. 

In a typical case, an affordable community seeking advantageous property tax credits or perhaps in an effort to meet lending criteria limits the number of units that can be rented at any one time.  Such restrictions, enacted for a seemingly legitimate purpose, may have a disproportionate impact on certain unit owners, and may violate the civil rights of certain prospective tenants (those who pay for their rentals through vouchers, for instance).

In such a scenario, the community association may be skirting dangerously close to violating federal fair housing laws that prohibit discrimination in housing.