Silence Is Not Golden: Resale Disclosure Statements and Minnesota Statute 515B

MCIOA
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Seldom are there situations in Minnesota where a prevailing party in litigation can have a debt forgiven, recover attorney fees, court costs and even, potentially, punitive damages. Successful litigants bringing claims under the Minnesota Common Interest Ownership Act, Minn. Stat. §515B (MCIOA) are the rare exception who stand to recover their legal fees and additional damages for claims brought under the act. One of the often overlooked provisions of MCIOA deals with an association’s disclosure obligations to a prospective purchaser looking to buy a unit within the association.

Under MCIOA, associations are required to provide purchasers with a resale disclosure certificate dated within 90 days of closing, which must disclose a litany of items ranging from assessments to “other material facts” as prescribed by the statute. “The purpose of the relevant MCIOA provisions is to compel the townhouse associations which have the best access to information … to voluntarily share this information with prospective purchasers.” Neumann v. Innsbruck North Townhouse Assoc., 2001 WL 910297 at *3 (Minn. Ct. App. 2001) (NSOP).

Under MCIOA § 515B.4-107(b), associations must disclose:

  1. Whether or not there is a right of first refusal or other restraint on the free alienability of the unit(s).
  2. Any common expense assessments and special assessments payable including the following:

a. Annual assessments.

b. Special assessment installments.

c. Unpaid assessments, fines or other charges.

d. The association has/has not (strike one) approved a plan for levying certain common expense assessments against fewer than all the units.

  1. Additional fees or charges other than assessments payable by unit owners (late payment charges, user fees, etc).
  2. Whether or not there are any extraordinary expenditures approved by the association, and not yet assessed, for the current and two succeeding fiscal years.
  3. Whether or not the association is obligated to replace the components of the common interest community and whether there are reserves for the replacement.
  4. Whether replacement will be funded by assessments levied only against the unit or units served by the component.
  5. The recent balance sheet and current budget.
  6. Whether there are any unsatisfied judgments against the association.
  7. Whether there are any pending lawsuits to which the association is a party.
  8. A description of insurance coverage.
  9. Whether the board of directors of the association has notified the unit owner (1) that any alterations or improvements to the unit or to the limited common elements assigned to it violate any provision of the declaration; or (2) that the unit is in violation of any governmental statute, ordinance, code or regulation.
  10. The remaining term of any leasehold estate affecting the common interest community.
  11. That the resale disclosure certificate is given in connection with the resale of the unit by a unit owner who is not a declarant and who, therefore, is not liable for express warranties … or implied warranties.
  12. Whether there are, in addition to the above, matters affecting the occupancy or use of the unit, or the unit owner’s obligations with respect to the unit which are deemed material.

Typically, if the association is managed by a management company, the management company takes on the task of filling out the resale disclosure certificate. By doing so, management companies share in the risk associated with improper disclosure. Under MCIOA, liability extends to anyone or any company providing inaccurate or misleading disclosures, which would include property managers or association board members. Minn. Stat. § 515B.4-116. Any person or class of persons adversely affected by the failure to comply has a claim for relief. § 515B.4-116(a).

The remedies for failing to disclose are significant. Under MCIOA, an aggrieved purchaser is statutorily entitled to forgiveness of any undisclosed assessment and is not liable for an assessment that exceeds any amount that was disclosed unless the increase was only approved after the sale. A misinformed purchaser can also recover their actual damages, attorney’s fees and costs of the litigation if they prevail. § 515B.4-116(b) and 515B.4-116. The association enjoys a similar right to its legal fees and costs should it prevail in any legal action.

Notably, however, damages are not limited to actual loss and legal fees. A court may also award punitive damages for a willful failure to comply. These remedies are to be liberally construed to ensure that “the aggrieved party is put in as good a position as if the other party had fully performed.” § 515B.1-114(a) (Emphasis added). While appellate decisions are few, thus far, courts have not shied away from awarding purchasers their requested relief under § 515B.

In one case where the resale disclosure certificate did not reveal a planned assessment but where the property manager orally disclosed a small anticipated assessment, the Court of Appeals held that the purchaser was only responsible for the actual amount disclosed. Neuman supra at *2. Citing § 515B.4-107(e), the Court of Appeals held that the property manager’s oral notification “substantially complied with [§ 515B4.107] to the extent of the oral disclosure.”

Courts have also not been reluctant to award attorney fees to purchasers who can prove violations of MCIOA. In Schmitt, the developer of a common interest community misrepresented the warranty and age on a roof and did not disclose any water intrusion issues. 2004 WL 3168081, at *1-2. The developer failed to correct the inaccuracies on its disclosure statement with subsequent sales. The Minnesota Court of Appeals held that the developer had violated MCIOA and that the purchasers were entitled to relief from the proposed roof assessment, as well as their legal fees and costs. See, also, McMorrow v. R.E.C., Inc., and Village Homes of Grandview Square Association, A12-0639 (Minn. Ct. App. February 11, 2013) (NSOP) (jury verdict for owner under MCIOA for judgment against the association for $120,537.65 in damages, affirmed along with district court’s award of $121,613.20 in legal fees, $25,698.71 in disbursements, $200 in costs and $17,242.68 for interest where association violated its duty to repair the common areas).

Looking at a developer’s nondisclosures and MCIOA warranty violations at Clifton Place Condominium, the Minnesota Court of Appeals awarded the purchasers a total of $389,888.18, which included $156,355.63 in legal fees and litigation costs of $19,992.44. The court also awarded punitive damages of $200,000 in the event the judgment was uncollectible. In Clifton, the dispute concerned a misrepresentation under MCIOA of the type of flooring promised to be installed in the units. Rather than installing the hardwood floors as promised, the developer installed “engineered wood flooring that contain[ed] layers of wood and other artificial material.” Id

In considering the purchaser’s request for punitive damages under § 515B.4- 116(b), the Clifton court noted that punitive damages can be recovered “when there has been a willful failure to comply with any provision of Chapter 515B, or any provision of the declaration, bylaws, or rules and regulations of the common interest community.” Clifton, 2009 WL 6666352, at ¶ 128 citing § 515B.4-116. (Emphasis added). “[‘]willful[’] is defined as [‘]willful[’] as [‘]voluntary and intentional, but not necessarily malicious.[’]” Id. citing Black’s Law Dictionary 1630 (8th ed. 2004).

Associations and their managers are well-advised not to overlook the catch-all phrase in the statute which requires disclosure of any matter “affecting the occupancy or use of the unit, or the unit owners’ obligations, with respect to the unit which are deemed material.” Thus far, there are no Minnesota appellate decisions deciding what falls within the purview of this catchall disclosure requirement. Certainly prior litigation, anticipated repairs, or other activities that will affect occupancy could be deemed “material” to the occupancy or use of the unit and failure to disclose these events could result in costly litigation for the association and any entity or individual involved in completing the resale disclosure certificate. When in doubt and given the significant downside to remaining silent, disclosures should be made carefully, not selectively.  Brenda M. Sauro

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