MARYLAND LEGISLATIVE UPDATE 2022
Craig B. Zaller
Erin K. Voss
Lauri J. Corley
Statewide Reserve Studies and Funding Required
Effective October 1, 2022
Building on the requirements put into place for Prince George’s and Montgomery Counties over the last couple of years, the Maryland legislature passed additional legislation requiring reserve studies and full reserve funding for ALL homeowners associations, condominium associations and cooperative associations (collectively, “Community Associations”) in all counties statewide. Similar laws are being adopted across the country in response to the tragic loss at the Surfside Condominium in Florida. Certain Community Associations in Prince George’s County and Montgomery County are subject to the already existing laws pertaining to reserve studies and funding and, as such, the new legislation affects Community Associations in Prince George’s County established on or after October 1, 2020, and Community Associations in Montgomery County established on or after October 1, 2022. Accordingly, if you have questions about your specific Community Association, please contact an attorney at our office to discuss how the legislation affects your community.
Reserve Study. In counties other than those noted above, if a Community Association has had a reserve study completed on or after October 1, 2018, then an updated reserve study must be completed within five (5) years of the date of the Community Association’s latest reserve study. Further, if a Community Association has not had a reserve study completed on or after October 1, 2018, then that Community Association must have a reserve study completed by October 1, 2023. In either case, the reserve study must be updated a minimum of every five (5) years thereafter.
The requirement to obtain a reserve study applies only to a homeowners association (i) that has responsibility under its Declaration for maintaining and repairing Common Area; and (ii) for which the total initial purchase and installation costs for all components identified in subsection (a)(1) of 11B-112.3 of the Maryland Homeowners Association Act (structural, mechanical, electrical, and plumbing components of the Common Areas and any other components that are the responsibility of the homeowners association to repair and replace), is at least $10,000.00. If you are unsure whether your homeowners association is required to commission a reserve study under the new law, please contact an attorney at our office to discuss how the legislation affects your community.
Funding Reserves. For Community Associations that have never commissioned a reserve study, once such study is complete the community must fully fund the reserve account within three (3) fiscal years, excluding the fiscal year in which the initial reserve study is commissioned. All other Community Associations are required to fully fund the reserves based on the funding amount recommended in the most recent reserve study for the Community Association.
Funding the reserves in accordance with the new legislation is MANDATORY under the law. The legislature provided tools to help with raising the required funds by authorizing the Board of Directors of a Community Association to increase assessments notwithstanding anything in the governing documents restricting assessment increases or capping the assessment which may be levied in any fiscal year. If you have any questions about this new law, please contact an attorney at our office to discuss how the legislation affects your community.
Other Regulations. Further regulations in this law require that the professional hired for such studies hold an architect’s or engineer’s license or be certified by Community Association Institute (CAI) or Association of Professional Reserve Analysts and that they have participated in the preparation of at least thirty (30) such studies within the last three (3) years.
As noted above, funding of reserves is MANDATORY. Failure to comply could result in the Community Association and/or the Board of Directors losing protection under what is known as the “business judgment rule” with the end result being that future owners may not be liable for increases in assessments or special assessments levied to raise reserve amounts. Further, Board Members could lose the indemnification that they are provided by their Community Association and the insurance carrier for willfully violating the law. This may leave the Community Association unable to fund its reserve accounts as required under the law. It is important to work with management (or request guidance from our office) to ensure the Community Association follows the new legislation and is raising the required funds. Please do not ignore this new law. If you have any questions about this new law, please contact an attorney at our office to discuss how the legislation affects your community.
See Sections 11-109, 11-109.2, 11-109.4 and 11-110 of the Maryland Condominium Act, Sections 11B-106.1, 11B-112.2 and 11B-117 of the Maryland Homeowners Association Act, and Section 5-6B-26.1 of the Corporations and Associations Article of Maryland.
Dispute Settlement Procedure for Condominiums and Homeowners Associations
Effective October 1, 2022
Section 11-113 of the Maryland Condominium Act was amended, and a new Section 11B-111.10 was added to the Maryland Homeowners Association Act to outline the dispute settlement process applicable to violations of the governing documents for community associations, unless the declaration or bylaws state otherwise. If your Community Association’s declaration or bylaws already sets forth a due process procedure, then you must continue to follow those requirements unless you amend to take advantage of the new law. If your Community Association’s due process procedure was adopted by virtue of a rule and regulation, then the new legislation controls without any further action.
The new law provides that no fines or other penalties may be imposed without following the process outlined in the statute, which is recommended in all instances where there is an alleged violation or dispute involving an owner or occupant within the association.
This new law has significant effects on both condominium associations and homeowner’s associations. Even before this law, a similar procedure has been our recommended process for dispute resolution for all community associations, but this statute has two significant changes. First, with respect to condominium associations and unless the condominium’s governing documents state otherwise, the law modifies the current due process procedures for alleged violations by allowing a unit owner to request a hearing instead of requiring a hearing to be held prior to a board of directors levying fines or other penalties for violations of the governing documents. The new law modifies timing and service requirements with respect to correction of violations and notification of due process procedures.
Second, the new law establishes a due process procedure for homeowner associations similar to that already in effect for condominium associations, and similar to that which we have recommended our homeowners association clients adopt for years. Among providing a clear process prior to imposing penalties for violations of the governing documents, the statute also allows for the recovery of attorney’s fees, even if the association does not have an attorney’s fees provision in its governing documents. This was a significant difference between condominiums, which had this statutory right to impose attorneys’ fees, and homeowner’s associations, which did not until the passage of this law.
Despite the new law, if a homeowner does not request a hearing in the time period provided under the new statute, we have always recommended and continue to recommend that boards of directors hold such hearings with notice to the impacted owner(s) prior to taking any further legal or administrative action. We have taken this position because it provides the board of directors the opportunity to review the evidence and formally vote together at a hearing or meeting on what penalty to levy or what next step to take. At the same time, it gives the owner due process and ensures that the decision, assuming it is made in good faith, is protected by the “business judgment rule”.
While each dispute is different and specific legal advice should be sought, our general view on these matters remains unchanged. We have published a newsletter with the step-by-step process for dispute resolution that we are happy to share with any board members or managers who are interested. Further, if you wish to discuss the specific needs and/or concerns of your association, please contact one of our attorneys or an attorney of your choosing.
Ratification of Defective Corporate Acts
Effective October 1, 2022
The Corporations and Associations Article of Maryland was amended to allow for the ratification of defective corporate acts under certain circumstances. This could come into effect for community associations when actions of the boards of directors are defective for certain procedural issues. If you have questions regarding any corporate charter issues affecting your Community Association, please contact legal counsel to get advice on how this law could benefit the Community Association. See MD Code, Corporations and Associations, Section 2-701, et seq. If you have any questions about this new law, please contact an attorney at our office to discuss how the legislation affects your community.
Disclosures to Unit Owners
Effective October 1, 2022
The legislature amended Section 11-109.1 of the Maryland Condominium Act to expressly state that a board of directors may not withhold or agree to withhold from unit owners any of the terms of a legal agreement where the council of unit owners is a party. However, the new legislation did not change the right of the board of directors to hold a closed meeting for the purpose of considering the terms of a business transaction in the negotiation stage if the disclosure would be against the financial interests of the association.
The legislation further went on to add provisions to Section 11-126 to the Maryland Condominium Act concerning the initial sale of a condominium unit from the builder/developer to a homeowner. Based on the new law, the contract for the initial sale of a condominium unit is not enforceable unless the purchaser is given certain information, including the public offering statement, warranties provided by Section 11-131 of the Maryland Condominium Act, and whether the council has entered into any agreement to settle or release it from unit owner claims related to the common element warranties.
It further requires the developer/builder-controlled board of directors to disclose to the unit owners any agreement by it for the purposes of settling a disputed common element warranty claim at least 21 days before executing such agreement. Nondisclosure agreements contained in any such settlement agreement may not prohibit disclosure by the board to the council of the terms of the settlement agreement.
In resale purchases of a condominium unit, the council of unit owners and the seller must provide additional certifications and ensure that documents are provided not later than 15 days prior to closing. Further, there must be specific disclosures if there has been an agreement entered into on warranty claims, or if the board intends to enter into such an agreement.
With regard to specific compliance with these changes (such as updating resale packages), we recommend that you set up a meeting with an attorney at our office to discuss how the legislation affects your community.
Small Claims Judgment Enforcement Prohibition
PASSED BY LEGISLATURE – VETOED BY GOVERNOR
The legislature attempted to amend Section 11-704 of the Courts and Judicial Proceedings Article to prohibit a judge from ordering the appearance of a debtor in a small claims action after judgment is entered for the purpose of answering Interrogatories in Aid of Enforcement (Post-Judgment Interrogatories), or for an Examination in Aid of Enforcement of a Money Judgment (Oral Exam). What this means is that the court would have no mechanism to require a Defendant to answer such post-judgment discovery which is used to locate assets and collect judgments. Prior to the passage of this law, courts were allowed to order the appearance of Defendants in court, and if they failed to appear, hold show cause hearings. If a Defendant still failed to appear, the court could order Defendant to be arrested. Had this law not been vetoed by the Governor, that process would no longer be available in small claims matters, where the principal balance is under $5,000.00 exclusive of interest, late fees, costs or attorney’s fees, and would greatly harm the collection efforts of community associations. Vetoed by Governor. We will continue to monitor for further action on this law.
If you have any questions or concerns regarding these new laws, please contact any of our attorneys here at Nagle & Zaller.
