Are Sellers Required to Disclose the Existence of Delinquent HOA Dues?

In Michigan the law is clear as to the duties of condominium associations to provide written statements to purchasers of units located in the condominium regarding unpaid assessments, interest, late charges, fines, costs and attorney fees. However, when it comes to homeowners that own lots in subdivisions governed by a Homeowners’ Association (HOA), the law is not as clear-cut. Therefore, prospective purchasers should be aware of any outstanding items that are owed by the prior owner of the lot to the Association. Those who purchase properties within an HOA’s jurisdiction automatically become members and are required to pay dues in the form of assessments. The purpose of this article is to inform prospective home buyers, wherein their titled real property interests will be governed in a planned community, of the requirements and duties of the seller and/or its broker to disclose these type of unpaid expenses.

Home buyers may be tempted to seek guidance by reviewing the applicable provisions of the Michigan Condominium Act (MCL 559.211) as it relates to disclosure requirements. The Act generally states that a purchaser of a condominium unit is entitled to a written statement from the association of co-owners setting forth the amount of those particular items which have been charged against the seller’s association account. As a result, the purchaser is not liable for this type of charges or subject to any lien which is in excess of the amount set forth in the written statement. The purchaser is required to request a written statement from the Association at least five days before the sale of the condominium unit. If they fail to do so, they will be liable for all unpaid items, including any attorneys’ fees incurred in the collection of any delinquent amounts.

It should be noted that purchasers of real property governed by an HOA do not have the same statutory protections as condominium unit buyers. In a typical home buying transaction, prior to closing, a seller must provide to the buyer the seller’s physical property condition disclosure statement, but not the actual governing documents of the association. The only legal requirement is for the seller to disclose whether the property is subject to common interests and property restrictions, whether membership in the HOA is required, and the identity of the HOA.

There are no other seller duties that are mandated by statute or in common law in regards to these type of disclosures. Typically, if a disclosure is made, a sale closing package will show if assessments have been paid down to a zero balance. Nonetheless, there is no legal duty for the title company handling the closing, nor the property agents brokering the deal, to provide any such documentation. Properties located in a subdivision which are under the purview of an HOA’s governance are subject to certain terms as dictated in the Master Deed of the subdivision which is recorded with the register of deeds in the county where the property is located.

A Declaration is a document that subjects land to certain restrictions and is typically recorded with the register of deeds by the original developer at the inception of the development of the subdivision. Once an Association of Homeowners is formed, those rights and restrictions, along with any Bylaws that have been adopted, will customarily be transferred to the HOA. These covenants are contractual in nature and will be enforceable against prospective buyers upon the closing and title transfer of the purchased lot. Once the seller discloses the existence of an HOA, the burden shifts to the buyer to review the governing documents. These documents are considered public record once they are recorded with the register of deeds and are usually available for inspection with the association, either in paper or electronic format, through its Board of Directors or a managing agent. However, not all community groups are organized in a manner that allows for easy access to such written instruments.

When it comes to retrieving records, many prospective purchasers are at a loss as to whether to contact their real estate agent, the title company handling the closing, or the HOA itself. Michigan law does not require real estate brokerage firms and realtors to provide community association governing documents to prospective buyers in the escrow period prior to closing. In fact, most closing documents indicate, on their face, that realtors are not legally mandated to provide these documents to buyers. This may be an issue for some buyers that would otherwise back out of a deal if problems exist and were properly revealed. Indeed, Michigan has explicit disclosure laws in terms of divulging the physical condition of properties, but not in regard to outstanding HOA assessments and other charges. Since the terms of the governing documents are contractual in nature, they ordinarily may be interpreted and enforced as written when challenged.

In many instances, a title company will order the HOA’s governing documents to be retrieved from public records, with the seller paying the copying costs, and include same as part of the overall seller disclosure documents in the closing package. In fact, some property condition reports include a separate seller’s disclosure statement that indicates language such as “…any common element areas co-owned with an HOA that have authority over the property must be disclosed”. These disclosures are made prior to a purchase agreement being executed by the parties. As such, the potential buyer is placed on actual notice that an HOA’s covenants of conditions and restrictions exist. However, these types of notices are considered constructive in nature in the absence of any such explicit written disclosures being provided.

It is important to note that disclosures are not considered to be a warranty of any kind by the seller that assessments are not owed in relation to the association. One of the results of providing constructive and explicit disclosures is that an HOA has no contractual obligation to provide to the buyer notice of or actual statements indicating that there are delinquent assessments owed in relation to the lot. It may be that the Michigan State Legislature has been reluctant to mandate any such legal duties as associations could be viewed as interfering with a sale of property for which it had no privity of contract or clear understanding of the terms that are being negotiated.

The lack of clear guidelines with these types of issues can be a problem, not only for buyers, but for community associations as well. An HOA’s Board of Directors has a fiduciary duty under the law to enforce the terms of the Declaration, Bylaws, and any Rules and Regulations governing the owned lots in the subdivision. The HOA entity itself is legally formed as a non-profit corporation that is under the direction of Articles of Incorporation that are typically in line with the provisions of the Michigan Non-Profit Incorporation Act (MCL 450.2101). It should be a best practice for an HOA to provide a “welcome package” to new homeowners and include copies of the recorded governing documents and all amendments thereto.

Even if that procedure is not followed, an HOA that has recorded their governing documents has provided constructive notice, which is legally enforceable, that a restrictive deed exists and contains covenants to pay assessments. This constructive notice to the public and to a prospective purchaser runs with the land and, in most instances, a proper title search prior to closing may be the only way for any such information to be revealed. The seller’s only other legal duty is to provide accurate disclosures when they are offered. Otherwise, the HOA’s covenants are binding and enforceable on all lot owners within the subdivision and automatically encumber the land upon transfer of title.

Many HOAs have procedures in place to provide a statement of “paid dues and assessments” upon request of prospective buyers in preparation for closing the sale of a lot. If litigation ensues regarding disclosure issues, typically it will be shown that the buyer, or the title company handling the closing, failed to request any such governing documents from the HOA. Because there is no statute in Michigan currently addressing this dilemma, buyers should beware and become informed as to the potential pitfalls of purchasing lots where full disclosure has not been provided.

John D. Gwyn focuses his practice on the representation of community associations, management companies and developers with a particular emphasis on real estate and commercial litigation. He has handled many types of community association related matters including assessment collections, lien foreclosures, bylaw violations, civil rights defense and creditor bankruptcy matters. Mr. Gwyn has gained experience in community association law over the years through his representation of condominium and homeowners associations, as well as individual homeowners, in matters involving real estate, contract, and construction defect litigation issues. His extensive litigation and transactional background provides him with the experience necessary to handle even the most complex legal issues that neighborhood associations may encounter. He may be reached at (734) 261-2400 or jgwyn@cmda-law.com.