Sept. 15 Deadline for Developers to Oppose DC Condo Warranty Legislation

FULL ALERT

The DC Council has proposed legislation that would dramatically increase developers’ exposure for condominium warranty liability and could impact developers’ financial ability to finance, develop, and construct condominiums.

A virtual hearing on Bill 23-601 is scheduled for Thursday, September 17, 2020, at 3 p.m. Requests to testify and written testimony must be submitted no later than Tuesday, September 15, 2020, at 5 p.m. We urge developers to submit testimony in writing and/or in person expressing opposition to this bill.

We published an alert in February 2020 (just prior to the COVID 19 pandemic) on this matter. At the time, the DC Council had two bills under consideration: Bill 23-622, the Condominium Warranty Claims Clarification Temporary Amendment Act of 2020 (Temporary Bill) and current Bill 23-601, the Condominium Warranty Amendment Act of 2020 (Warranty Amendment Act). While neither bill was desirable, the Temporary Bill was substantially less impactful, and it was ultimately adopted by the Council on June 17, 2020, for a temporary period of 225 days. The Council is now considering the Warranty Amendment Act, which will have a far reaching and costly impact on developers of condominiums and, as drafted, will impose significant risk on developers without reasonable due process.

The significant changes that will be imposed if this bill is passed by the Council and signed into law:

• Expansion of the definition of “structural defects.” Proposed changes will make any alleged building code violation a warranted “structural defect” without regard to whether it will affect a structural or significant component of the common elements or units of a condominium. Additionally, developers’ responsibility will be extended to include any resulting damages for such alleged defects.
• Establishment of new and additional requirements applicable to the amount and type of warranty security posted. Currently, warranty security shall be posted with the Department of Housing and Community Development (DHCD) to cover the two-year warranty period under the Condominium Act in an amount equal to 10 percent of the construction costs for the residential portion of the condominium project. This amount is typically based upon a good faith estimate. If the bill passes, the developer or contractor must provide affidavit support for the estimated amount, and it must be updated upon issuance of certificate of occupancy based upon actual costs with potential resulting penalties if ultimately deemed to be inaccurate. Bonds and letters of credit will be required as security, and although currently allowed, deeds of trust on unsold units (often used by developers) will only be allowed at the discretion of DHCD.
• Requirement of delivery of copies of the warranty security posted with DHCD to all purchasers at closing and to the condominium association within 30 days of the transition of control of the board of directors, which will no doubt increase claims and create confusion and misunderstanding.
• Increase in timing for release or reduction of the warranty security to at least two years following transfer of control of the board of directors, and release may be precluded if any claim is pending without requiring sufficient support for the claim or value of the same.
• Adoption of one-sided process for addressing and resolving warranty claims by condominium associations or unit owners that (1) eliminates adequate time for developers to investigate and sufficiently respond to claims; (2) prevents the developer from performing repairs and/or having its contractor perform repairs to address legitimate claims; (3) allows for the issuance of a ruling based upon limited investigation of claims; and (4) allows for the release of warranty security funds to a complaining condominium association or unit owner without affording the developer proper due process. In essence, the proposed procedure—it will be handled by the Department of Consumer and Regulatory Affairs (DCRA) instead of DHCD, which regulates condominiums —will result in substantial penalties on developers. Such penalties may be imposed without satisfactory technical investigation and without proper proof of defects and related repair costs. This will expose developers to significant liability without reasonable due process.
• Imposition of significant criminal and civil penalties (including monetary penalties), criminal infractions, and suspension of a developer’s ability to sell condominium units for alleged misrepresentations of the costs of construction and other errors or omissions in the public offering statement materials given to purchasers. The proposed procedures appear to impose penalties first and allow appeal rights second but while the penalty is already applicable.

These changes provide only a limited snapshot of the significant impacts that could occur if the bill passes. A full copy of the bill is here, and a redlined comparison of the bill against the current law is here.  It is clear that the objective of the proposed legislation is to provide associations and unit owners with a more expedited means to access the warranty security funds posted by developers through a new administrative procedure, which would hinder developers’ ability to defend against such warranty claims.

A hearing on the bill is scheduled for this week, and there is urgent need for testimonial opposition. To testify, submit a request to testify to the Committee on Housing and Neighborhood Revitalization by 5 p.m. Tuesday, September 15, 2020, at housing@dccouncil.us. The request must include your name, address, phone number, organizational affiliation, and title. Once you are accepted as a speaker, you will be provided with dial-in information. Alternatively or in addition, your written testimony may be submitted to the same email address also by 5 p.m. Tuesday, September 15, 2020.

The attorneys in Ballard Spahr’s Mixed-Use Development and Condominiums Group and Zoning and Land Use Group assist developers with various real estate issues including condominium warranty liability.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.