Condo Complex[ities]

Condominium ownership, by its very nature, is a bit of an oddity. The property owner does not own the real estate on which the residence sits and, in fact, does not typically own the exterior walls of the home. Rather, in most condos, the condo owner owns only the interior air space extending to include the floor covering and the paint on the walls and ceiling. Maintenance of the real estate and everything beyond the interior wall paint is a community expense, associated with the community nature of the living arrangement.



Buying into a condominium complex means that a buyer buys into a community where decisions affecting buyer’s use, occupancy and enjoyment of buyer’s home are controlled, to a large degree, by the vote of buyer’s neighbors. This surrender of autonomy means that a condo owner cannot make unilateral decisions concerning every use of the condo, including whether the condo owner will rent the condo unit rather than owner-occupy it. But, in September 2014, the Washington Court of Appeals gave condo investment-owners a serious boost. This article will discuss that case and other issues that often arise in condo sales.

Filmore v. Centre Point, 183 Wash. App. 328 (2014)

Prior to September 2014, a series of Washington cases created the impression that a condominium homeowners association could, somewhat easily, amend its declaration (CC&Rs) to eliminate a previously existing right of unit owners to rent their units. Many condominium CC&Rs and the Washington Condominium Act, create a requirement for a 67% membership vote to modify certain aspects of the CC&Rs (RCW 64.34.264(1)). Associations were amending their CC&Rs, by a 67% membership vote, to eliminate the right of owners to rent condo units. With the Filmore case, that changed. According to the Washington Appellate Court, Washington law requires a 90% vote of association members to change CC&Rs to prohibit owners from renting their units. (RCW 64.34.264(4)) All of those condo CC&Rs that were revised to eliminate the ability of an owner to rent a unit, based on a vote of less than 90% of its members, were invalidated with this Court decision.

How does this impact real estate brokers?

The cause and effect of this Court decision is very simplistic. Condo associations that claim to prohibit investors may not have authority to impose that limitation. If the limitation is created by an amendment of the CC&Rs and if that amendment was passed by the membership with a vote total of less than 90%, the limitation is unenforceable. Condominium complexes that have been off limits to investors may be back in play. While this is likely good news for investors, it may be damaging to sellers and condo owners. Lending requirements often prohibit loans against units in a complex with too many non-owner occupied units. The rental caps were one way that HOAs retained marketability for sellers whose buyers need to obtain institutional financing. If the only buyers who can purchase in a complex are cash buyers, that will limit property values.

The Filmore case does not mean there can be no restriction or even prohibition on condo complexes imposing an owner-occupancy requirement. If an association amends its CC&Rs with a vote of at least 90% of its members, then the rental restriction can be implemented. Or, if the original CC&Rs, as created by the declarant, impose an owner-occupancy requirement, the requirement is enforceable. What the Filmore case eliminates, is restrictions that were created as an amendment to the original CC&Rs and that were passed by a vote of less than 90% of association members.

If a seller is limited in seller’s marketing efforts by a claim from the owners’ association that seller may not sell to an investor, seller should be advised to investigate the roots of the association’s prohibition. A title company can likely assist seller in this effort, if the association is not forthcoming. Ultimately, seller may need to hire legal counsel if the association is recalcitrant. Similarly, listing brokers should be aware that if the condo complex boasts a rental cap, it may not be enforceable and buyers relying on that representation to obtain a loan may find that the unit will not qualify for financing.

Resale Certificate

Without doubt, the single greatest source of controversy in residential condo sales is production of the resale certificate. Whether angst develops between seller and the owners’ association or between buyer and seller — or both — production of the resale certificate is sure to create sparks at some point in every transaction.

The resale certificate is a statutorily required disclosure that condo seller must give to buyer. (The only exception to this is that new construction or condo conversion sellers must give buyer a public offering statement instead.) The tricky part, however, is that while seller is required to sign and deliver the resale certificate to buyer, seller is not able to prepare the resale certificate. Rather, seller’s condo owners’ association must prepare and also sign the resale certificate. Washington statutory law mandates the association’s cooperation in this effort and defines the required content of the certificate, the timeframe in which it must be produced and the maximum amount ($275) the association may charge for production. The certificate requires a significant amount of detail and documentation and many owners’ associations make delivery of the certificate a nearly unbearable experience.

The Condominium Act (RCW 64.34.425) requires that the owners’ association provide the information for the resale certificate to seller within ten days following owner’s request. The Association may charge a reasonable fee, not to exceed $275, for preparation of the information. When an association is managed by a professional management company, the task of assembling the resale certificate typically falls to the management company.

Battles often rage between the various players over the format in which the association or management company delivers the information. It is frequently delivered by email, with little or no organization or as a "link" to a web site from which buyer is instructed to download information. Sometimes seller will refuse to sign the resale certificate, or be denied the ability to sign based on the delivery mechanism, though the statute clearly makes seller’s signature a requirement. There is often unhappiness over the timing and the amount charged by a management company for production of the documents. While the statute caps the fee for preparation at $275, some management companies charge an additional fee for consultation, delivery, packaging, expediting, etc.

There are two legal consequences to all of this that stand out. First, buyer has a statutory right to terminate the transaction, with a full recovery of earnest money, for five business days following buyer’s receipt of the complete resale certificate, signed by both the seller and the association. Buyer may terminate for any reason or no reason at all prior to the expiration of this five day period. The statute provides no vehicle for buyer to waive buyer’s rights to receive the resale certificate and/or terminate the transaction. Second, buyer cannot be held liable, after closing, for any unpaid assessment or fee owing as of the date of the certificate, greater than the amount set forth in the resale certificate, unless buyer had actual knowledge of the amount. Consequently, timely delivery of an accurate document is essential.

There is also a significant transactional consequence. If the resale certificate is provided deep into the pending transaction, and based on that information buyer or buyer’s lender determine that the sale cannot close, buyer will have invested needlessly in an inspection and perhaps an appraisal. Seller will have lost valuable marketing time and will bear the stigma of a sale fail upon return to the market.

Understanding the heartache that often accompanies production, delivery and review of resale certificates, the only attempt at a solution is for listing agents to take a pro-active role in securing the resale certificate and insuring its "readability". It is tempting to say that a listing broker should obtain the resale certificate as soon as the listing is taken. In a seller’s market, where broker is confident the unit will sell quickly, that may be the best approach. If the resale certificate must be amended prior to closing, however, the association will charge an additional fee. If the certificate is updated within six months of original production, the statute limits the updating fee to a "nominal" amount. Recognizing the value of having the resale certificate early in the marketing process, some sellers or brokers will absorb the additional fee, if it becomes necessary, but that is a decision that brokers and sellers have to make within the context of the listing. Many lenders will not accept a resale certificate that is more than 30 days old.

The Condominium Act only requires the association to respond to the unit owner’s request. When it is time to order the resale certificate, listing broker should obtain seller’s written request for the resale certificate and insure the request is delivered to the association immediately. When the resale certificate arrives from the association, listing broker should make sure that it is "readable" by a buyer. If it is not, broker may have to work with seller or seller’s association to achieve "readability". Broker should then obtain seller’s signature on the resale certificate and finally, deliver it timely to a buyer. Until this delivery is made, buyer’s five day clock for termination does not begin to run.

While this article describes listing broker’s task in simplistic terms, it is well known that this task is nearly impossible to accomplish with some associations and management companies. For that reason, listing broker needs to set the motion in process as early as possible and persistently pursue delivery of a readable resale certificate.

If, notwithstanding listing broker’s diligence, the association or management company fails to conform to its statutory obligation, listing broker should immediately advise seller, in writing, to seek legal counsel. A strongly worded letter from seller’s lawyer may bring the association and its management company into compliance. The association’s failure to timely and competently provide the resale certificate leaves seller’s transaction vulnerable to termination. Condominiums and their associations are created and regulated by statutory law. The statute is very clear as to what is required of the association and those who are elected to lead it. Ultimately, association leadership is responsible for the management company hired to service the association and its members, including sellers in need of a resale certificate. If an association, through its own incompetence or disinterest, allows its members to be damaged due to the lack of a timely, competent resale certificate, then the association and its leadership will have to account for that.

Legal Description

Statewide form 28 is the statewide purchase agreement for condos. As evidenced by the form, a condominium unit is not legally described in the same way that any other real property is described. Exhibit A is not used to legally describe a condo unit. Rather, a condo unit is described with the information required for completion of Form 28, paragraph 4. Listing broker needs to insure that the information necessary to describe the unit is included with the listing printout so that a buyer’s broker is prepared to draft an offer that can be accepted and made binding by seller without the need to counter for a correction of the legal description information.

A title company provides the required information with the preliminary commitment. As with all listings, the condo listing agent needs to order a preliminary commitment for title as soon as the listing is taken. The legal description for the condo unit should be attached to the listing printout so that it is available to buyer brokers writing an offer.

Condominium ownership is unlike ownership of traditional real estate in many ways. As a result, brokers selling condominiums must be prepared for condo-unique issues.




Annie Fitzsimmons, Legal Hotline Lawyer

Hotline Attorney Annie Fitzsimmons writes the Legal Hotline Question and Answer of the Week. If you’d like to submit questions to the Legal Hotline, e-mail them to legalhotline@warealtor.org or call (800) 562-6027. Please have your NRDS number ready when you call or e-mail the Hotline with your question. The Legal Hotline lawyer does not represent Washington Association of REALTORS® members or their clients and customers.




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