Condominium & Mixed-Use Development Law Alert: District of Columbia Warranty Amendment Act of 2020
March 4, 2020
The District of Columbia Warranty Amendment Act of 2020 (“Act”) currently before the D.C. Council will, if enacted, have a profound impact on condominium registration applications filed by developers in the District, as well as on the adjudication of claims for alleged warranty defects filed on behalf of condominium associations and unit owners. The Act appears to be related to concerns raised in recent years by the D.C. Department of Housing and Community Development (“DHCD”) regarding the accuracy of construction and conversion cost estimates used to determine the amount of the warranty security bond or letter of credit required pursuant to the D.C. Condominium Act to be posted in the amount of 10% of the estimated construction or conversion costs of a residential condominium, or of the residential component of a mixed-use condominium.
The Act has the potential to greatly increase a developer’s disclosure obligations regarding projected construction and conversion costs, as well as its potential liability for misstating such costs. The following provisions are of particular concern:
- A declarant shall provide a sworn statement from a contractor licensed in the District of cost estimates for the work proposed in the permit, including the costs of materials and labor. This is a completely new and potentially expensive requirement. The intent appears to be that this statement be filed with the original registration application.
- The above statement of estimated costs and the bond or letter of credit are required to be updated: (1) with any changes submitted for plan approval to the Department of Consumer and Regulatory Affairs (“DCRA”) or at any time actual costs exceed the cost estimate by more than 10%; and (2) prior to the issuance of a certificate of occupancy, with a final accounting that reflects the actual costs of construction or conversion, including the actual costs of materials and labor. Compliance with the foregoing update requirements will result in multiple such statements being needed for each registration application, increasing developer expenses and the potential for developer liability for misstating such costs.
- DCRA shall maintain an online record of the warranty security amounts and the form of security being held for each condominium project for which such security is required, which shall be available to the public on a searchable website.
- Administration of warranty claims will be transferred to DCRA, with appeals being heard by the District of Columbia Office of Administrative Hearing.
- Upon a finding that a defect exists, the amount awarded to the association shall include an award of the reasonable legal fees and costs incurred by the association, both before DCRA as well as any court. This provision seems unduly onerous on developers, particularly in any proceeding in which the existence of a defect is a question of genuine dispute among the parties.
- The Act would impose serious consequences on developers that fail to accurately disclose construction or conversion costs. Any person who willfully misrepresents the estimated construction or conversion costs in the posting of a bond or letter of credit is subject to a fine of up to $50,000, or to be imprisoned for not more than 6 months, or both.
- As a further penalty, the Act authorizes the Mayor to suspend, for up to 36 months, the declarant from recording condominium instruments, or from selling condominium units, upon receipt of facts that demonstrate the “uttering of an untrue statement of material fact” in connection with the estimated construction or conversion costs of a condominium, or the costs of the posting of a bond or letter of credit.
- Perhaps more ominously, the Act provides that the “fraudulent, criminal, or other seriously improper conduct” of any officer, director, shareholder, partner, employee, or other individual associated with a declarant may be imputed to the declarant under certain circumstances, including when the improper conduct occurs with the declarant’s knowledge, approval, or acquiescence. Evidence of such knowledge, approval, or acquiescence is deemed to exist by the declarant’s acceptance of a benefit from such conduct. Although not entirely clear from the Act, to the extent that a contractor hired by the declarant to prepare construction or conversion cost estimates qualifies as an “individual associated with” the declarant and such contractor engages in “fraudulent, criminal, or other seriously improper conduct” while generating cost estimates that are later found to be understated, a benefit to the declarant could be found to exist in the form of lowered bond or letter of credit requirements, and knowledge of the contractor’s improper conduct could then be imputed to the declarant. Of course, any suspension, let alone a suspension for 36 months, of the declarant’s ability to record condominium instruments, or to sell units, has the potential to be catastrophic.
- The bylaws or other condominium documents prepared by the declarant shall not restrict or hinder an executive board’s right to assert claims for defects. This provision appears to be intended to limit the declarant’s ability to include dispute resolution provisions in its documents.
Even prior to submission of the Act to the Council, DHCD had been seeking to enhance, on an administrative basis, developer disclosures regarding estimated conversion and construction costs. Given the potential serious penalties for non-compliance under the Act, condominium developers need effective strategies for addressing and minimizing the potential downside of these enhanced disclosure requirements.
The Act is currently under Council review and has been referred to the Committee on Housing and Neighborhood Revitalization and Committee of the Whole. Members of the Shulman Rogers Mixed-Use Development Group are monitoring the legislative process and will provide updates.
The contents of this Alert are for informational purposes only, and do not constitute legal advice. If you have any questions about this Alert, please contact the Shulman Rogers attorney with whom you regularly work or a member of the Shulman Rogers Condominium & Mixed-Use Development Group.