New CIC Disclosure Requirements Real Estate Agents Need to Know – Effective August 1, 2017

Michael Klemm

By Michael D. Klemm

The 2017 amendment to the Minnesota Common Interest Ownership Act (MCIOA) imposes additional disclosure obligations regarding the maintenance of common elements. Seller’s agents who assist developers or builders with the sale of new homes in common interest communities can assist their clients by making them aware of these new requirements and, when applicable, by coordinating delivery of a complete disclosure statement to each buyer. Buyer’s agents can assist their clients by alerting them if they are entitled to receive disclosure statements and informing them that they may have legal rights and remedies if a complete disclosure statement is not provided.

Disclosures for New Communities

The 2017 amendment to MCIOA requires that if a common interest community (CIC) is created on or after August 1, 2017, then the declarant’s disclosure statement must include a preventative maintenance plan, maintenance schedule and maintenance budget for the common elements.

The 2017 amendment establishes certain standards for the preventative maintenance plan prepared by the declarant. The plan must be based on the best available information; list all building elements to which the plan will apply; list the generally accepted standards of maintenance on which it is based; be dated and signed by the declarant; and be fully funded by the initial budget. The amendment does not provide further guidance, so the declarant must use its judgment in determining how to meet these standards.

Experienced agents may notice that the amendment requires preventative maintenance plans for common elements, but not for components of the units that the association is required to maintain. The preventative maintenance plan for a typical condominium must include roofs, siding, and other exterior building surfaces (which are part of the common elements in a typical condominium), but the preventative maintenance plan for a typical townhouse development need not include roofs, siding and other exterior building surfaces (which are part of the unit, not part of the common elements, in a typical townhouse development).

If a declarant fails to give a disclosure statement that includes a preventative maintenance plan, maintenance schedule and maintenance budget in connection with the initial sale of a unit in a CIC created on or after August 1, 2017, there may be significant consequences under MCIOA:

Minnesota Statutes section 515B.4-106(a) provides that if a required disclosure statement is not given, the purchaser may cancel the purchase agreement at any time prior to closing, without penalty, and receive a full refund. Waiver of cancellation rights is not effective unless made in compliance with detailed requirements in MCIOA.

Minnesota Statutes section 515B.4-106(d) provides that if a declarant fails to deliver a required disclosure statement which substantially complies with MCIOA, then the declarant is liable to the purchaser for a statutory penalty of $5,000, in addition to any damages, attorney’s fees or other amounts recoverable under MCIOA or otherwise.

Minnesota Statutes section 515B.4-101 provides that a declarant shall be liable to the purchaser for any false or misleading statement in the disclosure statement or for any omission of a material fact.

Minnesota Statutes section 515B.4-116 provides that if a declarant violates any provision of MCIOA, then (1) any person adversely affected by the failure to comply has a claim for appropriate relief; (2) the court may award reasonable attorney’s fees and costs of litigation to the prevailing party; and (3) the court may award punitive damages for a willful failure to comply.

Disclosures for Existing Communities

If a CIC was created before August 1, 2017, then its board of directors has until Jan. 1, 2019, to (1) prepare and approve a written preventative maintenance plan, maintenance schedule and maintenance budget for the common elements; (2) provide all unit owners with copies of the plan or electronic access to the same; and (3) follow the approved preventative maintenance plan, subject to amendment, modification or replacement from time to time.

Neither the 2017 amendment nor the existing provisions of MCIOA specifically address the issue whether the preventative maintenance plan, maintenance schedule and maintenance budget should be included in (1) the disclosure statement in connection with the initial sale of a unit in a CIC created before August 1, 2017, or (2) the resale disclosure certificate in connection with the resale of any unit.

As a real estate attorney, when there is a question whether or not to disclose information that may be of interest to a purchaser, I generally recommend disclosure, to reduce the risk of surprise or dispute with a purchaser after closing. In this case, providing copies of the preventative maintenance plan, maintenance schedule and maintenance budget is unlikely to deter any prospective purchaser, and doing so will reduce the risk of a claim alleging that a disclosure statement or resale disclosure certificate is incomplete without these documents.

Michael D. Klemm represents clients regarding land use regulation and development, real estate transactions and common interest communities. In his nearly 20 years of practice, Michael has handled hundreds of residential and commercial real estate transactions, including acquisitions, construction, financing, leasing, and sales. He consults with clients regarding potential transactions, negotiates agreements, assists with due diligence regarding property, title, and environmental matters, and more. He also has extensive experience with community associations. Michael is a MSBA Certified Real Property Law Specialist and a member of the MCIOA Committee of the MSBA Real Property Law Section. Contact Michael at (952) 746-2198 or mklemm@hjlawfirm.com.