SELLING CONDOMINIUMS UNDER THE NEW
NORTH CAROLINA CONDOMINIUM ACT

All real estate brokers and salesmen should be aware of the new North Carolina Condominium Act that applies to condominiums created on or after October 1, 1986. The new law is much more comprehensive than North Carolina's first generation condominium statute, the Unit Ownership Act (which continues to govern condominiums created prior to October 1, 1986). In addition to containing complex provisions relating to the creation and management of condominiums, the new law provides for important consumer protections for purchasers of new condominium units and also requires individual owners who are reselling their units to provide certain information to purchasers.

This article briefly addresses the specific consumer protection provisions of the new condominium law and the responsibility of brokers salesmen when selling condominium units as agents of developers and when reselling units as agents of individual unit owners.

New Consumer Protections

Public Offering Statement. The condominium developer (or the broker/ salesman acting as his agent) must provide a prospective purchaser of a new condominium unit with a copy of a public offering statement before a purchase contract is signed by the purchaser. The law provides a long "laundry list" of information that must be included in the public offering statement. Among other things, it must provide (1) a complete description of the condominium project (all units, common elements and amenities), including any phasing plan for the construction of additional buildings or amenities; (2) copies of the recorded (or proposed) declaration creating the condominium, any other recorded covenants, conditions or restrictions affecting the condominium, and the bylaws and any rules and regulations of the unit owners' association; (3) the current budget (or projected budget for a new project) for the unit owners' association, including the monthly common expense assessment to be paid by unit owners, and a description of any known future fees to be paid by unit owners for use of the common areas or related facilities; (4) a description of any special closing fees; (5) a description of any liens, encumbrances or defects affecting title to the condominium, and any unsatisfied judgments or pending suits against the unit owners' association or affecting the condominium; (6) a description of any warranties made by the developer and of the insurance coverage provided for the benefit of unit owners; and (7) a statement explaining the purchaser's right to cancel and the escrow procedures for earnest money deposits. (These two matters are discussed separately below.)

There are a few exceptions to the requirement for delivery of a public offering statement to prospective purchasers. The three most important exceptions that real estate agents might encounter are: ( 1 ) Where a-nonresidential condominium is being sold and the buyer agrees to waive receipt of a public offering statement. (2) Where the purchase contract is subject to cancellation by the purchaser at any time for any reason without penalty. (3) Where the developer sells condominium units to a person in the business of selling real estate (e.g., a broker) who intends to resell those units to purchasers. [Note: In this case, the broker (or other person in the real estate business) assumes the responsibility for delivering a public offering statement to individual unit purchasers.]

Purchaser's Right To Cancel.  The purchaser of a new condominium unit has the absolute (nonwaivable) right to cancel his purchase contract for any reason within seven (A calendar days of contract execution (signing). This right to cancel is without penalty, and any payments made by the purchaser before cancellation must be promptly refunded. No conveyance of a unit may be made during the seven-day cancellation period.

Escrow of Deposit. Any deposit made in connection with a contract to purchase a new condominium unit must be immediately deposited by the developer/seller (or the broker acting as his agent) in a trust or escrow account in an insured bank or savings and loan association in North Carolina, and must remain in such account until either expiration of the seven-day cancellation period or cancellation of the purchase contract by the purchaser, whichever occurs first. [Note: A broker holding such an earnest money deposit in his trust account may disburse the deposit to the developer/seller at the end of the seven-day cancellation period if the purchase contract so provides and the purchaser has not cancelled the contract; otherwise, the broker must continue to hold the deposit in his trust account until the transaction is closed or terminated.]

Resale Certificate. The new condominium act also provides limited protection to purchasers of "used" condominium units in a condominium created on or after October 1, 1986. A unit owner who is reselling his unit (or the broker/salesman acting as his agent) must provide to the prospective purchaser before conveyance of the unit (i.e., before closing), a resale certificate setting forth the monthly common expense assessment and any other fees payable by unit owners. [Note: It is strongly suggested that agents provide prospective purchasers with a resale certificate prior to the purchaser's signing an offer. Although the condominium act only requires that unit owners do this before closing, real estate agents have a duty to disclose all material facts about the property to prospective purchasers, and the amount of common expense assessments and fees payable by unit owners would certainly seem to be a material fact.]

"Long-Arm" Provision. The new condominium act also provides that the public offering statement and purchaser's right to cancel provisions described above apply not only to the purchase of new condominium units located in North Carolina, but also to the purchase of such units located outside the state where the purchaser signs the contract in North Carolina.

Agent's Liability

The responsibility for providing the consumer protections described above is placed on developers/sellers by the new condominium act. However, where a broker or salesman is acting as the agent of a developer/seller in the sale of condominium units governed by the new act, the law of agency and the Real Estate License Law require the agent to assure that any duties owed by their principal to prospective buyers are properly fulfilled. Agents also owe certain legal duties to third persons (purchasers). Therefore, an agent who fails to properly perform such duties may be civilly liable to the developer/ seller or the purchaser and may be guilty of a Real Estate License Law violation.

In addition to complying with the legal requirements described above, the real estate agent should, as a matter of good practice, advise a prospective condominium unit purchaser of certain general facts about condominium ownership as well as specific facts about any particular condominium that is shown to the prospect. Many potential buyers have little or no understanding of the condominium concept and how condominiums operate. Making sure that a prospect understands the basics about condominium ownership will help assure a more satisfactory result for all parties involved.

Listed below are several matters that should be explained to prospective condominium purchasers, regardless of which condominium act is applicable:

(1) The concept of individual ownership of units and common ownership by all unit owners of the "common elements." Use examples to illustrate these points.

(2) The role and operation of the "unit owners' association" and the importance of active participation in the association by all unit owners. It is particularly important that prospective purchasers understand the extensive powers of the unit owners' association with regard to management of the condominium. [Note: The new condominium act authorizes unit owners associations to assess fines of up to $150 against unit owners for violation of the condominium's bylaws or rules and regulations, and such fines, if unpaid, can become a lien against the offending individual's unit.]

(3) The monthly common expense assessments that must be paid by all unit owners and how such assessments may be changed from time to time by the unit owners' association. Point out that unpaid assessments can become a lien against the delinquent owner's unit.

(4) How real property taxes and property insurance are handled for a condominium, especially the unit owner's responsibilities in this regard.

(5) The advantages and disadvantages of condominium ownership as compared to owning a house (or townhouse). When showing a particular condominium, be sure to point out any special restrictions in the declaration, bylaws or rules and regulations (favorable or unfavorable) that apply to that condominium.

(6) The importance of closely examining the condominium legal foundation documents before submitting an offer to purchase. These documents are: the declaration of condominium,(or proposed declaration if the condominium has not yet been legally created); any recorded covenants, conditions and restrictions affecting the condominium; and the articles of incorporation (if applicable), the bylaws, and any rules and regulations of the unit owners' association. These documents will be attached to or explained in the public offering statement for new condominiums subject to the new condominium act. For other condominiums, agents should make these documents available to prospective purchasers before they sign an offer to purchase.

Under the new condominium act, selling condominium units is a more complex matter than ever before. Real estate agents must be well-informed and must carefully perform their duties in order to adequately protect the interests of sellers and buyers and to fully comply with the legal requirements associated with selling condominiums.