Condominium Law Group Update: Struggling Condos Present Takeover Issues
2/26/2008

With the mortgage market fallout, single-family home and condominium sales across the country are taking a hit. Oregon is no exception. Large condo projects in Portland and elsewhere may soon be owned by lenders that financed the projects if the condo developer defaults under the loan because of a failure to sell units. Similarly, a successor developer may buy a project from the original developer who is financially unable to continue. This article reviews the key points of a lender or new developer takeover.

Successor Not Liable for Existing Construction

The Oregon Condominium Act expressly provides that a successor who is not affiliated with the original developer shall not be liable for any misrepresentations or warranties made or required to be made by the original developer, or for any breach of a fiduciary obligation by such party. Specifically, no successor liability exists for the statutory warranty that must be offered by the original developer to unit owners under the Oregon Condominium Act. No successor liability exists for this warranty even if the successor is selling units constructed by the original developer. The successor would, however, be liable for the statutory warranty with respect to common elements constructed by the successor or units constructed by the successor.

Successor May Disclaim Other Warranties and Liabilities

For common elements and units not constructed by the successor, the successor may disclaim all express and implied warranties and covenants, including the Oregon statutory warranty and warranties provided by other sources, such as the Magnuson-Moss Warranty Act or the Uniform Commercial Code. The successor may therefore sell the units "as is," subject only to the buyer's right to an inspection before purchase.

Successor May Have Disclosure Obligations

If the successor knows of construction defects or other problems at the time of sale, it may have an obligation to disclose the defects or other problems to potential buyers. Disclosure obligations can be vague and difficult to pin down, and the extent of disclosure necessary is an often-litigated issue. Also, successors may perform little or no investigation of potential problems, and may further assume (perhaps wrongly) that problems that have been or will be fixed need not be disclosed.

Joint Responsibility for Certain Items

The successor, as owner of the unsold units, will be jointly responsible for common expenses of the association (such as administration, maintenance, or repair of common elements), for any underfunded assessments, and for inadequate reserves. The successor should study these issues before takeover as part of its due diligence.

Successor's Decision to Annex

Another issue relates to unbuilt parcels contemplated for future annexation into the original condo. If an adjacent parcel is not already annexed, the successor may decide it is better to start a new condo rather than annex it. This may prevent existing condo problems from plaguing the new units. Before making this decision, the successor should ensure that, among other things, adequate easements exist for a separate condo and that utility services can be separated between the two projects.

Original Developer Still Liable for Warranty

The original developer is not relieved of any obligation or liability arising before the transfer and remains liable for warranty obligations imposed under Oregon's Condominium Act. This may be little consolation to unit owners; if a successor has taken over, the original developer (often a single-project limited liability company) may have no substantial assets. For construction defects and certain other liabilities, the original developer's insurance policy may provide coverage, but an insurance remedy is usually not quick to come.

The original condo developers, their successors, and unit owners should be aware of these issues before they dive into a transaction. In addition to the provisions of the Oregon Condominium Act, a careful review of each project's declaration, bylaws, and unit sales agreements, and the association's finances and record keeping, is warranted.

Stoel Rives' Real Estate & Development Law Group comprises lawyers specializing in real estate, land use, condominiums and planned communities and construction law. For a list of attorneys in the Real Estate & Development Law Group, click here.