THE
VIRGINIA PROPERTY OWNERS' ASSOCIATION ACT
LACKS CLARITY CONCERNING INCOMPLETE DISCLOSURE PACKAGES
by Martin Conway*
As many of you are aware, the Virginia Property Owners' Association Act, Va. Code Ann. §§55-508 to 55-516.2 (Michie Repl. Vol. & 2001 Supp.) (the "Act"), is the principal statutory scheme for the private regulation of land usage in Virginia and is the source of much legislative activity. In the 2003 session of the General Assembly, House Bill 2217 made the Act applicable to all subdivisions in which there are covenants. While the Act is becoming pervasive in its scope, it nonetheless fails to address many issues. For instance, while the Act requires an association to deliver an association disclosure package that substantially complies with the enumerated disclosures, it does not provide any remedies for an incomplete package. We represented buyers who were given a woefully inadequate disclosure package, and they could not obtain any judicial relief at the trial and appellate levels. I feel a legislative amendment is appropriate and make a proposal at the conclusion of this article.
Under the Act, the seller must obtain an association disclosure package from his homeowners' association and provide the same to the buyer. Upon the presentation of a package to the buyer, the latter has three days in which to rescind the real estate transaction. Unless and until the seller presents an association disclosure package to the buyer, the three-day period does not commence and in that case the buyer's right to rescind continues until the real estate settlement. In Davis v. D.R. Horton, Inc., At Law No. 198065 (Fairfax County Cir. Ct. Mar. 12, 2002), the seller delivered an association disclosure package to the buyer, but the disclosure package contained only 2 of the then mandated 13 disclosures. We argued unsuccessfully that an association disclosure package as defined by the Act was never delivered to the buyers and that the buyers' right to rescind continued for months after the ratification of the real estate sales contract.
In our case, the trial court had found that the seller, DR Horton, Inc., had delivered a homeowners' disclosure packet that complied with the Act. The court, however, did not state the reasons for this finding. In construing a statute, the court is to apply the plain meaning of the words. Section 55-512 states that the disclosure packet to be delivered by a seller to a purchaser "shall" contain the required disclosures. This language is mandatory. Section 55-512(E) requires the homeowners' association to prepare the packet for the seller substantially in the form mandated by §55-512(A). If the association fails to prepare such a packet, the association waives its claim for delinquent assessments and any violations of the declaration, bylaws, rules, and regulations, and it can be liable to the seller for damages up to $500.00. A statute must be construed to be reasonable and to effectuate its intent. Since a seller can only demand from an association a packet that substantially complies with the Act, logically, the purchaser can demand no greater compliance from the seller, who merely delivers the packet furnished by the association. Accordingly, while §55-512(A) states that a packet shall contain the enumerated information, the association has some discretion concerning the format in which this data is provided. "Substantial compliance" means that the conditions can be deviated from in trifling particulars not materially detracting from the benefit the other party would derive from a literal performance. Virginia Code §55-512(A) requires separate statements and/or disclosures for each of the enumerated items. In our case, the seller did not provide separate disclosures for each item. It did provide the declaration, articles of incorporation, bylaws, and outdated budgets, but the seller disclosure packet still fell far short of the statutory standard.
One could argue that a seller complied with the individually mandated disclosures if the information, which otherwise should have been provided, may be gleaned from a reading of the provided documents. But such a reading of the statute makes the requirement to furnish "statements" surplusage, and the rules of statutory construction require every word be given its full effect. The plain meaning of the statute requires statements or disclosures for each item. Although the seller may comply with its obligations by producing statements that incorporate by reference specific citations to other provided documents, the burden lies squarely on the association and the seller to disclose to the purchaser, not on the purchaser to glean the required information from the association documents.
With these rules of statutory construction in mind, a casual reading of the disclosure packet delivered to our buyers shows that the seller delivered a woefully inadequate packet, which violated the Act (it should be noted parenthetically that even if one used the looser standard that the disclosures could be gleaned from the documents, the disclosure package was incomplete here). The seller provided only two of the then 13 mandated disclosures.
In response to the buyers' arguments, the seller argued repeatedly that it did provide a disclosure to the buyers in the form of an addendum to the real estate contract that merely listed the documents that ought to have been provided and acknowledged that the buyers had received the documents.
The buyers asserted in the opening statement and at closing argument that their signature on the addendum did not relieve the seller of its statutory requirements and was ineffective as a waiver thereof. In 1997, the General Assembly amended §55-511 of the Act to explicitly provide:
E. Any rights of the purchaser to cancel the contract provided by this chapter are waived conclusively if not exercised prior to settlement.
F. Except as expressly provided in this chapter, the provisions of this section and §55-512 may not be varied by agreement, and the rights conferred by this section and § 55-512 may not be waived.
1997 Va. Acts ch. 887 (codified at Va. Code Ann. §55-511).
Prior to 1997, the Act provided that the purchaser's rights could be waived by a separate document. When the legislature amended the Code to end the rampant use of waivers, which precluded a purchaser from being informed, it changed the relationship between the parties and placed a greater disclosure burden upon the seller. Here by the seller's own evidence, the information actually disclosed to the buyers was much less complete than as acknowledged in the addendum. If the buyers' acknowledgment on the addendum were given preclusive effect, it would then constitute a waiver or contractual variance of the buyers' statutory rights in direct contravention of the 1997 amendment. Accordingly, at most, the acknowledgment on the addendum should be construed to create a rebuttable presumption. Therefore, the trial court's finding of material compliance ought to have been reversed.
The Virginia Supreme Court's refusal to grant the Petition for Appeal on this issue is surprising. This is especially so because the trial court gave no reasoning concerning its finding that the association disclosure package complied with the Act. Clearly, it did not.
Having determined that the disclosure packet delivered to the buyers materially complied with the Act, the trial court then made the finding that even if the packet were not compliant, the buyers had only three days in which to act after the delivery of the same to them: "In a case such as this case, where the disclosure package was given at the time of the signing of the contract but the purchasers are not satisfied with the completeness of the packet, the only remedy is to cancel within three days of receipt of the packet." Davis v. DR Horton, Inc., At Law No. 198065, letter opinion at 9 (Fairfax County Cir. CT Mar. 12, 2002). At the hearing, the buyers relied upon § 55-511(C) of the Virginia Code, which states in pertinent part: "The purchaser may also cancel the contract at any time prior to settlement if the purchaser has not been notified that the association disclosure packet will not be available and the association disclosure packet is not delivered to the purchaser."
The buyers did not contend they were notified that an association disclosure packet would not be available, but rather they contended that an "association disclosure packet" was not delivered to them.
The buyers' argument in this respect was logical, but somewhat weaker than their argument concerning the adequacy of the disclosure package they received. The Act is simply silent. Under the Act, the seller shall give the purchaser a packet or a notification that no such packet would be delivered. See Va. Code Ann. §55-511(C). The statute does not contemplate an incomplete disclosure package. Normally, upon receipt of a packet or notice that no such packet shall be provided, the purchaser has three days (six days after the postmark date if the packet is mailed) in which to rescind. This bright-line standard gives the purchaser the maximum opportunity to exercise his/her rights after complete disclosure. Here the buyers were not afforded such a clear opportunity to exercise their informed consent. They were never given a complete packet and were never told that one would not be provided. The trial court's finding that a packet had been delivered lessens the buyers' rights under the Act and contravenes the Act's apparent plain meaning. The court's decision puts the buyer in the unenviable position of canceling the contract or speculating that what he/she does not know and which the association has not revealed is immaterial.
Assuming "association disclosure packet" is susceptible to two meanings, i.e., one definition referring to the packet as described in the Act and the other being the documentation physically delivered by the seller, extrinsic evidence and the rules of construction must be used to determine the legislative intent. Under the "mischief rule," a remedial statute should be construed so as to suppress the harm it was meant to address. The harm the legislature meant to suppress in the 1997 amendment was the seller's failure to deliver a compliant homeowners' disclosure packet to the purchasers.
Again, the trial court's interpretation of the Act frustrated the clear intent of the 1997 amendment. Assuming the trial court is correct, a seller need only deliver a packet (really a page or so) to a purchaser stating that the enumerated disclosures should be provided and supply only a list of the statements of documents required by the Act (not the documents themselves); thereafter the purchaser must exercise his/her rescission rights in three days. Hence, the burdens of the Act are shifted onto the purchaser, who must review the Act, review the documents, and make a determination of whether compliance has taken place. This interpretation of the statute gives limited disclosure rights to the purchaser. Even assuming the buyers found the disclosure package inadequate, they could not request an updated version of the association disclosure package under §55-512(B), and still retain the right to rescind. Instead, the statute should have been "construed liberally, so as to suppress the mischief and advance the remedy" as the legislature intended.
If the General Assembly did not intend these documents to be actually furnished to the purchaser, why would it keep adding to the list of mandated disclosures, session after session? Over time the seller's obligations to provide the mandated disclosures have consistently been increased: 1997, ch. 222 (adding registration number with Real Estate Board); 1998, ch. 32 (redefinition of several disclosure items); 2000, ch. 891 (adding disclosure concerning flag display); 2001, ch. 556 (adding disclosure of current rule or architectural violation); and 2002, ch. 399 (adding disclosure from Real Estate Board). The trend is clear and unambiguous, and is intended to offer greater protection to purchasers, such as the buyers, by increasing the disclosure requirements for sales of residential real estate. The legislative intent is defeated by defining "association disclosure packet" to include any group of papers that is physically delivered by the seller to the purchaser rather than a resale packet that is compliant.
Consequently, we argued on appeal that an "association disclosure packet" is not actually delivered to the purchaser unless it complies with §55-512 and is delivered in the required manner. Since no "association disclosure packet" was ever delivered to the buyers, they timely exercised their right to rescind under the Act. Again the Supreme Court of Virginia denied the petition for appeal.
Interestingly, Delegate Terrie Suit introduced House Bill 2217, which makes the Act applicable to all subdivisions with covenants. House Bill 2217, which has been enacted, also defines when an "association disclosure package" is not available. In pertinent part it states:
For purposes of clause (iii), the association disclosure packet shall be deemed not to be available if (i) a current annual report has not been filed by the association with either the State Corporation Commission pursuant to §13.1-936 or with the Real Estate Board pursuant to §55-516.1, (ii) the seller has made a written request to the association that the packet be provided and no such packet has been received within 14 days in accordance with subsection E of §55-512, or (iii) written notice has been provided by the association that a packet is not available.
Delegate Suit indicated that she proposed the Bill at the instigation of the Virginia Association of Realtors. I consulted with a representative of the Association, Martin Johnson, who indicated the reasons for the amendment. Prior to the amendment, the Act applied only to subdivisions in which the annual assessment exceeded $150.00. This threshold created much confusion because neither the associations nor the agents were sure whether the Act applied. Also agents did not know whom to contact in order to obtain an association disclosure package. Hence, the amendment creates a new bright-line test. If the association has not registered with the Real Estate Board or the State Corporation Commission, the package is unavailable. Mr. Johnson stated that the new legislation did not anticipate the issues raised by Horton.
One way to explain the result in Horton is not to look at the law, but instead to examine the supposedly irrelevant background facts. The buyers had entered into a contract to purchase a new luxury home. Halfway through the construction process, they became very disgruntled with the quality of the construction. They sent a home inspector into the new home, and he found numerous alleged code violations and construction defects. Instead of complying with the mandatory notice and arbitration provisions of their contract, the buyers opted to enforce their rights under the Act and rescind the contract. It was apparent at the trial and on appeal the judges found that the buyers were not really aggrieved parties and that the rescission of their contract was inequitable.
This judicial attitude towards the Act suggests that the courts are not consumer friendly (there is a surprise) and also that the General Assembly needs to reconsider the definitions of "association disclosure package" and "substantial compliance." Any proposed solution should (i) encourage compliance with the Act, (ii) not favor the buyer over the seller or the association over either party, (iii) not interfere in the efficient marketing of real estate, and (iv) limit litigation. After debating the various alternatives, I think the best solution is to have the General Assembly revise the Act. The revised Act ought to explicitly require the package delivered to the buyer to comply substantially with the Act. Since associations must register their annual reports with the Real Estate Board, and a package is not available unless the association is registered, why not impose upon the Board the additional obligation of reviewing packages? In order to defray its actual costs, the Board could charge a fee for reviewing the packages. A board approved package should be presumed to be compliant, and such a presumption would give certainty to all parties to a real estate transaction. If the General Assembly is afraid of imposing an additional mandatory expense upon associations, it can make voluntary the filing of the association disclosure with the Real Estate Board, but keep the protection of the safe harbor. In effect, if the association pays the fee and obtains review, the Board's imprimatur is placed on the package.
Here are my modest proposed amendments:
Section 5-511 (C) should be amended to add the following:
"Unless and until a 'substantially compliant' package is delivered to the seller, the package shall be deemed to be unavailable."
Section 55-512 (E) should be amended to provide:
"Any package found by the Real Estate Board to substantially comply with §55-512 shall be deemed to meet the requirements of this section."
Section 55-516.1 should be amended to provide a new subsection D as follows:
With the annual report, the association shall file its then current association disclosure package as defined by §55-512 along with the appropriate fee determined by the Real Estate Board for the review of the association disclosure package. The Board shall review the association disclosure package for substantial compliance with §55-512 within 30 days from receipt and shall approve the annual report and package once substantial compliance is reached. The Board may adopt necessary regulations to administer this section.
I am hopeful that the proposed solution in this article or something similar to it is adopted by the General Assembly. There is an obvious ambiguity in the Act, which is important and needs addressing. Is an "association disclosure package" merely the document delivered, or is it a compliant package as defined under the Act? Obviously, the court system had a chance in Horton to provide clarity, but it ducked the issue. Even so, a judicial determination for the buyers in that case would not have given clarity to parties in future real estate transactions. Instead, it would have created more litigation over "substantial compliance." Is a package compliant when 5, 4, or 2 items are missing? Does it matter which documents are missing? What if the information can be gleaned from reading all the documents, but separate statements are not provided? The General Assembly needs to speak.
*Martin Conway is a shareholder of the Pesner Kawamoto Law Group PC in McLean, Virginia. He specializes in real estate and commercial litigation. He also is the current legislative chair of the Legislative Committee of the Fairfax Bar Association. Mr. Conway would like to extend a special thanks to his partner, Susan M. Pesner, who participated in the formulation of the theory of the case at the trial level and actually presented oral argument on the petition for appeal.
Editorial
note: HB 2217 may be found at the General Assembly website
at http://leg1.state.va.us/cgi-bin/legp504.exe?ses=031&typ=bil&val=hb2217