During the real estate downturn, condominium buyers and their lawyers have advanced many arguments seeking to cancel contracts and recover deposits from sellers. The recent decision of Herlson v. RTS Residential Block 5, LLC, et al.by the Maryland Court of Special Appeals may provide another basis for these buyers to terminate their contracts.
Condominium developers should be most concerned with the Court’s opinion that Section 11‑126(d) of the Maryland Condominium Act provides the purchaser five days to rescind a sales agreement after receiving amendments to the Public Offering Statement (POS)―regardless of the effect of amendments. Many, including the Secretary of State's Office, which administers condominium registration and amendments, have construed the section to provide a five-day rescission right only if POS changes materially affect a purchaser's rights.
In Herlson, the purchaser plaintiff entered into a contract restricting the purchaser from leasing or reselling the unit for one year. The seller later provided notice of several POS updates, including removing the leasing prohibition and changing the ability to resell from one year to two years. The day after receiving notice, the purchaser tried, in writing, to cancel the contract, arguing that removing the rental restriction constituted a material change. The seller countered that the purchaser had no right to cancel because the POS updates did not materially affect the contract.
The seller initially prevailed, but the Maryland Court of Special Appeals overturned the trial decision, holding that the POS changes materially affected the purchaser’s rights, even though they related to future contracts to which the purchaser would not be party. As a result of this decision, it is critical that condominium POS materials be drafted to provide as much flexibility as possible in anticipation of future changes and that developers carefully evaluate the risks of changing such materials.
If you have any questions regarding the effect of Herlson on your POS materials, please feel free to contact any member of the Planned Communities and Condominiums Group.
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