MINNESOTA: Rethinking MCIOA Resale Disclosure Certificates

As a law firm that works with homeowners’ associations (“HOAs”), we have noticed a trend in disputes relating to resale disclosure certificates and HOA insurance loss assessments. Consider the following hypothetical scenario:

You own a townhome in Minnesota and purchased your unit in September of 2020. You heard about a large hailstorm that went through the area earlier that summer and as a savvy buyer, you understood that the HOA could assess back some of the costs to repair damages. You therefore reviewed the association-provided resale disclosure certificate before making an offer on the unit to see if any storm-related assessments were planned.

The resale disclosure certificate did not mention anything about damage from a hailstorm and specifically stated that there were no extraordinary expenditures approved by the Association, and not yet assessed. You made a fair offer and closed on the unit later that year.

Two years go by and to your surprise, you receive a letter from your HOA notifying you that you are responsible for paying nearly $13,000 for a loss assessment that is “your portion of the deductible” from the HOA’s insurance claim that it made for the hail damage from August 2020, prior to you purchasing your Unit.

You attempt to make a claim with your HO-6 insurance policy, as recommended by your HOA, but your insurer denies your claim because you did not own the unit when the storm damaged the property. You try and tell that to your property manager, board of directors, and even the HOA’s attorney, who all point the finger back at you and expect you to pay over ten thousand dollars within 60 days.

Remember, you specifically looked at the disclosure certificate and it did not include anything about a hail claim or future assessment. You point this out, but the HOA’s attorney sends you a letter that says the Association did not know about the assessment in 2020 and could not have notified you of something it did not know about. As unfair as it seems, you are eventually forced to pay the full amount.

Consider the other side of this story. The HOA first discovered hail damage from 2020 in 2021 because nearby communities were making claims and getting new roofs. After engaging an attorney and fighting for nearly two years, the HOA’s insurance finally paid for the damage from the August 2020 storm. Even though the storm happened in 2020, the HOA did not know if the insurer would cover any damage until 2022. During the intervening time, a handful of units have changed hands. That said, the HOA only has authority to hold homeowners who own at the time of the assessment liable for the deductible assessment.

No homeowner wants to be in this situation and certainly no Board member or property manager wants to be the one to enforce this situation. The only way to prevent owners from ending up in this situation is for developers, HOAs, and property managers to ensure that their resale disclosure certificates include even potentially insurable events and assessments.

What is an MCIOA Resale Disclosure Certificate?

The Minnesota Common Interest Ownership Act (“MCIOA”) is a Minnesota state law that governs the operation of Common Interest Communities (“CICs”) and gives legal authority to address issues that frequently affect them. MCIOA applies to many, but not all, CICs in Minnesota.

Minnesota Statute Chapter 515B requires the disclosure of financial and other operating information to potential buyers in the form of a certificate that must be dated no more than 90 days prior to the date of a purchase agreement.

The statute requires specific disclosure of 13 topics, including information about the HOA’s Reserve Fund and Operating Fund balances, if there are any outstanding assessments (dues) or special assessments owed by the unit, if the HOA has approved any pending or imminent special assessments, if there are any lawsuits against the HOA, and a statement of insurance coverages.

Which HOAs are required to provide Resale Disclosure Certificates?

In general, there are four types of CICs: condominiums, planned communities (often referred to as townhomes), cooperatives, and single-family communities.

All HOA’s, regardless of the type, that have opted in to MCIOA are required to provide MCIOA Resale Disclosure Certificates. Nearly all condominiums in Minnesota are subject to MCIOA, even if they were created before 1994 because MCIOA superseded the now-obsolete Minnesota Uniform Condominium Act. Most townhomes and cooperatives in Minnesota are also subject to MCIOA.

Of the minority of townhomes and cooperatives in Minnesota that are not subject to MCIOA because they were created before 1994 and have never opted in to MCIOA, many hold the misconception that they are not required to provide MCIOA resale disclosure certificates. However, despite not being subject to MCIOA, Section 515B.1-102(b)(3) of MCIOA requires all planned communities and cooperatives, even if not otherwise subject to the rest of MCIOA, to provide MCIOA Resale Disclosure Certificates.

Likely because of this unique caveat for non-MCIOA townhomes, many individuals in the CIC industry believe that all CICs are required to provide MCIOA Resale Disclosure Certificates. However, this is incorrect. A notable exception to the MCIOA Resale Disclosure Certificate requirement is for single family HOAs that have not opted in to MCIOA, but only if the HOA or master association does not maintain any part of a building that contains a dwelling.

When should HOAs update their MCIOA Resale Disclosure Certificates?

The not-so-hypothetical scenario described above can be improved by reevaluating the HOAs resale packet often and over-disclosing. It is a good idea for HOA Boards of Directors to review the information contained in their resale disclosure packet at regular quarterly meetings to ensure that the information the HOA is disclosing contains the most up-to-date information that a potential buyer and future member of the community would want/need to know.

What information should be included in a MCIOA Resale Disclosure Certificates?

Certainly, every disclosure certificate should include all information required in each of the 13 subjects listed in 515B.4-107. Subjects one through twelve require disclosure of easily identifiable information.

However, subject thirteen requires disclosure of all “matters affecting the occupancy or use of a unit, or the unit owner’s obligations with respect to the unit [that] are deemed material.” This is a catch-all that we generally recommend including things like pet and leasing restrictions or if the community is a 55-plus community. We recommend also using this section to disclose less certain information like, “the HOA was hit by a hailstorm in August 2020, may make a claim, and if the insurer approves a claim for damages, the HOA might levy a large assessment in the future to cover the deductible.”

If an HOA included such a disclosure in its certificate and the HOA’s insurer eventually finds that no damage occurred, the “worst case scenario” is the HOA removes that information from the resale certificate and moves on. No harm is done by over-disclosing this type of information.

On the other hand, when HOAs do not include potential and uncertain information, one can end up with the situation described at the beginning of this article.

Moving Forward

Until the law changes and HO6 insurers are required to cover claims based on the date of assessment instead of the date of loss, developers, HOAs, and property managers can protect HOAs and their members by including tentative information in resale certificates and reviewing their resale packets regularly.

If you have questions about disclosing a certain situation at your HOA or if you are dealing with a dispute related to a resale disclosure certificate, reach out to SJJ and one of our experienced community association attorneys will be happy to assist.