The Maryland General Assembly has enacted a bill regarding condominiums and homeowners associations that would significantly affect developer costs and flexibility. The legislation, which affects residential and mixed-used condominiums, will become law October 1, 2010, unless Governor O'Malley vetoes it.

The bill (SB 597 / HB 620), amending the Condominium Act and Homeowners Association Act, mandates that certain components of a condominium will be common elements, regardless of how they are designated in the documents and their intended use. It also extends the developer's warranty on condominium common elements and on HOA common area improvements.

The Condominium Act would now require that roofs; foundations; external and supporting walls; mechanical, electrical, and plumbing systems; and other structural elements be included as common elements to the extent that they are shared by or serve more than one unit or serve any portion of the common elements.

Serious unintended consequences for master condominiums and/or mixed-use condominiums may include compromising the ownership and control of distinct portions of buildings (including desirable smart growth, mixed-use TOD projects); eliminating eligibility for secondary mortgage financing on residential units; interfering with condominium documents negotiated well in advance by developers, lenders, and commercial users; impairing financing by lenders who refuse to provide construction loans for common elements but insist on the full security of unit components; and making all or portions of a building ineligible for historic tax credits that might otherwise be available.

The bill also would extend the duration of the developer's warranty on condominium common elements and HOA common area improvements.

For condominium common elements, the warranty would extend until the later of three years from the transfer of the first unit or availability of the common element for use by the unit owners; or two years from the date on which the unit owners, other than the developer and its affiliates, first elect a controlling majority of the Board of Directors. Extending the common element warranty for two years after turnover of control could result in these warranties lasting for twice as long as (or longer than) is now required.

For HOA common area improvements, the warranty would extend until the later of two years from the transfer of the first lot or availability of the improvement for use by the lot owners; or two years from the date on which the lot owners, other than the developer and its affiliates, first elect a controlling majority of the governing body of the homeowners association. This will at least double the current one-year developer warranty on HOA common areas.

One obvious problem is that by imposing a longer warranty period tied to a controlling majority in the association, the bill exposes to greater liability a developer who is, through no fault of its own, stuck in a sluggish economy with lagging home sales. In the current economy, residential units are selling much more slowly, and developers may continue to own a majority of residential units in a project much longer than initially anticipated.