Home buyers must perform their own due diligence

Question: Our homeowner association’s directors have attorneys telling them they can do whatever they want because they are the board. Distrusting the board, I went to the office to inspect documents and found an agreement dated February 2007 for a loan for more than $3.3 million the board had taken out without the knowledge of owners. I purchased my condominium in 2007 after the loan was taken out. I believe that this obligation should have been disclosed during my purchase.

While in escrow, I had only two weeks to review my condo documents, which stated, among other things, that there was $2.05 million in reserves. That was confirmed by the association’s manager. There was no mention of the loan proceeds.

I feel I was deceived in the purchase. Do I have any recourse against the association, the board of directors or real estate agents?

Answer: Boards are not free to do whatever they want. Their attorneys should be telling directors what they can legally do and what they are prohibited by law from doing. Attorneys and boards are limited by the law and by the association’s governing documents. Being on the board is not justification for breaking the law, and attorneys can be disbarred for recommending actions that violate the law. That does not mean boards are prohibited from taking loans secured by the common property, but the actions must be authorized by the governing documents.

Those purchasing any property in a common-interest development need to read and understand the association’s governing documents and how the restrictions will apply to them long before signing the final papers. Smart buyers perform due diligence well in advance of signing a purchase agreement. Providing those documents well in advance of closing should be a precondition to any sale. Leaving little time for review before the closing of escrow should be a red flag of potential problems at that association. What these documents cannot disclose is how your board will act.

The loan should have appeared in the association’s pro forma budget, where a buyer performing due diligence should have discovered it. But it is the buyer’s duty to ask for and the seller’s duty to disclose that assessment.

Civil Code Section 1368 lists documents buyers are required to receive before closing escrow, whether provided by the association or the seller. The association is not required to voluntarily disclose any loans or even any litigation involving the association. That failure does not make the association, its board or even the real estate agent liable to you. The onus for knowing what questions to ask, and to whom, is on the potential buyer.

The association may seek a separate assessment to pay off the loan, but titleholders may find selling or refinancing, although not prohibited, difficult while loans are outstanding. It is incumbent on buyers to perform their own due diligence before making an offer.

The late Stephen Glassman, an attorney specializing in corporate and business law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295, or noexit@mindspring.com.