What is a Disclosure Statement and what is Required?

In Michigan, condominium developers are required to provide several documents to prospective purchasers of a condominium. Pursuant to MCL 559.106, “Developer” is defined as “a person engaged in the business of developing a condominium project as provided in this act”. In addition to original developers, the Condominium Act imposes similar requirements upon “Successor Developers”. MCL 559.235 states in part “As used in this section, ‘successor developer’ means a person who acquires title to the lesser of 10 units or 75% of the units in a condominium project, other than a business condominium project, by foreclosure, deed in lieu of foreclosure, purchase, or similar transaction”. Notably, sub-section (2)(a) of MCL 559.235 states “A successor developer shall … Comply with this act in the same manner as a developer before selling any units.”

The documents required to be provided by developers include, (1) the recorded master deed, (2) a purchase agreement and escrow agreement in the appropriate form, (3) a condominium buyer’s handbook, which was created by the Michigan Department of Licensing and Regulatory Affairs, containing a summary of portions of the Michigan Condominium Act, and (4) a disclosure statement relating to the condominium project. Pursuant to MCL 559.184a, the disclosure statement is required to include all of the following:

(i) An explanation of the association of co-owners’ possible liability pursuant to section 58.

(ii) The names, addresses, and previous experience with condominium projects of each developer and any management agency, real estate broker, residential builder, and residential maintenance and alteration contractor.

(iii) A projected budget for the first year of operation of the association of co-owners.

(iv) An explanation of the escrow arrangement.

(v) Any express warranties undertaken by the developer, together with a statement that express warranties are not provided unless specifically stated.

(vi) If the condominium project is an expandable condominium project, an explanation of the contents of the master deed relating to the election to expand the project prescribed in section 32, and an explanation of the material consequences of expanding the project.

(vii) If the condominium project is a contractable condominium project, an explanation of the contents of the master deed relating to the election to contract the project prescribed in section 33, an explanation of the material consequences of contracting the project, and a statement that any structures or improvements proposed to be located in a contractable area need not be built.

(viii) If section 66(2)(j) is applicable, an identification of all structures and improvements labeled pursuant to section 66 “need not be built”.

(ix) If section 66(2)(j) is applicable, the extent to which financial arrangements have been provided for completion of all structures and improvements labeled pursuant to section 66 “must be built”.

(x) Other material information about the condominium project and the developer that the administrator requires by rule.

In addition to the Michigan Condominium Act, the Michigan Department of Licensing and Regulatory Affairs has enacted Administrative Rules which interpret the Condominium Act. The Administrative Rules provide a significant amount of additional information regarding the requirements of disclosure statements. Michigan Administrative Rule 559.901 states that the developer shall furnish a copy of a current, effective disclosure statement to a prospective condominium purchaser not less than 9 business days before a binding purchase agreement. Additionally, Rule 559.901 requires developers to amend the disclosure statement before further use if there is a material change in the information contained therein. More specifically, Rule 559.903 provides as follows:

(1) The disclosure statement shall fully and accurately disclose those facts or characteristics about a condominium project and a developer which are deemed material. “Material,” as used in the preceding sentence, refers to those factors which might reasonably affect a prospective purchaser’s decision to accept or reject the offer to purchase the condominium unit. Where material information is not known by the developer, such facts shall be stated with a brief explanation.

(2) The information presented in the disclosure statement shall not obscure the facts, encourage a misinterpretation of the facts, or otherwise mislead the reader. No information is to be incorporated by reference to an extrinsic source which is not readily available to an ordinary prospective purchaser.

(3) The language of the disclosure statement shall be readily understandable by a lay person. Legal phraseology, technical terms, and terms of art are to be avoided where possible.

(4) Brevity is desirable to the extent consistent with the purpose of the disclosure statement and the rules governing its preparation. Thus, the contents of the disclosure statement shall be limited to factual information.

(5) The disclosure statement shall contain a cover page and a table of contents which identifies the sections and subsections of the disclosure statement.

(6) Material information about the developer and the condominium project within the following categories shall be included in the disclosure statement, when applicable:
(a) Condominium project warranties.
(b) The size and scope of the condominium project.
(c) The condominium project budget and assessments.
(d) The condominium project recreational facilities.
(e) Condominium project restrictions.
(f) The developer’s background and experience.
(g) Legal proceedings involving the condominium project or the developer.
(h) Condominium association management contracts.
(i) Other material information as will inform purchasers about the unique characteristics of the particular condominium project.

(7) Pursuant to section 101 of the act, the disclosure statement shall contain an explanation of the possible liability of co-owners under section 58 of the act. A statement similar to the following shall be included within the disclosure statement: “Co-owner liability. Section 58 of the Michigan condominium act provides: If the holder of a first mortgage or other purchaser of a condominium unit obtains title to that unit by foreclosing that mortgage, the holder of the first mortgage or other purchaser is not liable for unpaid assessments which are chargeable against that unit and which had become due prior to foreclosure. These unpaid assessments are common expenses which are collectable from all unit owners, including the holder of the first mortgage who has obtained title to the unit through foreclosure.”

(8) If a project is a conversion condominium project, the developer shall disclose the following additional information:
(a) The year when construction was completed on the building or buildings in the project.
(b) A statement, if known, of the condition of the main components of the building, including the plumbing, heating, electrical, roofing, and structural components. If the condition of the plumbing, heating, electrical, roofing and structural components is unknown, the developer shall fully disclose that fact.

Disclosure statements must begin with a table of contents and typically follow with an introduction of condominium law in Michigan and an overview of the remaining contents of the statement. The disclosure statement then provides information about the concept of condominiums as a form of property ownership along with each of the requirements listed in MCL 559.184a and Michigan Administrative Rule 559.903.

It is also critical to include information concerning the administration of the affairs of the condominium which is done through the formation of a nonprofit corporation. The corporation that is formed will typically be referred to as the “condominium association”. The estimated initial annual association operating budget must be included with a detailed breakdown of the amount of assessments being collected and the expenses being paid with said assessments. There is a strong incentive for developers to estimate low budgets so that prospective purchasers anticipate paying very low assessments and are more willing to buy into the project. While this is common practice, developers should be cautious of understating the estimated budget to avoid liability.

It is critical for developers to ensure that their disclosure statements comply with the requirements of the Condominium Act and Administrative Rules. Failing to comply with the extensive requirements exposes developers to both civil and criminal liability under the Condominium Act. With respect to civil liability imposed under the Condominium Act, the Michigan Court of Appeals has stated:

MCL 559.184a further provides that the disclosure statement may not make any untrue statements of material fact or omit any material facts in order to mislead, and that if there are any material changes or omissions, an amendment must be made. The provision concludes by stating that a violator of the section is subject to section 115 of the Act. Section 115, located at MCL 559.215(1), provides that “[a] person or association of co-owners adversely affected by a violation of or failure to comply with this act, rules promulgated under this act, or any provision of an agreement or a master deed may bring an action for relief in a court of competent jurisdiction …”

Heritage in the Hills Homeowners Ass’n v Heritage of Auburn Hills, LLC, unpublished opinion per curiam of the Court of Appeals, issued February 2, 2010 (Docket No. 286074), p 4. Additionally, MCL 559.258 provides that an individual who aids in the publication, advertisement, distribution, or circulation of a statement or representation concerning a condominium project which misrepresents the facts concerning the condominium project is guilty of a misdemeanor and shall be punished by a fine of not more than $10,000.00, or imprisonment for not more than 1 year, or both.

Accordingly, anyone who is considered to be a developer or successor developer under the Condominium Act is required to comply with the provisions of the Condominium Act and Administrative Rules concerning disclosure statements. All developers should obtain legal counsel to assist with the preparation of the disclosure statement and all other required legal documents to ensure compliance with Michigan law. Similarly, all prospective purchasers of a condominium should have an attorney review the disclosure statement, purchase and escrow agreements, and governing documents prior to signing.

Brandan Hallaq is an attorney with the law firm of Cummings, McClorey, Davis & Acho, P.L.C., in the firm’s Livonia, MI office where he focuses his practice in the areas of business and real estate law. He practices in state and federal courts handling a wide scope of real estate and business/commercial litigation matters. He also has experience preparing the necessary documents for business formation, purchases/sales of businesses, as well as negotiating and drafting contracts. Mr. Hallaq obtained his Juris Doctor degree cum laude from Wayne State University Law School and his B.A. degree cum laude in Political Science from Wayne State University.