As of February 2, 2015, the Risk Management Committee released an updated H.O.A. Condominium / Planned Community Addendum. For more information on the form see our introduction here , best practices here or our webinar on the revised addendum here.
Q: Why did the Risk Management Committee believe it necessary to revise the H.O.A. Condominium / Planned Community Addendum (the “HOA Addendum”)?
In the eyes of the Risk Management Committee, it was becoming increasingly common for parties to be surprised at close of escrow by previously undisclosed HOA fees that were due and payable upon close of escrow and which neither the buyer nor seller had previously agreed to pay. In an effort to avoid this scenario, the Committee wanted to create a form that promotes a greater level of disclosure of the various fees that are payable upon close of escrow.
Q: Who takes the initial steps in completing this Addendum and what exactly are they supposed to do?
Upon listing a property for sale, the Seller is instructed to contact the Association(s)/Management Company(ies) that govern the Premises to obtain an understanding of the HOA fees payable upon close of escrow. Once that information has been obtained, the Seller is to complete page one of the Addendum and place their signature on line 34. Thereafter, the entire three-page Addendum is to be uploaded to the Multiple Listing Service, if available, or delivered to prospective buyers upon request.
Q: Why does page one of the Addendum not ask for the identity of the Buyer?
At the time page one is being completed by the Seller, the identity of the Buyer will not yet be known.
Q: What steps does the Buyer take in regard to this Addendum when submitting a purchase offer?
Prior to submitting their purchase offer, the Buyer should secure a copy of the Addendum in which page one has been completed by the Seller. The Buyer should review the fees disclosed on page one and should then contact the Association(s)/Management Company(ies) to obtain verbal verification of the Fees Payable Upon Close of Escrow. Once the Buyer feels that they understand the Fees Payable Upon Close of Escrow, they are to complete page three of the Addendum, thereby identifying which party pays for which fees. Finally, the Buyer signs the Addendum at line 100 and conveys all three pages of the Addendum to the Seller upon submission of their purchase offer.
Q: Why do lines 82-83 of the form request that the prospective Buyer contact the Association(s)/Management Company(ies) to obtain verbal verification of the Fees Payable Upon Close of Escrow?
Although the Seller has used best efforts to identify the Fees Payable Upon Close of Escrow, the Seller is not guaranteeing the accuracy of the fees. It would therefore benefit a prudent buyer to independently investigate the amount of these fees, including before a purchase offer is submitted. And while prospective buyers would presumably prefer to receive written verification of the fees from the HOA/Management Company, it is unlikely that such will be provided at this very early stage of the transaction. Specifically, the HOA/Management Company will most likely not provide written confirmation of the fees to the Buyer unless a fee has been paid as permitted by A.R.S. § 33-1260 and A.R.S. § 33-1806. The workgroup was concerned that if the word “verbal” was omitted from line 82, buyers would insist upon receiving written documentation to which they are not yet entitled.
Q: In some instances, the CC&Rs that govern the property may dictate which party pays for a specific fee(s). How does this impact the Buyer and Seller?
Even if the CC&Rs designate the payor of a specific fee(s), the parties can, nonetheless, negotiate which party will pay that fee at close of escrow.
Q: If the Fees Payable Upon Close of Escrow as identified on page one of the Addendum are incorrect, is the Seller or the Seller’s broker subject to liability?
No. Lines 94 through 98, titled Buyer Acknowledgement, explain that the parties may not know the exact amount of the fees until written disclosure documents are paid for, and furnished by, the Association(s)/Management Company(ies). As a result, the Buyer agrees to “hold Seller and Broker(s) harmless should the Fees Payable Upon Close of Escrow prove incorrect or incomplete.”
Q: What is the purpose of uploading the HOA Addendum into the MLS?
Once page one of the Addendum is completed by the Seller, the entire three-page form is to be uploaded to the MLS, assuming that the local MLS permits such action. The reason for uploading the Addendum is so that prospective buyers will be able to easily access the Addendum and take note of the Fees Payable Upon Close of Escrow. With this knowledge, the Buyer can make an informed decision as to which fees they are offering to pay as part of their purchase offer.
Q: What if the HOA Addendum is not uploaded into the MLS?
In the event that the local MLS does not permit the Addendum to be uploaded, or in the event that the listing agent fails to do so, the Buyer’s agent should directly contact the listing agent and request that the HOA Addendum be promptly conveyed.
Q: What if, despite all of their efforts, the listing agent is unable to obtain a copy of an HOA Addendum completed by the Seller?
If unable to obtain a completed HOA Addendum from the Seller, the Buyer should try to contact the Association(s)/Management Company(ies) for verbal verification of the Fees Payable Upon Close of Escrow. If the Buyer cannot reach the Association(s)/Management Company(ies), the Buyer has two options. First, the Buyer can elect to complete page three of the Addendum without knowledge of the amount of the fees, and then submit all three pages of the addendum with their purchase offer. (Note – Under this fact scenario, page one of the Addendum would be blank.) Alternatively, the Buyer can submit their purchase offer without submission of the HOA Addendum, noting on the Purchase Contract that their offer is contingent upon the parties’ execution of the HOA Addendum once the Fees Payable Upon Close of Escrow have been successfully negotiated.
Q: If the property is governed by an HOA, does that mean that it is also governed by a Master Association?
No. While some communities may be governed by more than one association, most are governed by only a single association.
Q: Upon payment of the fee authorized under A.R.S. § 33-1260 and A.R.S. § 33-1806, the Association(s)/Management Company(ies) will provide written resale disclosure documents that state with certainty the Fees Payable Upon Close of Escrow. If the Buyer does not approve of the fees, can the Buyer cancel the contract?
Yes. The Purchase Contract provides the Buyer five (5) days after receipt of exceptions to Buyer’s policy of Title Insurance (which includes CC&Rs and other association documents) to provide written notice to the Seller of any items disapproved. Accordingly, if after receipt of the written resale disclosure documents, the Buyer disapproves of the Fees Payable Upon Close of Escrow, the Buyer can deliver to the Seller a signed notice of any items disapproved and elect to cancel the Contract. This fact is reiterated on lines 42 and 43 of the Addendum. Additionally, the Buyer is encouraged to investigate the Fees Payable Upon Close of Escrow during the Inspection Period provided for in the Purchase Contract. If during that time the Buyer does not approve of the Fees Payable Upon Close of Escrow, prior to expiration of the Inspection Period, Buyer can deliver to the Seller a signed notice of any items disapproved and elect to cancel the contract.
Q: Why does line 78 require the Seller to pay all Disclosure Fees?
This is a requirement imposed by Arizona law as A.R.S. § 33-1260(C) and A.R.S. § 33-1806(C) allow the HOA to charge “the unit owner” / “member” a fee of no more than an aggregate of four hundred dollars to compensate the association for the costs incurred in the preparation of a statement or other documents furnished by the association pursuant to the resale of the Premises for purposes of resale disclosure.
Q: What if the Seller is not willing to accept the Buyer’s proposed terms set forth on lines 75 through 81 of the HOA Addendum?
If the Seller is not willing to accept the Buyer’s proposal regarding the Fees Payable Upon Close of Escrow, the Seller has two primary options. First, the Seller can simply reject the Buyer’s purchase offer. Alternatively, the Seller can submit a counteroffer to the Buyer that contains the Seller’s proposal for who pays what fees.
Q: Why doesn’t the HOA Addendum ask the Seller to identify a list of services provided by the HOA?
The HOA Addendum is intended solely to disclose the Fees Payable Upon Close of Escrow and determine which party will pay for which fees. Furthermore, it would likely prove very difficult for a seller to compile an exhaustive list of this nature.
Q: What if the Association is voluntary?
If the association and related association dues are voluntary, the HOA Addendum is not required. There are voluntary associations that do not fall within the statutory definition of a planned community association because they do not own or operate portions of the planned community. Arizona statutes only regulate planned community associations that fall within the following definition: “a nonprofit corporation or unincorporated association of owners that is created pursuant to a declaration to own and operate portions of a planned community and that has the power under the declaration to assess association members to pay the costs and expenses incurred in the performance of the association’s obligations under the declaration.”
Some of these voluntary associations are formed for the purpose of enforcing the CC&Rs or deed restrictions recorded against the property. Thus, the Seller should disclose the existence of a voluntary association to the prospective buyer.
Updated April 2, 2015
About the Author: Scott M. Drucker, Esq., a licensed Arizona attorney, is General Counsel for the Arizona Association of REALTORS® serving as the primary legal advisor to the association. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.