The Perils of
Section 22.1 Disclosures

by: Jeffrey A. Goldberg

Of the many potential pitfalls involved with a residential real estate closing, there are particular risks when a condominium unit is being sold. One dangerous snare for the unwary buyer or seller, condominium associations, and their attorneys, is contained within the disclosure requirements of Section 22.1 of the Condominium Property Act ("Act").

Section 22.1 of the Act governs the sale of condominium units by unit owners. It authorizes a prospective purchaser to demand that the seller obtain from the condominium association, and make available to the purchaser, a number of disclosures, including:

1. A copy of the Declaration, by-laws, other condominium instruments and any rules and regulations.

2. A statement of any liens, including a statement of the account of the unit setting forth the amounts of unpaid assessments and other charges due and owing.

3. A statement of any capital expenditures anticipated by the unit owner's association within the current or succeeding two fiscal years.

4. A statement of the status and amount of any reserve for replacement fund and any portion of such fund earmarked for any specified project by the Board of Managers.

5. A copy of the statement of financial condition of the unit owner's association for the last fiscal year for which such statement is available.

6. A statement of the status of any pending suits or judgments in which the unit owner's association is a party.

7. A statement setting forth what insurance coverage is provided for all unit owners by the unit owner's association.

8. A statement that any improvements or alterations made to the unit, or the limited common elements assigned thereto, by the prior unit owner are in good faith believed to be in compliance with the condominium instruments.

9. The identity and mailing address of the principal officer of the unit owner's association or of the other officer or agent as is specifically designated to receive notices.

The association has 30 days from the date of the request to disclose this information.

• Perils for the Purchaser

The danger posed to the purchaser by Section 22.1 comes from failing to request the disclosure or neglecting to pay serious attention to the information when received.

The protection provided by the Act should not be regarded simply as a legal technicality of a condominium closing. Rather, the disclosure should be embraced as one of the few timely opportunities for the purchaser, and his or her attorney, to find out essential information about the condominium association.

In particular, the purchaser should use this opportunity to try to ascertain the association's financial condition while there is still time to avoid becoming a member. If the association is involved in major litigation, or if a number of the units are in foreclosure, or if there are construction defects, of if any of a number of serious problems exist as to the unit being purchased or in the association generally, a careful review of the disclosures most often would uncover them.

If problems are revealed, the prospective purchaser will have a right to terminate the real estate sale agreement. Although not expressly stated in the Act, the Appellate Court has found there is an implied private remedy in Section 22.1 of the Act in favor of the prospective purchaser. Nikolopulos v. Balourdos, 245 Ill. App. 3d 71, 77, 614 N.E.2d 412, 416, 185 Ill.Dec. 278 (1st Dist. 1993). The court ruled that a prospective purchaser may terminate the real estate contract within a reasonable time after being furnished the information. Typical real estate agreement forms generally in use specifically provide for a 7-day contingency period after receiving the information.

Even if no problems are revealed by the disclosure, the fact itself that the disclosure was made could prove beneficial to the purchaser in the event undisclosed future problems arise. The purchaser may have legal recourse against the seller or the condominium association for failure to make a full disclosure. At the very least, the purchaser may be protected against any claims by the association regarding the unit's compliance with the association's governing documents, which may have been waived as a result of the association's disclosure.

• Perils for the Seller

Even if the purchaser does not make a Section 22.1 request, the seller may want to consider asking the association for the information in order to protect the seller from possible liability The seller should use the opportunity provided by Section 22.1 to transfer the burden of disclosure upon the association. Since the condominium association has a statutory duty to make disclosure, the seller should be entitled to rely upon the disclosure in case the purchaser ever seeks damages for an undisclosed condition.

The Residential Real Property Disclosure Act requires all sellers of residential property to make a number of disclosures about the physical condition of their property. The disclosure expressly does not cover the common elements but does specifically include the limited common elements (which are within the scope of the Section 22.1 disclosure). The seller could find extra protection by making sure that the association has made a representation covering the limited common elements.

• Perils for the Association

The greatest risk of a Section 22.1 disclosure is to the condominium association. It is surprising, however, how few associations seem to take the disclosure seriously. It seems that many associations hastily prepare a form letter whenever a request is received, apparently oblivious to the future danger which can arise from the representations contained in the letter.

The failure to make full and accurate disclosure of anticipated capital expenditures, the financial condition of the association, or pending litigation could be used against the association by its new member, and could form the basis of liability for deceit or negligent misrepresentation. The association has a clear statutory duty to make disclosure to the prospective purchaser, and therefore generally the prospective purchaser should be able to rely upon the statements in determining whether to proceed with the purchase of a unit. He or she should then be entitled to recover damages, including economic losses, as a result of the negligent or intentional failure of the association to accurately disclosure material information. See Lehmann v. Arnold, 137 Ill. App. 3d 412, 420, 484 N.E.2d 473, 479, 91 Ill.Dec. 914 (4th Dist. 1989).

Another peril for the association is the failure to inspect the unit before making the representation that any improvements or alterations made to the unit, or its assigned limited common elements, by the prior unit owner, are in good faith believed to be in compliance with the condominium instruments. It is a quite common violation for unit owners to make unauthorized alterations or improvements in violation of the governing documents, including alterations which may improperly invade the common elements. These alterations may not be readily apparent, but can surface when damage is caused as a result of improper construction or design.

In the event there are unauthorized improvements or alterations, the association may have waived them unless it made a good faith effort to determine whether such improvements or alterations existed. If waived, the association may not be able to enforce its governing documents against the purchaser or other unit owners. This could lead to the association's liability to the other unit owners. It may be that the association has no authority to waive violations of governing documents, but because the prospective purchaser relied upon the association's disclosure or failure to disclose, the association may have to pay damages to the unit owner and assume the expense of returning the property to its original condition.

In conclusion, the perils of Section 22.1 of the Condominium Property Act must be respected by purchaser, seller, and condominium association. Great care must be taken to avoid unforeseen liability for the negligent or intentional failure to accurately or fully disclose information to the condominium purchaser.