Anne Arundel County Maritime Industry Advisory Board Member

anne-arundel-county-advisory-board

Marina Purchase and Sale

pexels-photo-2There are many marinas in Maryland, ranging from large commercial ones the size of small towns to “informal” (or illegal) ones with a few slips and a ramp.  The purchase or sale of a marina property has all of the financial elements of a regular commercial property, but with highly specialized business, riparian rights, zoning, and environmental concerns.  There are many risks to purchasers, and they pose very interesting questions for the real estate lawyer that knows about waterfront and marine businesses.

I was recently hired by a cash buyer to review a potential marina purchase in Baltimore County.  Intellectually, this was an exciting opportunity, since it meant that it was up to me to do the due diligence that is often handled by the lending bank, and it gave me the freedom (and responsibility) to know all aspects of the deal.  Here are some of the things that I looked at.

Zoning and Development Restrictions: This property was in a very specialized and highly restrictive zoning category, and some face to face discussions with the zoning office revealed that prior sales had fallen through because the property had been considered as having the ability to convert to residential condominiums, when that was not possible under current zoning.  These restrictions limited the upside potential of the property significantly.

Piers and Riparian Rights: The possibility of expansion of the existing marina was an intriguing aspect of the purchase.  Careful review, however, revealed that the marina was already built out to the maximum side-lot restrictions and out to the harbor line, which prevented further expansion.  The slips could potentially be reconfigured, but expansion was not possible.

Lease Agreements and Tenant Relations: The seller provided all of the lease agreements with current tenants for review.  These were professionally done, transferable, and enforceable, but during the course of the review it came to light that one of the tenants was unlikely to continue at the expiration of the lease in a few months.  Even more concerning, the largest tenant (who made up nearly half the revenue) appeared to be teetering on the edge of default, and had recently requested that the rent be renegotiated.

Environmental Review and Survey: With marinas, it is crucially important to be sure that there are no significant environmental concerns — especially buried or leaking hazardous materials.  Also key is the question of whether there are easements across the property or other issues that might materially limit the access to and control of the waterfront.  With this property, those reviews did not reveal any issues.

Revenue and Business Concerns: The seller in this instance was a well established commercial business with a known history and other similar properties.  There were no concerns about its ability to deliver good title or to demonstrate that it had the authority to sell the property.  The business concerns in this case were with the revenues generated by the property and whether they supported the investment.  Secondarily, whether there might be future appreciation (or depreciation) with the property or upside from redevelopment.  In this case, current revenues were good, but deviated from historical norms, and were also highly dependent on the largest tenant, who did not look sustainable.  We ran numbers for return on investment based on historical norms and accounting for the possible loss of tenants — these made the property look riskier than it had initially appeared based on revenues.  The difficulty redeveloping the site, in light of the restrictive zoning in place, also limited upside potential and future appreciation.

J. Dirk Schwenk is a Maryland lawyer in Real Estate law, Waterfront Property, Civil Litigation and Maritime Law from Annapolis, Maryland.  He graduated cum laude (with honors) from the University of Maryland School of Law in 1997 and has been in private practice in Maryland ever since.

 

Baylaw Boat Closing and Settlement Services

Boat closing and settlement servicesBoat Closing and Settlement Services

You can save thousands of dollars over what a broker will charge with complete confidence that your purchase and sale documents and funds will be handled professionally and honestly.  Baylaw will close the deal for 2.5% of the purchase price ($1000 minimum).  Funds will be held in our attorney trust account; purchase documents will be reviewed by a lawyer; and no money will be released until all parties are fully satisfied that the deal is ready to close.

Baylaw, LLC will finalize your boat purchase or sale.  We:

1. Collect purchase funds in an attorney trust account in preparation for closing.

2. Obtain and review ownership documents for completeness and accuracy.

3. Verify ownership status and publicly filed liens on the boat, yacht or ship.

4. Obtain lien pay-off information.

5. Prepare a settlement statement showing who is to be paid what funds from closing.

6. Pay off all known liens and mortgages.

7. Deliver closing funds to seller and lienholders.

8. Delivering good title to purchasers
In addition, we can also provide the following.

Documentation and registration services for all boats, yachts and ships.

Set up and transfer LLC and corporations and/or conduct asset sales for vessels held in LLCs or corporations.

Provide tax advice related to sales and use tax in any state in the United States.

Provide advice on related legal issues such as recommendations for where and how to title the boat; corporate ownership; chartering; maintaining anonymity, etc.

 

Vessel Purchase – Closing and Settlement

Vessel Purchase Closing and SettlementOnce the contract is signed, the most exciting and harrowing part of the purchase of a yacht or ship is the final magic moment when money and ownership change hands — that is the moment we call closing or settlement. It is truly one of the magic moments in the law: in an instant money is transformed into a living ship and a living ship is transformed into money. There is a great deal of work that must be done, however, before that moment can safely occur.

For a lawyer, representing the buyer is the most complicated transaction because everything must be verified — the identity of the ship, the identify of the owner, the authority of the owner to possess and sell the ship, the title documents offered in the sale. In addition, attention must be paid to the buyer/client — if they are buying through a company, is that company established and in good standing; are the funds going to be available to close; can the use the ship for the purpose that they expect; can it be registered in the location of their choice; is insurance in place? The worries are endless, and inevitably they all come to a last minute peak 24 hours before the scheduled close.
When closing finally occurs, it is the lawyer’s job to be sure that the title documents are legally sufficient to transfer title, that funds are properly allocated, and that possession is given to the new owner.

For small domestic boats, Baylaw, LLC will conduct settlement for a flat rate of $800, to include verifying and holding the documents necessary to transfer title; holding the purchase funds in trust; and ensuring that buyer receives title and seller receives ready funds. This resolves the problems giving a boat or a check to a thief.

Every closing is different, but here are some of the questions that we try to answer before any closing becomes final.

1. Can the owner deliver title to the boat free and clear of any liens or mortgages? Answering this requires checking with the registry of the flag nation and in some circumstances doing investigation to be sure that there are no hidden liens. Verifying the identify of the owner is also recommended.

2. Is the boat eligible for sale in the United States? A ship or yacht that has not been properly imported (and paid import duty) cannot be sold in the United States to a US Citizen without paying import duty. The consequences of violating customs law can be significant.

3. What documents will be required by the vessel registry in which the vessel will be placed? All registries will require that the boat be deleted from any prior registry and that properly executed Bill of Sale be executed. Different jurisdictions have many different and specific requirements as well, including the United States, which requires that vessels be primarily owned by US citizens. .

4. Are there factors that require that the closing be conducted in international waters or a different state of the United States than where the boat presently lies? Usually the reasons to conduct an international settlement involve state sales and use tax or the application of duty.

Closing and settlement can feel overwhelming — that’s pretty normal. There are a lot of moving parts and there are always surprises. With good representation, however, the important issues will be resolved: you will either get your boat or your money and be ready to move on to your next projects.

Dirk Schwenk is a maritime attorney in Annapolis, Maryland. He is a member of the Yacht Broker’s Association of America, the Maryland Marine Trades Association and the bar of Maryland. He has been practicing in admiralty and maritime since 1997.

Vessel Documentation, Registration and Flagging

Vessel documentation (also known as Flagging) is a national form of registration, which essentially registers the ownership of your vessel with the shipping agency of the country of choice. In the United States, this is a Coast Guard responsibility, and it is that agency that accepts applications for documentation and also files liens against federally documented vessels. The “Certificate of Documentation” essentially replaces a title and registration that you would receive from state authorities. All maritime countries have similar agencies, with large yachts often flying the flag of the Cayman Islands, British Virgin Islands, Jamaica, as well the flags of the home countries of the owners.

Baylaw, LLC can provide documentation and flagging services for your vessel at a very competitive fixed rate, assuring that you have a lawyer that is looking out for your interests in the closing process.

Documentation or flagging provides conclusive evidence of nationality for international purposes, provides for unhindered commerce between the states, and admits vessels to certain restricted trades, such as coastwise trade and the fisheries.  Vessel documentation also allows for greater flexibility in obtaining financing. Certain types of mortgages, specifically a “Preferred Ships Mortgage”, are only available to documented vessels and are only available from FDIC approved banks or other lending institutions that have received federal approval.

Baylaw, LLC provides documentation and flagging services including, as needed, setting up corporations in the United States or abroad, submitting applications for documentation or registration, perfecting liens and generally problem solving to assure the best experience possible for the vessel owner. We differ from most documentation companies in two ways. First, in addition to getting the proper papers filed, our attorneys are available to consult on complex issues such as avoidance of unnecessary tax, dealing with customs bonds and import duties, as well as review of purchase contracts, crew contracts and charter arrangements. Second, we bill for what needs to be done, instead of setting a price in advance. For simple transactions this will almost always result in savings for the vessel owner. For transactions that become complex, any additional money will go to assuring that you have the best possible maritime advice to solve the problem.

We look forward to working with you.

Legal Considerations for Buying Charter Boats

This article is aimed at people who are considering buying a yacht to be used for charters, or converting their existing yacht for charters.  There are, of course, lots of other things to consider – like how to properly employ a captain and crew; where the boat is going to be located, etc., etc.  But if you are considering charters in the US, this is a good place to start.   Originally published in the Yacht Brokers Association of America Spring, 2015 Newsletter.

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Eventually, many people that love the water and love their boats will entertain the idea of chartering their boat.  Perhaps if they can make a little money with chartering, they can write off their expenses and enjoy more time on the water.  This is a great idea, but one that should be approached with solid planning and much caution.  Here are some of the most important issues to consider:

  1. Income Tax Issues.  In my practice, I leave income tax questions to qualified professionals (and if you are going to consider writing off boat-related expenses, so should you).  Here is a rule of thumb, however — you’d better have income related to the boat if you are going to write off losses related to the boat.  Beyond that, lawyers like me are happy to consult with your qualified tax professional.
  2. Insurance Issues.  Almost all personal yacht insurance policies either ban chartering altogether or limit it to a very small number per year.  Carefully read the yacht policy to determine what limitations are currently in place.  About the worst possible result is that you decide to charter the boat, there is a serious injury or death, and then you find out that you have violated the conditions of your insurance policy.  That mistake could be catastrophic.  If the boat is to be chartered, the policy should reflect the scale and duration of the charters.
  3. Banking Limitations.  Many boat loans forbid the use of the boat for any purpose other than as a private yacht, and provide the bank the option to call the note if that prohibition is breached.  I personally have never seen this become a serious issue in a case, and I struggle to imagine a situation in which it would become a serious issue — but no one wants to be the guinea pig tasked with finding the worst case scenario.
  4. Limitations on Crewed Charters.  Only US flagged boats with a coastwise endorsement can be used to carry passengers in US waters (except for American Somoa, the Northern Marianas, and the Virgin Islands)
    1. To be coastwise, a boat must be built (or completely rebuilt) in the United States, or else it must obtain a waiver.  (The waiver application is here: http://www.marad.dot.gov/ships_shipping_landing_page/domestic_shipping/small_vessel_waiver/small_vessel_waiver_request/small_vessel_waiver_request.htm).  Generally waivers are available if a boat is more than 3 years old, cannot carry more than 12 passengers, and will only be used for passengers, not cargo or commercial fishing (sportfishing is allowed, assuming no commercial sale of the catch).
    2.  Tip for Brokers and Buyers: if the owner hopes to provide crewed charters (especially meaning that the owner selects and employs the Captain), then it is imperative that the boat be qualified for coastwise endorsement.  The safest option for this is a US built vessel or a boat with a previously granted waiver.  Less safe, but possible, is a boat that is more than three years old and to be certified for no more than 12 passengers.
  5. Issues with Bareboat Charters.  Most yachts are not built in the US, and therefore are not eligible for a coastwise endorsement (see above, Limitations on Crewed Charters).  The only chartering option for such yachts is to make them available for bareboat chartering.  Some considerations for bareboat chartering:
    1. A bareboat charter is considered to be equivalent of a lease of property — for all intents and purposes the ownership and control of the boat transfers from the title owner to the charter for the period of time of the charter.  The documents and the actions of the parties should reflect this.
    2. A boat under bareboat charter cannot have paying passengers (ie the Captain can’t charter the boat and then have the passengers pay him) as this is a violation of the coastwise protections.
    3. The title owner of the boat is responsible for providing a seaworthy vessel, and may be liable if issues arise.
    4. Although the charterer is responsible for operations, the title owner may be left holding the bag if the charterer engages in illegal activity (like smuggling) and gets caught.
    5. It is strongly recommended that any boat that is made available for charter comply with the inspection requirements for a similar passenger vessel with USCG certification — anything less may be considered unseaworthy or negligent preparation.
    6. While the boat must be fully in the control of the charterer, the owner can place some restrictions such as requiring certain certifications for the Captain and crew; placing navigational limits on region or running at night.
  6. Placing the Boat in a Charter Fleet.  Many boats in the US (and other destinations) place boat in a charter fleet so it is managed by a charter company.  The benefits of taking this path are that typically the charter company handles the contracting, scheduling, maintenance, etc.  On the downside, there may be significant limitations on the owner’s use and customization of the boat.  For an owner looking for a newer stock boat, and who is willing to accept some limitations in exchange for cost savings, this can be a great option.  Brokers may be advised to consider what boats the charter companies are looking for in order to best advise their buyers.
  7. Corporate Ownership.  A boat that is going to be placed in charter for a significant percentage of its use should consider ownership through a corporate entity like a limited liability corporation.  Such an entity provides some protection against liability (although insurance should be the first consideration), some anonymity for the true owner, and also provides an organizing vehicle for income tax considerations.

A buyer (or a buyer’s broker) that is considering purchase of a boat to be used in charter should do some homework before buying.  Considerations such as the location of future charters, the origins of the boat, the size and capabilities of the boat and its marketability should all be evaluated before purchase.  An existing boat can be converted into a charter opportunity, but it is much easier if attention is paid to purchasing the right boat for the job.

J. Dirk Schwenk is a Maryland real estate and maritime law lawyer.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice ever since.  He has worked on hundreds of matters involving boat purchase, tax, ownership and sale.

 

Contract Law 101 – Maryland Contracts

Back to Basics – Contracts 101.

(Originally published in the Mid Atlantic Mariners Club Newsletter, 2010).

The first rule of contract: capture the intent of the parties.

In every profession, not just the law, we are faced with making, interpreting and abiding by contacts.  Sometimes these contracts are long and impossible to understand (mortgage refinancings, consumer warranties) sometimes they are so fleeting that one hardly notices (“I’ll pick up lunch”).  In law school, we learn that a contract consists of an enforceable promise.  It’s a promise that one can take to court, and the court can make the other comply or award damages for their failure to do so.  All contracts, though, include a major element of hope and trust and if that trust is broken, bad things happen, and the threat of a court’s intervention may not be enough to save the deal.

When a client comes to me about a contract, it is usually one of three things — reviewing a contract that someone else has prepared; papering an understanding where the framework is already in place; or protecting a client from the risks of a particular kind of deal.  The most frequent contracts for me are boat and ship purchase contracts — these often involve a significant outlay of funds before the product is near completion, and therefore require both trust and legal protections.  With all projects, I generally start with the same three questions.  What are you trying to accomplish?  What has already been agreed to?  How much do you know and trust the other party?

 When it comes to reviewing a contract that someone else has prepared for my clients’ signature, I focus on two things.  First, does it capture the items that my client thinks are being agreed to?  Many times I am given a form contract such as a boat brokerage agreement, and the parts of the deal that are most important to my client (the time of delivery and the promises that the boat will be fully commissioned to spec) are nowhere to be found.  Usually this can be handled with an addendum that sets out the specifics (Boat to be delivered to Maryland on date certain at the seller’s risk and expense), but sometimes the brokerage contracts simply will not do the trick.  Lawyers often joke about the boat brokerage and real estate contracts — they do a great job protecting the brokers or agents, but beyond that, its usually a lot of words that don’t say too much.

 My favorite project is when a client comes to me and says … “I agreed to _____ with ______ – can you write a contract for that?”  I like this kind of project (not just for the irony of the fact that there may already be an oral contract) because it usually allows me to work from the ground up, as opposed to slogging through pages of 8 point font prepared by someone else.  I get to start with “what exactly has been agreed to?”  Typically a clients’ answer to that question feels like the tip of the iceberg … “we agreed that I would sell his product for a 10% commission.”  This leaves open all sorts of lawyer-fun — how much do you have to sell; can you sell competitor’s products, too; can they hire other brokers or salespeople; where will suit take place; what happens upon termination?  And what happens if there is no agreement on all of the side issues?  I love that question.

 The Second Rule of Contract: be reasonable.

Assuming that there is enough of a contract to be a contract (generally that it is known what is being agreed to, including when it is to be done and how much it is going to cost) everything else may be an open term.  In some areas of the law, like partnerships, employment and state insurance contracts, there is a whole body of statutes that fills in the blanks.  In those areas people may “agree” to many things that they never even thought of.  If there are not default terms, then the agreement reverts to the rules of reasonableness.  These rules are essentially human instincts — most people will agree most of the time about certain things even if they have never considered them before.  If the contract is to buy a certain thing (say a house), then it is only for that particular thing, not something else.  If it is for something that is largely interchangeable (like a Blackberry), then it may not mean a specific thing, just a thing like it.  You can usually do well in contracts by staying polite and acting reasonably, but sometimes that is mighty hard.

 The rest of contracts is just simple interpretation — if the words on the paper say to do X, and X isn’t illegal or completely unreasonable, then that is what you do.  Words are notoriously tricky things, though, so one must write with care and make sure that everyone abides by at least the most important terms over time.  There are a few contracts (marine insurance, for example) where certain words and phrases have such a history behind them that their meaning is known with some certainty.  But for most contracts, even ones that have been used many times, no court has ever interpreted the key language, and everyone is operating on   hope that the words mean what they think they mean.  This is the real difficulty with “form” contracts — people trust it because its The Form, but who knows whether it captures the agreement that was really intended.

 What can you take away from all of this?  First and foremost, be sure that the contracts you enter into actually capture what is being agreed to — this can be trickier than you think.  Second, sometimes the simplest contracts are the best ones — agree to the key items, and otherwise act reasonably.  Third, there are times when a very thorough papering is necessary — like when a major asset like a house or a business is on the line.  In those cases, have clear goals and good representation that is looking out for your specific interests.

J. Dirk Schwenk is a Maryland real estate and civil litigation lawyer.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice ever since.

Maryland Partition Actions

Dividing Real Estate in Maryland

What do you do if you own a piece of real property with someone else, but you can’t stand them anymore?  Or you need to sell the property, but they want to keep it?  In law, this implicates the doctrine known as “partition.”  In a partition action, one owner of a property files suit against another and asks that the property be divided up or sold and the money split.  It is similar to what happens in a divorce, but the owners aren’t married.  Typical examples: two brothers are made joint owners in their Grandparents will.  One brother uses the property, the other would like to sell it and use the money to work on his own house.  Also typical two people are in love and buy a house together; their love cools and one moves out.  The person that moves out wants to get her money out of the house; the one that stayed is happy with the status quo.  What to do?  File a partition action and ask the court to either divide up the land (perfect if there are two similar lots) or order the land to be sold and money split (necessary if there is one house on the property and it cannot be split in half).

The right to a partition is set out in the Real Property Article of the Maryland Code.  It says:

“Decree of partition (a) A circuit court may decree a partition of any property, either legal or equitable, on the bill or petition of any joint tenant, tenant in common, parcener, or concurrent owner, whether claiming by descent or purchase. If it appears that the property cannot be divided without loss or injury to the parties interested, the court may decree its sale and divide the money resulting from the sale among the parties according to their respective rights. The right to a partition or sale includes the right to a partition or sale of any separate lot or tract of property, and the bill or petition need not pray for a partition of all the lots or tracts.” § 14-107

As the language indicates, if the property cannot be divided without losing value to its owners, then the court should order that it be sold and the proceeds divided.  That is what is known as a sale in lieu of partition.  Such sales are controlled by a section of the Maryland Rules of Civil Procedure that state: “When the relief sought is a sale in lieu of partition, the court shall order a sale only if it determines that the property cannot be divided without loss or injury to the parties interested.”  MD R PROP ACT Rule 12-401.

This is the correct result — if the property can just be split, as with two similar lots that are not improved with buildings — they should be split and the parties can keep or sell them as they see fit.  If the property cannot be split, however, it needs to be sold.

For the owners of the property, however, there are very strong reasons not to actually go through the sale as it would be ordered by the Court.  Under the Rules, the normal procedure is to appoint three commissioners who can establish a value and oversee the sale.  “When the court orders a partition, unless all the parties expressly waive the appointment of commissioners, the court shall appoint not less than three nor more than five disinterested persons to serve as commissioners for the purpose of valuing and dividing the property.”

MD R PROP ACT Rule 12-401.  These commissioners, in turn, can be paid out of the proceeds of the sale.  “Payment of the compensation, fees, and costs of the commissioners may be included in the costs of the action and allocated among the parties as the court may direct.”  MD R PROP ACT Rule 12-401.  If needed, the sale would then proceed to judicial sale –an auction on the courthouse steps.  This means that, if the owners cannot agree to sell it on the open market, it will likely go for a steep discount and then be subject to significant fees to pay the attorneys, commissioners, trustee, and related court costs.

 The bottom line: if you own property and the other side won’t sell, or if someone has sued you to partition a property you own — you will need pragmatic, effective counsel that realizes that all fees and costs will ultimately come out of the value of the clients’ property.

J. Dirk Schwenk is a Maryland Real Estate, Waterfront Property, Civil Litigation and Maritime Lawyer from Annapolis, Maryland.  He provides civil litigation services in real estate issues, contract disputes, environmental and zoning issues, adverse possession and boundary disputes.  He graduated cum laude from the University of Maryland School of Law in 1997 and has been in private practice in Maryland ever since.

Maryland Boat Lien Sales and Marina Collections

Maryland marinas and marine businesses have a number of options to collect on unpaid bills.  Baylaw, LLC offers competitive rates to conduct lien sales. We have the legal expertise to assure that you select the right method to ensure the greatest return with the least likelihood of ending up worse a write off.

Maryland Boat Lien Sales: 

Three reasons to use Baylaw, LLC to conduct lien sales: 

Baylaw LLC Lien Sales

Baylaw Marina Collections

1. We know when the best option is to hold an auction, use the abandoned boat process, arrest a vessel under federal maritime law or simply sue for the amount due. We also know when to tell you that your best option is to walk away and not pursue the debt. 

2. The Marina or Marine Business can always negotiate with its customers.  We never stand in the way of a negotiation. We never tell owners that they have to pay our fees to get their boat.  Your customer is your customer.  

3. We will not put you at risk for claims of unfair debt collection or consumer protection act violations, and if litigation ever does arise, we will know what to do.  

Four Options:

There are four basic options if the boat owner will not pay: 1) conduct a lien sale; 2) seek title as an abandoned boat; 3) arrest the boat under federal maritime law; or 4) file suit against the owner in state or federal court.   Each of these options has its pros and cons.  Baylaw, LLC can help you decide which is appropriate for your situation.

1) Maryland boat lien sales: The most important facts for a lien sale are that you have possession of the boat and the owner’s bill is unpaid at least 30 days.  If those facts are present, and the boat is not a federally documented boat, then a lien sale is a good option.  Notice of the sale must be sent to the owner and secured lienholders and the sale must be conducted in a public place.  Baylaw, LLC does that work at a competitive flat rate.

2) Abandoned boats: This is a good option if the owner is unknown or will not respond.  If the owner will respond and challenge, it is better to conduct a lien sale.

3) Maritime arrest: this is a good option for a higher value claim or where the marina or maritime business does not have possession of the boat.  If a bill is unpaid, an arrest can be done in any jurisdiction where the boat can be found.

4) Sue for damages: This is another option if the boat is no longer in the hands of the marine business and is especially effective if the owner of the vessel is known and has assets.

If you need assistance with collecting a debt concerning a boat, please contact Dirk Schwenk at 410 775 6805 or dschwenk@baylawllc.com.

 

Condominium Units – Damages from Common Elements

Damage to your Unit as the Result of a Defect in the Common Elements: Who is Responsible?

A common problem for condominium unit owners is when their unit is damaged as a result of a defect in a common element of the condominium.  Common elements, as defined by the Maryland Condominium Act (the MCA), are all of the condominium property except the units.  For instance, the lobby area of a condominium and the pipes and wires that run from unit to unit are all common elements.  A common problem that arises is when a defect in the common elements causes damage to your unit.  The question that often comes up is: “who is responsible for paying for that damage?”

The answer, generally, is that the council of unit owners’ property insurance will cover the loss.  However, the council of unit owners – or the Condominium Association – will often refuse to reimburse a unit owner for damage to his or her unit.  Generally, they will hide behind the language in §11-108.1 of the MCA, which states that “each unit owner is responsible for maintenance, repair, and replacement of his unit.”  However, there is an important exception to this rule:  when the damage is caused by a defect in the common elements, the council of unit owners is responsible to cover the loss through its property insurance.  We can reach this conclusion by further examining the text of the MCA.

Section 11-114(a)(1) of the MCA mandates that the council of unit owners maintain property insurance on the common elements and units, insuring against those risks of direct physical loss commonly insured against.  Furthermore, § 11-114(g)(1) of the MCA imposes a duty upon the council of unit owners to promptly repair or replace any portion of the common elements and the units that are damaged or destroyed.  If the council fails to take corrective measures, and a condo owner’s unit is subsequently damaged as a result of the failure to fix the defect, the council of unit owners’ property insurance will cover the loss, and the insurance deductible is a common expense.  Md. Code Ann., Real Prop. § 11-114(g)(ii) (West).

Furthermore, even if the council of unit owners couldn’t have fixed the problem before it caused damage to your unit – e.g. if a pipe bursts and floods your unit – the council of unit owners’ insurance will still cover the loss.  What this means is that the council of unit owners is responsible for reimbursing you if a defect in the common elements causes damage to your unit.

This insurance coverage should also generally apply in situations where your unit is damaged as the result of another unit owner’s negligence.  Section 11-114(g)(iii) of the MCA provides that “[i]f the cause of any damage to or destruction of any portion of the condominium originates from a unit, the owner of the unit where the cause of the damage or destruction originated is responsible for the council of unit owners’ property insurance deductible not to exceed $5,000.”  This seems to mean that the coverage extends to defects not only in the common elements, but also defects in other unit owners’ units that cause damage to your unit.

If your unit has been damaged by some defect in the common elements or as a result of some other unit owner’s negligence, you should not be forced to pay out of pocket for repairing the damage.  If you find yourself in this situation, please contact us and we will be glad to assist you in enforcing your rights as a condominium owner.