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It's The Law: Condo Associations Hurt By Mortgage Meltdown

Q: I am on the Board of Directors of a condominium association. A few owners have stopped paying assessments and are rumored to be in mortgage foreclosure. Some of these units have not paid assessments in over 12 months. What can we do?

A: Your board is in a tough position. But it could be worse. In some condominiums that were purchased primarily by investors, a form of urban blight has crept in as a majority of owners stopped paying assessments, leaving the cost of operating the association on the shoulders of the few who did pay. If your condominium has only a few owners who are not paying assessments, you should review each unit on a case by case basis.

Condominium associations have a right to place a lien on units for unpaid assessments. The lien can be foreclosed just like a mortgage, which means that a foreclosure judgment will order the unit sold if the assessments are not paid.

Florida's Condominium Act provides that for most condominiums, the lien relates back to date the declaration of condominium was recorded. That means the assessment lien will come ahead of mechanic liens, judgment liens and even most mortgages. However, first mortgages are given special treatment.

Under the Act, liability of a first mortgagee (mortgage holder) acquiring title to a unit by foreclosure or a deed in lieu of foreclosure is only liable for assessments that came due prior to acquiring title equal to lesser of one percent of the original mortgage debt or the assessments which came due during the six months immediately preceding acquisition of title. Assessments on and after the date the lender takes title must be paid by the lender just like any other condo owner. Because of that liability, some lenders delay foreclosure when they will have to pay assessments to an association. They delay even though the mortgage is not being paid, hoping the market will improve so they can foreclose and have better opportunity to sell the property quicker and for higher price when they get title. In other cases, the owner works out a "deal" with the lender but does not pay anything to the association.

In some cases, it may be a good idea for the association to proceed with foreclosure of its own lien. This might be attractive if the unit has a tenant, Through foreclosure, the association could become owner of the unit and thereafter collect the rent. Even without a tenant, many units are furnished and could be rented by the association, which might also make those units attractive candidates for association lien foreclosure.

You might also have units where the owners have simply walked away from their purchase. The mortgage is more than the unit is worth and these owners simply gave up. They are not trying to sell the property or make any other arrangement with the lender.

These "give up" units can be attractive candidates for lien foreclosure. In one case, the association foreclosed and acquired title to a unit. It then actively marketed the unit for sale, ultimately making arrangements with the lender to accept less than full payment under a short sale to a new owner. Once the new owner took title, that owner began paying assessments.

The decision to foreclose and attempt to acquire title is not simple. The association needs to consider possible expenses of ownership, such as insurance and that the association becomes obligated to pay assessments on the unit. The Act treats a condominium association like any other non first mortgage purchaser, which means the association is liable for all past assessments.

Even if the association chooses to sit back and wait for the mortgage to foreclose, all may not be lost. Pay close attention to identity of the purchaser at the foreclosure sale. If it is not the first mortgagee, or the assignee of the first mortgagee, the purchaser will be liable for all of the overdue assessments. If it is the first mortgagee, the first mortgagee is liable for the six months/one percent plus assessments beginning with the date the Certificate of Title is issued. You should be sure to send an invoice.

Confirm if it is the first mortgage being foreclosed. Foreclosure of any mortgage other than the first mortgage does not get limited liability for overdue assessments.

The association should also consider suing the owner for unpaid assessments. If there is a tenant in the unit, the association can attempt to collect its judgment by garnishment under which the tenant would be ordered by the court to pay rent to the association instead of the unit owner.

Suit against the unit owner might also be a good idea after foreclosure, if the association believes that the foreclosed owner has assets that could be reached to satisfy a judgment. Many Southwest Florida condo owners who have stopped paying assessments bought their units as investments. They have money and assets in their home state, but have simply walked away from their Florida investment. Those owners could prove to be good targets for collection action and the association's board of directors likely has a fiduciary responsibility to carefully consider suit.

Far too often, condominium boards simply give up on collection when a mortgage foreclosure is involved. Some give up because they do not want to be second guessed about attorney fees spent on collection. Others simply do not want to be bothered. A more aggressive approach could pay substantial dividends for the association and might also serve as a warning to other owners that ignoring their assessment obligations would not be a good idea. The facts of each particular case will have a direct bearing on options and course of action an experienced legal advice in this area will prove invaluable to your board. I suggest your board schedule a strategy meeting with an experienced attorney.

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