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01/24/13 It's The Law: Danger in Association Taking Title

It's The Law

Danger in Association Taking Tile

(1/24/13)

Question:

I am on the board of a condominium association. We have one unit that is way behind in assessments. There is a mortgage on the unit which is a lot bigger than the value of the unit. Some of our board members want to foreclose our lien for assessments. Others want to wait for the bank to foreclose. Which is better?

Answer:

The exact circumstances of these cases determine what might be the best course. Only hindsight can confirm.

If the unit is occupied by the owner, the association may want to pursue foreclosure for two reasons, without regard to financial benefit. First, the owner is getting a free ride and that is likely not acceptable to other owners. Second, the association may want to sent a message to other owners considering not paying assessments.

A third, and important, factor to consider is whether the unit can be rented. Is it in good shape? If there is a rental market for the unit, foreclosure may be a good option because the association could get rental income after it completes foreclosure. Since the mortgage is bigger than value of the unit, it is unlikely that any third party will bid on the property at the foreclosure sale. That would leave the association as the only potential bidder and ultimate title holder.

Keep in mind that the association's lien for assessments does not extend to furniture in the unit. That means, even after foreclosure, the former owner likely has a claim to the furnishings. Although many merely walk away and abandon the furnishings with the unit, some can show up later and make demand for the furniture. That issue requires detailed discussion with your association's attorney.

Your question does not indicate the mortgage is in foreclosure. By Florida statute, if the holder of a first mortgage takes title to a condominium unit, its liability for assessment arrearages is limited to the lesser of twelve months of assessments or one percent of the original mortgage principle. It is liable to pay assessments accruing on and after the date it takes title, so many mortgage holders defer foreclosing on a condominium unit to avoid incurring liability for assessments after taking title. In some cases, mortgage holders do not foreclose for years. In those cases, the association might be well served to foreclose an assessment lien, take title and rent the property. But, no one can predict how fast a mortgage holder will foreclose. And, there is always the possibility that the property owner will pursue a short sale, acceptable to the association, accelerating new ownership and payment of assessments.

One concern that I have had with associations taking title to units is Section 718.116, Fla. Stat. In pertinent part, that section provides "a unit owner, regardless of how his or her title has been acquired, including by purchase at a foreclosure sale or by deed in lieu of foreclosure, is liable for all assessments which come due while he or she is the unit owner. Additionally, a unit owner is jointly and severally liable with the previous owner for all unpaid assessments that came due up to the time of transfer of title." Because of that statute, I have long been concerned that if an association takes title, it becomes liable for all assessments that came due prior to taking title, as well as assessments after it takes title and is thereby barred from seeking payment for those assessments from a purchaser at foreclosure sale. On January 23, 2013, Florida's Third District Court of Appeal confirmed that my concern was justified.

In the case of Aventura Management, LLC, the condominium association took title to a unit by foreclosing its lien for assessments. Because the Condominium Act provides that a first mortgage is superior to an association's lien for assessments, the association could not foreclose the interest of the first mortgage holder. Accordingly, it took title subject to the first mortgage.

The first mortgage holder later foreclosed and at mortgage foreclosure sale, a third-party purchased the unit. The association demanded payment of the all the unpaid assessments from the new owner and the case proceeded to court. The association argued that by statute and case law, the association's lien for assessments survives a mortgage foreclosure. The new owner argued that the association, as an intervening owner, was responsible for the assessments owed by the previous owner and for the time while it owned the unit. The trial court agreed with the association.

The appellate court reversed. It explained that although the statute clearly indicates the association's lien survives a foreclosure, it just as clearly states that a prior owner is jointly and severally liable with the current owner for all past due assessments up to the time of transfer of title. On that basis, the association was liable for the assessments and could not foist them onto the new owner. One of the three judges on the panel disagreed with written dissent.

Unless reversed on further appeal, the Third District Court of Appeal decision is binding on all trial courts in Florida. That means, associations need to consider possible loss of assessments from a subsequent purchaser at mortgage foreclosure sale as part of its decision regarding foreclosure of an assessment lien. A wide variety of other factors can also influence the decision. Your association should discuss this issue in detail with your attorney.

By: William G. Morris, Esquire

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Questions for this column can be sent to: William G. Morris, e-mail: wgmorrislaw@embarqmail.com or by fax, (239) 642-0722 or

The Marco Island Eagle

Other articles of interest can be viewed at our website, www.wgmorris.com.

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