In the past few years a proliferation of “funding companies” has acquired the right to collect assessments in the name of associations. Those companies maximized revenues for themselves after foreclosures. Their actions have resulted in a number of court decisions which limit the ability of associations to recover delinquent sums when mortgages are foreclosed. This article examines the case law development that has harmed associations and their members.
Some background is needed before examining the issues. Prior to 1992, there were no laws governing the rights of purchasers of condominiums at first mortgage foreclosure sales. The buyer’s rights were governed only by a community’s declaration of condominium. Almost all declarations stated that the lien of the association to collect delinquent assessments from the unit was wiped out by a foreclosure sale. When a mortgage holder took title at its foreclosure sale, no assessments could be collected if they accrued before the foreclosure. Many declarations added that any purchaser at a foreclosure sale was exempt from past due assessments.
In 1992 the Florida Legislature passed a law which set up a requirement that foreclosing mortgagees on condominium units were required to pay 6 months of delinquent assessments, if any, or 1% of the first mortgage, whichever was less. This law is known as the “Safe Harbor” provision of Chapter 718, because it limits what foreclosing mortgagees have to pay, even if a unit is delinquent for a year or more. Later, the limit was changed to 12 months of assessments or 1% of the mortgage, whichever is less. In 2008, the Legislature passed a law which provides for a Safe Harbor for Homeowner Associations, set at 1 year of assessments or 1% of the mortgage whichever is less.
For many years, purchasers at first mortgage foreclosure sales routinely paid the Safe Harbor amount. Many even paid interest, costs, legal fees and late fees attributable to the prior owner. This changed when the housing crisis of 2007 resulted in skyrocketing foreclosure rates. Hundreds of thousands of homes and condominiums were foreclosed and sold in Florida. Lawyers for the purchasers challenged the amounts demanded by the funding companies and a series of appellate court cases ensued.
In 2010 the case of Coral Lakes Community Association v. Busey Bank held that homeowner associations whose declarations were recorded before 2008 are not entitled to recover the Safe Harbor amounts contained in Chapter 720 F.S. As a result only associations whose declarations provide for Safe Harbor or incorporate changes in the law as amended from time to time can collect Safe Harbor amounts.
In 2015 the case of Pudlit 2 Joint Venture, LLP v. Westwood Gardens Homeowners Association, Inc. held that a third party buyer was entitled to Safe Harbor exemption from payment of assessments at a foreclosure sale. This was not contemplated by the 2008 legislation. This decision extended rights to third parties who previously had no Safe Harbor protection.
The law is not clear with regard to the ability of an association to collect costs, late fees, interest and legal fees that accrue prior to mortgage foreclosure sale. The introduction to section 718.116 F.S. states that: “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.” It does not mention costs, late fees, interest and legal fees but every voluntary sale has always included these amounts, if due. Therefore, in my view, if they are collectible in a voluntary transaction, they should be collected in an involuntary (mortgage foreclosure) transaction as well.
Condominiums are governed and created by the Condominium Act. The Act must be interpreted to either allow collection of those amounts in all unit transfers or they cannot. Unfortunately, two recent court decisions have ruled that amounts that are always collectible on voluntary sales cannot be collected post foreclosure.
In 2014, in United States v. Forest Hill Gardens East Condominium Association , the court held that the obligation of a mortgage holder to pay Safe Harbor amounts does not include anything other than assessments, holding that interest, late fees, collection costs and attorney’s fees are not to be added to those amounts when otherwise due. The Court reasoned that these expenses are neither common expenses nor regular periodic assessments. They were referred to as “Collateral Expenses” and therefore not recoverable.
In 2016, a state appellate court ruled similarly in the HOA context. The case dealt with §720.3085(2), Fla. Stat. (2014) and explored whether a lender taking title is required to pay anything other than delinquent assessments. In Catalina West Homeowners Association, Inc. v. Federal National Mortgage Association, The court reasoned that if the Legislature intended to require mortgagees taking title in foreclosure to pay attorneys’ fees, interest, or costs, it would have done so. The court further concluded that interest, late charges, attorneys’ fees, and collection costs are individualized charges to induce compliance with assessment obligations, rather than “common expenses” or “regular periodic or special assessments,” which infer expenses shared among all the units of a homeowners’ association. In rejecting the HOA’s argument, the court reasoned that nothing in the Safe Harbor provision prevented the HOA from applying the monies received in the order specified by section 720.3085(3)(b), but the HOA was not authorized under the Safe Harbor provision to payments for the additional cost items sought.
What are associations to do? Most importantly, adopt a policy to move aggressively against delinquent owners so they know that if their assessments are not paid, legal action, including foreclosure may ensue. Secondly, contact your state legislators and request that they enact laws favorable to associations.
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