Legally Creative Collection Solutions
By Will Anderson
A brief explanation of legal options that condo associations can consider as they pursue the collection of unpaid dues and assessments.
By now, you have heard about the prevalence of foreclosures in condominiums. Most foreclosures involve financing entities pursuing unpaid debts against individual unit owners, but it is also common for condominium associations to pursue unit owners’ unpaid debts through the foreclosure process. The common denominator with each situation is a unit owner that is not paying assessments.
The fact of the matter is that associations need funds to operate, and they cannot sit around and hope that the situation will take care of itself. Associations are beginning to become more proactive and free-thinking in their efforts to collect dues and avoid further deficits.
This article will discuss alternatives being explored by associations that are faced with owners on the brink of foreclosure, owners for whom foreclosure is a foregone conclusion, and banks that contribute to the problem by delaying payment of dues, or failing to pay altogether.
For associations dealing with owners who are in arrears with the association, but have not yet been pursued by the mortgage holder, there are several options available. First, the association can record its lien and then file suit to foreclose upon it. The problem with this method is that it takes time for the “wheels of justice” to turn it into a judgment that the court can order to be foreclosed. Meanwhile, the delinquent owners often continue to rent their units and pocket the proceeds. In Florida, more associations are now requesting the court to immediately appoint a receiver who has the power to collect rent from the unit owners and their tenants to pay their delinquent assessments. If the owner fails to comply, the court can hold them in contempt and impose additional penalty. If you are dealing with a Florida property that rents well, this is a good course of action, assuming the court obliges.
A second option associated with the association’s foreclosure suit is for the association to hold a foreclosure sale. The chief problem with this second option is that the units are not very marketable to the public with the security interest of the first mortgage attached to the property. Still, the association can often acquire title at a nominal amount and proceed to rent the unit to the public and use those proceeds to offset the unpaid assessments. Unfortunately, the mortgage holder may thereafter file suit to foreclose on its interest and take the property away from the association, but that process takes time and rental profits may make this a viable alternative. Also, after acquiring title, the association can work directly with the bank to market the unit and sell it to someone without encumbrances at an amount that reasonably offsets the losses of each entity.
Finally, a third and less likely option is for the association to work with the unit owner and the bank to orchestrate a short sale whereby both the association and bank accept less that they are due in order to immediately liquidate and offset their losses.
In most foreclosures, where banks are foreclosing on a condominium unit due to that owner’s failure to pay, both Alabama and Florida law provide protection to the mortgage holder by limiting its exposure to those unpaid debts. In Alabama, the mortgage holder is generally only responsible for payment of six months of unpaid dues prior to acquisition of title.[i] In Florida, the mortgage holder is generally responsible for six months past dues, or one percent of the original mortgage debt, whichever is less.[ii]
For associations with significant amounts of unpaid owner assessments, those payments do not offer much refuge. Of course, once title is acquired, the mortgage holder, or anyone obtaining title from it, will be responsible for the assessments that come due. But, what is the association to do about the deficiencies that still exist with respect to unpaid assessments? Both Alabama and Florida law provide that the prior owner is responsible for all unpaid assessments that accrue while that person holds title to the property.[iii] Interestingly, in Florida, if title is acquired by a private party by some means other the foreclosure of a first mortgage, the new owner is jointly liable for all assessments that are due at the time title is transferred.
Nevertheless, an action may be initiated to pursue the resulting deficiency. The most realistic concern is whether the prior owner is one with sufficient assets from which a judgment may be collected. Assuming the prior owner has assets, after a judgment is obtained, those may be pursued and attached by the sheriff to be sold. If the person is gainfully employed, the association may seek to garnish wages until the debt is satisfied. Sometimes, however, the units are owned by a corporate entity with no assets and the pursuit of a judgment for the deficiency is not a viable use of the association’s money. On other occasions, the owner may declare bankruptcy, thereby placing the association in a pool with others hoping to collect only part of unpaid debts, if anything.
Some associations are getting creative when dealing with owners who have very large unpaid balances by negotiating with the unit owner’s mortgage holder to buy the note at a reduced rate and pursue foreclosure of the note itself, rather than the unpaid assessment. Of course, there are risks involved, but the association may then be in a better position to sell the unit at a price that would completely offset the amounts owed by the prior owner.
Finally, even the foreclosing banks can become part of the problem after initiating foreclosure proceedings by delaying the acquisition of title through inaction in hopes that the market improves, or simply to avoid paying assessments.
In summary, by filing its own suit to foreclose as discussed previously, the association can force the mortgage holder’s hand to complete the process and acquire title, which then brings a dues-paying owner to the condominium. If the mortgage holder continues to sit idle, the association can pursue a public sale, or acquire the unit itself and place it in the rental pool as discussed above. The decision to foreclose on a unit and acquire title is not an easy one to make. The association must consider the expenses associated with it, such as insurance, taxes and (gasp) assessments.
Too often, condominium associations just give up on collection of assessments after a mortgage holder comes into the picture. But, an aggressive approach can yield great results for an association, and it likewise serves as a warning to other owners that failure to honor their obligations has real consequences. The facts of each situation will ultimately dictate which options and alternatives should be pursued by the board. Certainly, your association’s board should arrange for a meeting with an attorney to discuss collection options.
Will Anderson is a member of the Baldwin County-based law firm of Daniell, Upton, Perry & Morris, P.C. The attorneys in this regional law firm practice in the fields of condominium, construction and insurance law in coastal Alabama, Florida and Mississippi. Contact the firm at P. O. Box 1800, Daphne, AL 36526; Phone: (251) 625-0046; Fax: (251) 625-0464; www.dupm.com.
[i] See Code of Alabama (1975), § 35-8A-316
[ii] See Florida Statutes, § 718.116
[iii] See Code of Alabama (1975), § 35-8A-315; See Florida Statutes, § 718.116