What amending your governing documents can do to save your association money

Reres_Kathleen

Kathleen Reres

Over the last several years, homeowner’s associations and condominium associations across Florida have taken serious losses and written off large amounts of bad debt due to the housing market crash and the flood of mortgage foreclosures following in its wake. Most associations came to rely upon recovering at last some delinquent assessments once a mortgage foreclosure was finally complete.  Fla. Stat. sections 718.116 and 720.3085 provide that purchasers are jointly and severally liable with former owners for assessments that accrue before transfer of title.  For mortgagees or their successors or assignees, the “safe harbor” provisions in theses statutes limits liability to the lesser of one year of past due assessments or one percent of the original mortgage debt.  When third parties purchase properties at mortgage foreclosure sales, associations often rely on the “joint and several liability” language in these statutes to hold purchasers liable for years of past due assessments.  Similarly, when banks take title, associations rely upon the “safe harbor” provisions to recover at least one year or one percent.  However, evolving case law has made clear that the “joint and several liability” language and the “safe harbor” provisions in Fla. Stat. sections 718.116 and 720.3085 may not apply for associations with contradictory language in their governing documents.

Most association’s governing documents are prepared by a developer when the association is first created and mortgage friendly provisions are added to ensure that purchasers can obtain financing and that units will be sold. “Subordination Provisions” are often added to provide that an association’s lien for assessments will not take priority over a first position mortgage.  These provisions vary in their exact wording and in their effect on an association’s ability to recover delinquent assessments. Some provide that mortgagees who take title through foreclosure or deed in lieu of foreclosure will not be liable for unpaid assessments that accrued before transfer of title.  Some provide that no purchaser at a foreclosure sale will be liable.  And some provide that no purchaser, regardless of whether they purchased at a foreclosure sale, will be liable for unpaid assessments at the time of transfer of title unless they expressly assume such liability in writing. Savvy purchasers have argued that these “subordination provisions” eliminate any liability for delinquent assessments, regardless of the language in Florida Statutes.

Courts faced with these challenges have ruled in favor of the purchasers. In Ecoventure WGV, Ltd. v. Saint Johns Northwest Residential Ass’n, Inc., 56 So.3d 126 (Fla. 5th DCA 2011), the court found that a mortgagee that was high bidder at a foreclosure sale was not jointly and severally liable with the former owner under Fla. Stat. 720.3085, because application of the statute would impair the mortgagee’s vested contract rights under the association’s declaration.  The declaration included a subordination provision and promised mortgagees that unpaid assessments would be added to the association’s budget for common expenses and paid by all homeowners on a pro-rata basis. Consequently, the mortgagee was not liable for assessments that accrued before the foreclosure sale. In Pudlit 2 Joint Venture, LLP v. Westwood Gardens Homeowners Association, Inc., 169 So.3d 145 (Fla. 4th DCA 2015) the Fourth District Court of Appeal went one step further and found that a third-party purchaser at a mortgage foreclosure sale was not liable for unpaid assessments that accrued before transfer of title. The Court found that a subordination provision in an association’s governing documents controlled over language in Fla. Stat. 720.3085, which would have otherwise made the purchaser jointly and severally liable with the former owner.  The association had no language in its governing documents that incorporated the statute and the Court found that there was no reason to assume the language in the statute amended the governing documents. The Court further held that the purchaser at the foreclosure sale was a third party beneficiary of the governing documents and was entitled to rely upon the subordination provision to conclude that it would not be liable for previously unpaid assessments.

These cases may have serious implications for associations with subordination provisions. If your association has a subordination provision in its governing documents, and the documents do not specifically adopt chapters 718 or 720 of the Florida Statutes and all amendments thereto, your association may not be able to recover delinquent assessments from new owners upon transfer of title. While your association will generally still have the right to pursue the former owner (assuming they have not obtained a discharge in bankruptcy), claims against the former owner may cost more money to pursue than the association will actually recover.   As a general rule, those who lose their homes in foreclosure do not often have deep pockets, large bank accounts or other assets that can be liquidated to pay the association’s judgment for past due assessments.  Associations are generally more likely to recover when they have the right to pursue payment from a bank or from a purchaser against whose property the association can assert a claim of lien.

To protect its right to pursue payment from mortgagees and other purchasers, associations with subordination provisions may need to amend their governing documents. Although it may be difficult to obtain the requisite votes to amend, a short term investment in amendment will likely pay off in the long run for associations that gain the ability to recover the maximum amount of delinquent assessments from new owners upon transfer of title.

If you have questions concerning this article or if you would like assistance reviewing your association’s governing documents or preparing amendments, please contact Kathleen Reres, Esq., at kreres@slk-law.com or 813.221.7167.