ATTENTION FIRST MORTGAGEE LENDERS Be Careful What You Wish For

Of late, more and more first mortgagee lenders argue that they do not have to pay past due assessments which became due prior to their acquisition of title that occurred as a result of their foreclosure. Such argument results from recent appellate cases where it was found that the statutory assessment obligation which provides for joint and several liabiltiy for past due assessments, as set out in sections 720.2085 and 718.116, Florida Statutes, yields to the specific terms of the association’s declaration which often provides that the lenders do not need to pay the prior assessments and which fully eliminate the statutory safe-harbor, too.

By now, many board members and managers are familiar with at least two of these seminal cases: Coral Lakes v. Busie Bank, a 2010 Second District Court of Appeals case, and Ecoventure v. St. Johns, a 2011 Fifth District Court of Appeals case. But, are these cases and the principles for which they stand being too broadly construed by foreclosing lenders? In short, and to the delight of Florida’s community associations, “you bet”.

In a recent decision by the Florida Second District Court of Appeal (the “Court”) in the case of Ballantrae Homeowners Association, Inc. v. Federal National Mortgage Association, the Court, in reversing a trial court decision, held that the first mortgagee who obtained title to the two subject properties through foreclosure was NOT entitled to the limitation or elimination of liability for assessments that accrued prior to obtaining title where the declaration of covenants did not provide for such limited or eliminated liability and where the lender failed to name the association in the foreclosure action.

In this case, the lender foreclosed on two properties in the association’s community but failed to name the association in the foreclosure action. It is well established law that the lien of a junior lienholder (here, the association) is unaffected by a foreclosure judgment where the junior lienholder was not named in the foreclosure action. While the association’s assessment lien remained intact, the lender argued that it was still entitled to an elimination of past due assessments due to the subordination of the association’s assessment lien. However, although the declaration of covenants in this case provided that the association’s assessment lien was subordinate to the lender’s first mortgage, it did not contain language specifically limiting or eliminating the lender’s liability for unpaid assessments accruing prior to obtaining title.

Finally, the Court provided that, EVEN IF the lender had proven its entitlement to a limitation or elimination of past due assessments, the association’s assessment lien would still be effective. This is because, without foreclosure of the association’s assessment lien, the lien would remain effective and, if improperly extinguished, the association would be without the opportunity to bid on the properties, make claim to any surplus, or assert any available defenses. So, by Fannie Mae arguing that the terms of the declaration controlled rather than simply accepting the requirements of the statutory safe harbor, we once again learn that pigs get fed, and hogs get slaughtered.

A lender’s liability for past due assessments will fully depend on the specific language of the declaration which can both subtly and drastically differ. Therefore, careful examination of such terms is required.

When you examine the terms of your community’s declaration you should look to see (i) if there is text that provides that the association’s assessment lien is subordinate to a first mortgagee’s lien; (ii) if there is text that provides that the first mortgagee, upon foreclosure of its mortgage, is not responsible for past due assessments; and (iii) if there is text that provides for a subsequent owner’s assessment liability when title is acquired from the lender who recently foreclosed. In other words, from Ballantrae we learn that having just the subordination language (in (i) above) will not operate to fully extinguish the prior assessments due from the foreclosing first mortgagee.

Many, but not all, association declarations which have not been minimally amended to mirror the statutory safe harbor obligations to determine the first mortgagee’s liability for prior assessments upon foreclosure or deed in lieu of foreclosure, as set out in Chapter 718 and Chapter 720 of the Florida Statutes, governing condominium associations and homeowners’ associations, respectively (otherwise known as “safe harbor”), continue to provide the lender with a full elimination of liability for past due assessments. This language is generally included in declarations prepared by a community’s developer to entice lenders to approve purchaser loans.

As to the “safe harbor” statutory provisions, while the provisions for both condominium associations and homeowners’ associations are vastly similar, there is one great distinction. As to homeowners’ associations, the “safe harbor” provisions only apply if the first mortgagee initially joined the association as a defendant in the foreclosure action while there is no similar requirement for condominium associations.

What does your declaration say with regard to first mortgagee’s past due assessment liability? Does it provide the foreclosing first mortgagee lender with a full pass on assessments due prior to its acquisition of title, or does it only provide for subordination? Regardless, if you have not reviewed or amended your association’s declaration in regard to assessment liability provisions that result from foreclosure in the past 5 or so years, then the board should consult with the association’s attorney to both review these terms and propose an amendment to provide better terms in favor of the association.

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