and Other Interesting and Important News
What do short sales, Florida’s Marketable Record Title Act, construction agreement indemnities, the term, “defalcation”, prevailing party attorney fees, and the implied covenant of good faith and fair dealing have in common? Well, not too much, except that they are discussed in today’s Rembaum’s Association Roundup.
Did you know, generally speaking, that forgiveness of a real estate loan is considered a taxable event by the I.R.S.? For example, say a homeowner owes $400,000 to their lender for their home that, due to market conditions, is only worth $300,000. If the lender allows the homeowner to short-sell the property for the lesser amount of $300,000, then the homeowner has received a taxable benefit of $100,000, meaning the homeowner would be expected to pay income tax on the forgiven $100,000 portion of the debt. Until now there has been legislation in place that acts to prevent the I.R.S. from taxing the homeowner for that portion of their loan that was forgiven by the lender. However, the legislation will expire on December 31st. With that in mind, if you are short selling your home, you might consider doing so prior to the new year or hope that Congress extends this benefit.
The Marketable Record Title Act, or MRTA for short, is set out in Chapter 712, Florida Statutes. MRTA operates to extinguish covenants recorded against real property not sooner than 30 years after the covenant was recorded against the property. While MRTA operates against homeowners’ association declarations, it does not operate against condominium association declarations. In Southfields of Palm Beach Polo and Country Club HOA v. McCullough, a 2013 case, the Fourth District Court of Appeals recently held that an HOA has a duty, which can be enforced by mandatory injunction, to take certain steps to prevent the horrible effects of MRTA from operating against a homeowners’ association. So, if your HOA’s declaration was recorded close to 30 years ago, then time is of the essence to ensure the effects of MRTA don’t begin to render your HOA declaration meaningless.
As to construction contracts, remember that if the contractor promises an unlimited indemnity in the event of damages, the contractor’s promise is absolutely meaningless unless the promise to indemnify contains a monetary cap. We are reminded by the First District Court of Appeals, in Griswald Ready Mix Concrete v. Reddick, a 2012 case, that Florida Statutes, section 725.06 requires the contractor’s indemnity to contain a monetary limitation in order to be enforceable.
In the “Jeopardy” category of words you have likely never heard of … for $500.00, Alex, comes the term “defalcation” (pronounced, dee-fal-kay-tion). It is a term used in Title 11 of United States Code, Section 523 and refers to the failure of a fiduciary to produce the funds entrusted to them. The Eleventh Circuit has held in the matter of In Re Bullock, that to be accused of “defalcation” the person holding the funds need not have engaged in fraud, embezzlement or even misappropriation, but does require more than mere negligence… such as being “objectively reckless” to give rise to a claim for defalcation.
As to a community association seeking prevailing party attorney fees for enforcing the terms of its declaration, in Alorda v. Sutton Place, the Second District Court of Appeals held that if the covenants provide for a legal remedy, and instead the association sued the non-conforming owner for injunctive relief for refusing to comply with the covenants, then even though the association prevailed, it is not entitled to prevailing party fees as to the injunctive relief it won.
Finally, in QBE Insurance Corp. v. Chalfonte Condominium Association, Inc., a 2012 case, the Florida Supreme Court reminds us that Florida contract law recognizes “an implied covenant of good faith and fair dealing” in every contract. “This implied covenant is intended to protect ‘the reasonable expectations of the contracting parties in light of their express agreement’.” Further, it must relate to the performance of a specific term of the contract.