On January 3, 2014, in U.S. v. Forest Hill Gardens East Condominium Association, Inc., the United States Federal District Court for Florida’s Southern District held that the provision of the condominium association’s declaration, which provided that a foreclosing lender had no liability to the association to pay its share of common expenses or assessments pertaining to the foreclosed unit which became due prior to the foreclosing lender’s acquisition of title, trumped the provisions of section 718.116(1)(b), Florida Statutes, commonly referred to as the “safe harbor” provision, which would have entitled the association to the receipt of the lesser of one percent of the initial mortgage or 12 months back assessments. Because this case is being used as the basis for avoidance of lender assessment liability upon taking title as a result of the lender’s mortgage foreclosure, it is important that every community association manager and community association board member understand why the Court reached this very distinguishable conclusion.
Since at least 1992, every foreclosing lender of a condominium unit has been responsible to pay the “safe harbor” amount. What makes this situation so very different that the Court held the lender had no liability but to pay assessments as they came due AFTER taking title? The Forest Hill Gardens East Declaration of Condominium (the “Declaration”) contained some very unique and extremely uncommon language. The provision at issue provided that “the present provisions of the Condominium Act… are incorporated…” into the Declaration and that “the provisions of this Declaration… shall be paramount to the Condominium Act…” Of great importance to understanding the Court’s logic is that, in this case, the Declaration was recorded in 1980, long before the version of section 718.116, Florida Statutes, at issue was amended by the Florida legislature in 1991.
After first confirming that your association’s declaration does not contain a similar provision, the next time a foreclosing lender argues that they do not have to pay the “safe harbor” in reliance on the Forest Hill Gardens East case, you know better.
On a related but different note, the Forest Hill Gardens East case clarifies that interest, late fees, collection costs and attorney’s fees are not to be added to the “safe harbor” amounts when otherwise due because, the Court reasoned, these expenses are neither common expenses nor regular periodic assessments.
Two other recent cases discuss a third party purchaser’s liability to a condominium association in the context where (1) the condominium association first foreclosed a unit assessment lien and, as a result, ended up owning the unit, and then (2) the lender foreclosed its unpaid mortgage which wiped out the association’s ownership interest in the unit and then (3) as a result of the lender’s foreclosure, a third party ended up being the winning bidder at the lender’s foreclosure auction and took ownership of the foreclosed unit.
Both the Third District Court of Appeal in Park West Professional Center Condominium Association, Inc. v. Londono, decided November 27, 2013, and the Fourth District Court of Appeal in Aventura Management v. Spiagga Ocean Condominium Association, Inc., decided on March 3, 2014, held that the joint and several liability of the new owner for past assessments only related back to the prior owner, that being the association. Neither association could look to the prior owners’ assessment deficiencies and collect it from the winning third party bidder of the lender’s foreclosure sale. Thus, these cases are being used to assert that the third party purchaser of a lender foreclosure does not have to pay bask assessments that were accrued as a result of the delinquencies of all other owners of the unit, but only for those of the immediate prior owner.
While, pursuant to section 718.116(1)(a), Florida Statutes, each owner is jointly and severally liable to the association for the back assessments that remain unpaid, a plain reading of these cases would suggest the new owner is only liable for the unpaid assessments of the immediate prior owner. Technically, this is true, but it is crucial to understand that the unpaid assessments of each owner become the next owner’s responsibility. But, in these two cases, it was the association itself that was the immediate prior owner. Thus, carrying the unpaid balances of the other prior owners forward the association as the immediate prior owner and then to the third party purchaser who acquired the unit as a result of the lender’s foreclosure sale, meaning that the new owner does indeed have no liability for the prior unpaid assessments. The reason why is not fully explained in either case. Simply put, because the association took title to the units, the debts of all prior owners of that unit were wiped clean as of the day the association took title. In other words, the debt merged into the ownership of the unit. Because, in both cases, the associations were the immediate prior owner of the units, the prior assessment debts were all carried forward to the association and, for all intents and purposes, were wiped out since you can’t owe money to yourself.
So, the next time a third party purchaser tries to argue that they are only responsible to pay the back assessments of the immediate prior owner, you will know that only applies if the immediate prior owner was the association. If it was anyone else, you might say, after confirming with your association’s lawyer, PAY UP, PAL!