On May 27, 2015, Florida’s Fourth District Court of Appeal entered its whirlwind decision in Pudlit 2 Joint Venture, LLP v. Westwood Gardens Homeowners Association, Inc., Case No. 4D14-1385 (Fla. 4th DCA May 27, 2015). This case rocks the boat in what was considered the “safe harbor,” referring to the limitation of a first mortgagee’s liability for assessments which result from the first mortgagee obtaining title as a result of its mortgage foreclosure action or by deed in lieu of foreclosure as set out in section 720.3085, Florida Statutes (the “Safe Harbor Statute”).
Most, if not all, homeowners’ associations throughout Florida take the position that the Safe Harbor Statute takes priority over any conflicting terms set out in the association’s declaration. However, at odds with this notion is that the declaration is a contract between the members of an association and the association itself. The substantive law in effect at the time a contract is made is a part of the contract as if it were written therein. Associations take the position that the Safe Harbor Statute is a procedural law and therefore controlling over any provisions to the contrary set out in the declaration, especially to mortgages entered after July 1, 2008 which was when the present Safe Harbor Statute became law. Lenders and third party bidders who acquire property as a result of the lender’s mortgage foreclosure take the position that the Safe Harbor Statute is substantive, and therefore, to apply the Safe Harbor Statute to a declaration that provides otherwise is an impairment of contract prohibited by the Constitution itself.
In this case, which will no doubt muddy third partly assessment liability quite a bit, Pudlit 2 Joint Venture, LLP (“Pudlit”) purchased two properties at foreclosure sales that were located within communities maintained by Westwood Gardens Homeowners Association, Inc. (“Westwood Gardens HOA”). As a result, Westwood Gardens HOA then demanded that Pudlit pay all assessments, including all assessments which came due before Pudlit acquired title to the properties. Pudlit paid the assessment arrearage amounts demanded, however it did so “under protest and with full reservation of all rights and remedies.” After which, Pudlit sued Westwood Gardens HOA seeking recovery of the monies paid, asserting breach of contract, referring to Westwood Gardens HOA’s declaration of covenants which is in and of itself a contract between the owners and the association, and for declaratory relief. In the end, the Court ruled in favor of Pudlit and, in so doing, held that the terms of Westwood Gardens HOA’s declaration controlled over the Safe Harbor Statute.
Had Pudlit not clearly and overtly established that it paid the assessment arrearage under protest and with a full reservation of rights, then it very well may have not been in a position to file its lawsuit. This is because when a person, the payor, freely pays an alleged debt due, without a reservation of rights of any kind and later files a lawsuit seeking a recovery of its monies from the payee, the payee can defend the case by arguing that the payor voluntarily paid the debt freely and voluntarily and thus waived any later right of protest. (We will have to see how these competing arguments resolve themselves in future court battles.)
Of relevance to the Pudlit case, Westwood Gardens HOA’s declaration of covenants provided that:
“The personal obligation for delinquent assessments shall not pass to [an owner’s] successors in title unless expressly assumed by them.
Sale or transfer of any Lot which is subject to a mortgage as herein described, pursuant to a decree of foreclosure thereof, shall extinguish the lien of such assessments as to payments thereof which become due prior to such sale or transfer.”
Such language is in conflict with the Safe Harbor Statute, which provides that a first mortgagee’s liability for assessments which accrued prior to the first mortgagee obtaining title as a result of its foreclosure action or by deed in lieu of foreclosure is limited to one percent of the original mortgage debt or twelve months assessments which accrued prior to the first mortgagee obtaining title. The Safe Harbor Statute, additionally provides that all other successors in interest are jointly and severally liable for all past due assessments, with exception for assessments charged during an association’s ownership of the property.
Applying a constitutional principal which prohibits the impairment of contracts, the Court held that the Safe Harbor Statute, could not impair (meaning, override) the provisions of Westwood Gardens HOA’s declaration of covenants, unless the plain language of the statute requires such application or the declaration of covenants contains “Kaufman” language, which has the effect of making amendments to the Florida Statutes automatically applicable to an association’s declaration of covenants as the Florida Statutes are “amended from time to time.” The Court further held that the provisions of Westwood Gardens HOA’s declaration of covenants expressly created rights for third party purchasers who are “intended third party beneficiaries” to such provisions which rights cannot be impaired pursuant to the same constitutional principal.
Although the Pudlit case is with regard to a third party’s liability for assessments which accrued prior to the third party obtaining title at a foreclosure sale, this decision will impact the manner in which assessments due on a property are analyzed in the “safe harbor” context. Pudlit essentially provides that, unless the statute provides for automatic application or unless the declaration contains “Kaufman” language, the terms of the declaration will prevail over the provisions of the statute.
As with many declarations which have not been amended since their creation by the community’s developer, declarations may provide for a wipe out of all assessments that accrued prior to the first mortgagee obtaining title as a result of its foreclosure action or by deed in lieu of foreclosure. The Pudlit case further emphasizes the importance of reviewing and updating your association’s declaration to ensure that it provides for necessary and available protections for the association and its members which includes the importance of including “Kaufman” language.
If your association’s declaration does not contain language similar to the following sentence, then the board should consider further discussing this important matter with the association’s legal counsel:
This Declaration is subject to Chapter 720, Florida Statutes, as it is amended from time to time.