COMMUNITY ASSOCIATION

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1 COMMUNITY ASSOCIATION ASSESSMENT COLLECTION & FORECLOSURE: KGBLawFirm.com CANFL.com

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3 Index Introduction...4 The Association Collection Process 5 Assessment Obligations...5 The Lien and Foreclosure Process...5 a) Contested Cases b) Uncontested Cases Procedural Issues...9 The Effects of Bankruptcy...10 The Impact of Sale...11 Lessening the Burden...12 Association Foreclosure vs. Lender Foreclosure.14 To Proceed or Not to Proceed...14 Mechanisms for Moving the Lender s Foreclosure Additional Options for Combating Delinquency. 19 Blanket Receivers and Demands for Rent...19 Suspension of Use and Voting Rights Association Ownership... and Beyond 21 The Association as Owner Looking Toward the Future What You Need to Know CANFL.com Toll Free 855-WE-LOBBY ( ) 3

4 COMMUNITY ASSOCIATION ASSESSMENT COLLECTION AND FORECLOSURE: Over the past few years, we have had the pleasure of speaking with board members representing thousands of common interest ownership communities around the State. Throughout these discussions, certain questions and concerns regarding assessment collection and foreclosure are posed time and again. In continuing our objective to assist community association boards in undertaking the very real and often onerous task of pursuing the collection of delinquent assessments, the Law Firm of Katzman Garfinkel & Berger has compiled these commonly posed questions, together with their answers, into the following easy-to-use Guidebook. This Guidebook provides an overview of the many options and various strategies available to community associations to move the collection process forward, while shedding light on the many complicated issues involved in collecting delinquent assessments in today s difficult economic environment. While not every question can be addressed or answered in this format and specific factual circumstances are sure to play a significant role in the collection policies and decisions ultimately adopted by community association boards, it is our hope that this Guidebook serves as a valuable reference tool. After reviewing the many strategies contained in this Guidebook, boards are urged to consult with association counsel for further discussion, creation and implementation of a collection policy that best suits the specific needs of their individual communities. 4 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

5 THE ASSOCIATION COLLECTION PROCESS: ASSESSMENT OBLIGATIONS: Q: Does an owner in a community association have an obligation to pay assessments? A: Yes. Each owner in a community association has an affirmative obligation to pay the pro-rata share of the common expenses of the association attributable to his or her unit or lot, which are commonly known as assessments. Owners DO NOT have the option to withhold payment of assessments for any reason, including a dispute with the association, or a desire to forego use of the common areas. Q: Does the board have an obligation to pursue the collection of delinquent assessments? A: Yes. The board has a fiduciary duty to pursue the collection of delinquent assessments from owners through the collection process, which may include lien and foreclosure. THE LIEN AND FORECLOSURE PROCESS: Q: How long does the collection process take? A: The time that it takes to complete the collection process is largely dependent upon (a) whether the delinquent owner fights (or contests ) the association s collection efforts, and (b) the volume of cases pending in the court system. Generally, in matters where the owner fights the association s collection efforts and/or where the court experiences a particularly high volume of cases, the collection process may be significantly delayed. CONTESTED CASES: Q: What does it mean when a collection case is contested? A: A collection case is described as contested when the delinquent owner fights or challenges the association s collection efforts. It is important to remember that a collection case can become contested at any stage of the process. Contested cases generally take longer to complete than uncontested cases. CANFL.com Toll Free 855-WE-LOBBY ( ) 5

6 UNCONTESTED CASES: Q: What does it mean when a collection case is uncontested? A: A collection case is described as uncontested when the delinquent owner does not respond or otherwise challenge the association s collection efforts. Generally, an uncontested case is completed in much less time than a contested case. However, the volume of cases pending in the court system is still a potential delay factor. Q: What steps are involved in the typical collection case? A: Collection cases, whether contested or uncontested, follow the same basic course. This basic course is described below, with certain noted exceptions pertaining to contested matters. Initial Demand: The collection process begins with an initial demand letter sent to the owner as required by Florida Statutes. The initial demand letter notifies the owner of the amount of the delinquency and of the association s intent to place a lien on the property if payment in full is not made or if a payment agreement is not reached within the period of time set forth in the letter. Statutory time frames apply with regard to the initial demand, and are described in further detail below. Claim of Lien and Notice of Intent to Foreclose: If the delinquency is not cured pursuant to the initial demand, a claim of lien is recorded against the property. The owner is then placed on notice of the recorded lien, as well as the association s intent to foreclose such lien. Statutory timeframes also apply with regard to the notice of intent to foreclose, and are discussed in further detail below. Foreclosure Complaint: If the delinquent balance remains outstanding following the initial demand and Notice of Intent to Foreclose, a Foreclosure Complaint is filed with the court. A Foreclosure Complaint is a lawsuit initiated by the association against the delinquent owner and any other party claiming an interest in the property that is subordinate to that of the association. Once the complaint is filed, it follows the general course of action described below: Service of Process: Once the lawsuit is filed, all named defendants must be provided with a copy of the Foreclosure Complaint as notice of the action. The procedure by which defendants are provided notice is known as service of process or service. An attempt must be made to serve all defendants personally. The actual time it takes to serve all defendants depends largely upon the ease of locating such defendants. It is common for defendants to try to avoid being served. In fact, at times, the defendants cannot be found at all. In such cases, after a diligent effort to locate and personally serve the defendant 6 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

7 is made, service may be achieved by publishing notice of the foreclosure action in a local newspaper. This process is known as service by publication. Upon completion of personal service, the defendants have twenty (20) days to file a response. However, if service by publication is used, the defendants will have approximately thirty (30) days to file a response, depending upon the date set by the clerk of court. Overall, service issues can significantly delay the progress of a foreclosure proceeding. Motion for Default: In uncontested cases where the defendants fail to respond to the Foreclosure Complaint, a Motion for Default is filed with the court, and the association may proceed with its foreclosure action. A default means that the defendant admits to all of the allegations made in the Foreclosure Complaint, and has no defenses to the action. Motion for Default Final Judgment: After a default is entered against all defendants, the association may file a Motion for Default Final Judgment. Along with the motion, a number of supporting affidavits are submitted showing past-due assessments, interest, late fees, attorney fees, and costs. A Default Final Judgment may be entered by the court without a hearing. However, due to the very serious nature of taking away a defendant s home, many judges require a hearing prior to entering a Default Final Judgment. Motion for Summary Final Judgment: If a defendant responds to the Foreclosure Complaint, the case is deemed contested. The response must be reviewed to determine how best to proceed. Some responses can be dealt with swiftly, while others may take some time to address. When the response does not present a valid challenge to the facts set forth in the Foreclosure Complaint, a Motion for Summary Final Judgment is filed with the court. In such motion, the association advises the court that there are no material facts in dispute, and the association is entitled to judgment as a matter of law. Along with a Motion for Summary Final Judgment, a number of affidavits are submitted showing past-due assessments, interest, late fees, attorney fees, and costs. Unlike a Motion for Default Final Judgment, a Motion for Summary Final Judgment may be filed in both contested and uncontested cases. It should be noted that generally, the only valid defense to an assessment collection action is payment of the alleged delinquent amounts. Again, due to the very serious nature of taking away the defendant s home, many judges require that the defendants be given an opportunity to appear before the court prior to the entry of a Final Judgment of Foreclosure. When the motion is filed, a hearing will be scheduled with the court. Final Judgment Hearing: As discussed above, a final judgment hearing (default or summary) provides an opportunity for the defendants to appear before the court prior to the entry of a Final Judgment of Foreclosure. The date of the hearing depends on the current caseload of the judge and the court in which the case is pending. Typically, such hearing is scheduled within thirty (30) to sixty (60) days after the filing of the motion. If the association is successful at hearing, the judge will grant a Final Judgment of Foreclosure, and a sale of the property will be scheduled. CANFL.com Toll Free 855-WE-LOBBY ( ) 7

8 Foreclosure Sale: The timing of the sale date depends largely on the current caseload in the county in which the case is pending. At the present time, as the court system is generally overwhelmed with the number of active foreclosure cases, the sale date may range anywhere from thirty (30) to one hundred twenty (120) days from the date that the final judgment is entered. On the scheduled foreclosure sale date, the property will be auctioned off to the public. The association may bid up to the amount of its judgment at the foreclosure sale without paying any money out of pocket. In essence, the association has a bidding credit in the amount of its final judgment. In order to acquire title, the successful bidder must bid a sum in excess of the amount of the association s final judgment. Once the bidding is complete, a certificate of sale is issued in the name of the highest bidder. Certificate of Title: Absent an objection to the sale, the Clerk of Court must issue a Certificate of Title. Once a Certificate of Title is issued, the winning bidder becomes the legal record title new owner of the property subject to any outstanding first mortgage. It is important to note that the new owner has no legal obligation to pay the outstanding mortgage. Due to the current backlogged court system, the actual time for issuance of a Certificate of Title may vary from ten (10) days to as long as one hundred twenty (120) days or more after the sale date. Writ of Possession: If the Certificate of Title is issued to the association, and the property is still occupied or contains personal belongings from the previous owner, the association may seek an order from the court directing the clerk to issue a Writ of Possession. A Writ instructs the county s Sheriff to remove any occupants from the premises, and secure the property for the association. It may take anywhere from twenty (20) to sixty (60) days to obtain a writ of possession, depending on the county. As you can see, the above described process includes several steps for which timing is dependent upon the heavily congested court system. As such, in the current environment, even for an uncontested case, it is very difficult to give an accurate prediction of just how long any particular foreclosure case will take from initiation to completion. This makes it extremely important for associations to take an aggressive position with regard to collections, and not let owner delinquencies reach excessive amounts before proceeding with legal action. Q: What is a Claim of Lien and what does it do? A: A Claim of Lien is a document recorded in the public records of the county in which the property is located that secures past due and future assessments, interest (in the amount provided in the governing documents or, if no amount is provided, then at the highest rate permitted by law, which is presently eighteen (18%) percent per year), late charges, and reasonable attorney s fees and costs of collection. A claim of lien filed by a condominium association expires after one (1) year, and a claim of lien filed by a homeowners association expires after five (5) years. 8 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

9 PROCEDURAL ISSUES: Q: What procedures must the board follow in pursuing the collection of delinquent assessments? A: When pursuing owners for delinquent assessments, in addition to any requirements contained in the association s governing documents or properly adopted collection policy, strict statutory guidelines for collection must be adhered to by the association. The most important of these statutory guidelines deals with notice requirements, as set forth below: Notice of Intent to Lien The collection process begins with the association notifying the delinquent owner of its intent to place a lien on the property if the account is not brought current within thirty (30) days for Condominiums or forty-five (45) days for Homeowners Associations (HOAs). This Notice must be sent via certified mail, return receipt requested, to the last known address of the owner as reflected in the association s official records. In HOAs, this Notice must also be sent to the property address, if the mailing address of the owner is different than the property address. Notice of Intent to Foreclose on the Lien If payment in full is not made pursuant to the Notice of Intent to Lien, then prior to foreclosing the association s lien, the association must inform the owner of its intent to foreclose. This second Notice requirement is identical to the Notice requirement for the intent to lien letter. Once the delinquent owner is given notice of the association s intent to foreclose the claim of lien, the association may proceed with its foreclosure action. In a Condominium Association, a thirty (30) day Notice of Intent to Foreclose the Lien must be provided. In an HOA, a forty-five (45) day Notice is required. Q: How does an association go about foreclosing its Claim of Lien? A: An association may foreclose its Claim of Lien by filing a foreclosure action with the court. Foreclosure of an association lien is handled in the same manner as a mortgage foreclosure. In addition, an association may bring an action seeking a money judgment against the owner of the property without waiving the right to foreclose its Claim of Lien. Provided that proper notice of intent to foreclose its lien is given, if successful, an association is entitled to an award of reasonable attorney s fees and costs incurred in connection with an action to foreclose a lien or to recover a money judgment for unpaid assessments. CANFL.com Toll Free 855-WE-LOBBY ( ) 9

10 THE EFFECTS OF BANKRUPTCY: Q: What happens if an owner files for bankruptcy protection during the association s collection process? A: When an owner files for bankruptcy protection, Federal Bankruptcy Law provides that all collection activity against the property owner must stop. This is referred to as an Automatic Stay, as all collection efforts and proceedings are stayed pending the outcome of the owner s bankruptcy petition. CHAPTER 7: A Chapter 7 Bankruptcy involves liquidation of the owner s non-exempt property by the bankruptcy trustee. Liquidated property is then converted to cash for distribution to the owner s creditors. The owner/debtor will usually receive a discharge in bankruptcy for all dischargeable debts in approximately four (4) to six (6) months from the date of filing a petition. Upon completion, the owner/debtor s personal responsibility for all amounts owed to the association at the time of the filing of the bankruptcy petition is discharged, and the association is barred from seeking a personal money judgment against the owner for those amounts. However, the association may proceed with collection efforts against the property or In Rem through the lien and foreclosure process for all past due amounts, including those amounts accrued prior to the filing of the bankruptcy. The association may only proceed against the owner personally for those delinquent amounts coming due after the filing of the bankruptcy. CHAPTER 13: A Chapter 13 bankruptcy is a personal reorganization, and is generally filed by owners with non-exempt property that they wish to keep. This type of bankruptcy allows an owner/debtor to maintain some assets and pay off past due amounts on secured debts over a period of time. A Chapter 13 bankruptcy generally takes between three (3) to five (5) years from the date of filing to the date of discharge. The owner makes monthly payments during the pendency of the bankruptcy as part of an approved Chapter 13 Plan. The Chapter 13 Plan is submitted by the owner/debtor, reviewed by creditors, and ultimately approved by the bankruptcy court. To be included in the owner s Chapter 13 Plan, the association must file a Proof of Claim. In order for an association to continue with collection efforts against an owner/debtor who has filed for bankruptcy protection, the association must first seek and obtain a Relief from Stay from the bankruptcy court. Overall, the mere filing of a bankruptcy petition will trigger the automatic stay, preventing the association from moving forward and otherwise delaying the association s collection efforts. While a bankruptcy petition may be filed at any time during the association s collection case, many times the bankruptcy is filed just days prior to the scheduled date of the association s foreclosure sale. Often this is simply a maneuver on the owner s part to delay the sale of the property. In any event, in such circumstances, the automatic stay is triggered and the association is left with no immediate alternative other than to cancel the sale. 10 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

11 If the bankruptcy court dismisses the debtor s case, either a Chapter 7 or a Chapter 13, the association can resume collections efforts against the property or In Rem, as well as individually against the owner. Q: Can the association proceed with collection efforts against the owner while the bankruptcy is in progress? A: Once the owner files a bankruptcy, and the automatic stay is in effect, an association cannot proceed with collection efforts unless and until it seeks and obtains Relief from Stay from the bankruptcy court. THE IMPACT OF SALE: Q: What happens to delinquent assessments when the property is sold by the owners or is the subject of a shortsale; is sold at foreclosure sale; or is foreclosed upon by a mortgagee? A: Sold by Owner: Generally, when a delinquent owner sells his or her unit or lot, the delinquent assessments are collected at closing. This includes short sales. A short sale is a transaction in which a lender agrees to accept a sum less than the total balance of the outstanding mortgage to permit a sale of the property, where lender foreclosure is imminent. Like any other sale, the purchaser in a short sale will be jointly and severally liable with the prior owner for all unpaid assessments accrued prior to the time of the transfer of title. Sold at Foreclosure Sale: An owner who takes title to a unit or lot, whether through purchase at a foreclosure sale, or by deed in lieu of foreclosure, is liable for all assessments which come due during his or her ownership, and is jointly and severally liable with the prior owner for all unpaid assessments which came due up to the time of the transfer of title. Foreclosed Upon by a Lender: The obligation of a lender for delinquent assessments accrued prior to the time of foreclosure or deed in lieu of foreclosure, is determined by statute for first mortgage holders, and is limited to the lesser of twelve (12) months of unpaid assessments, or one (1%) percent of the original mortgage debt. This limitation on liability is known as the statutory safe harbor. Statutory safe harbor applies only to first mortgage holders, and lenders must meet certain criteria in order to be entitled to its limits on liability. Associations should consult with legal counsel to determine whether a lender that takes title to a property is entitled to safe harbor. Second mortgage holders are not entitled to statutory safe harbor. The liability of a second mortgage holder or other inferior interest holder for unpaid assessments accrued prior to the time of foreclosure or deed in lieu of foreclosure is determined by the provisions of the association s governing documents. CANFL.com Toll Free 855-WE-LOBBY ( ) 11

12 LESSENING THE BURDEN: Q: Should associations accept payment plans from delinquent owners? A: Generally, the answer is Yes. However, it is important that the payment plan is reasonable and that it provide that if all installments are not made in a timely manner, the owner waives all defenses and the association may proceed with its foreclosure action. To entice owners to enter into payment plans, the association may consider approving a full or partial waiver of interest or late fees. Moreover, in this economic climate, unless the association is actively renting the properties it forecloses upon, it should strongly consider any reasonable payment plan request that provides for at least full assessments going forward and a reasonable amount toward the arrearages each month. Q: With association and mortgage foreclosure actions at an all-time high, what measures or strategies are available to boards to lessen the resulting economic burden placed on their communities? A: Although there is nothing that an association can do to fully alleviate the financial problems inherent to delinquent assessments and foreclosures, certain measures may help to contain the delinquency problem and lessen the financial impact on the association. The following are some examples: Budget for Bad Debt: When a board considers the budget for the upcoming fiscal year, it should take into account the current delinquency rate in the association, and factor such rate into the proposed budget as bad debt. For example, if the association is currently experiencing a delinquency rate of fifteen (15%) percent, the board should attempt to forecast whether the delinquency rate will rise or fall in the upcoming year, and formulate the next year s budget to include a line item for bad debt based upon such forecast. Budgeting for bad debt lessens the likelihood of having to further burden the non-delinquent owners in the community with a special assessment to cover a budget shortfall. Adopt a Collection Policy: The association should adopt a clear and concise collection policy, which may include the following: Shorten Timeframes for Legal Action: The commencement of collection efforts should be swift and certain when an account falls delinquent. With the statutory notice requirements and current court backlog resulting from increased mortgage and association foreclosure actions, the collection process does not happen overnight. Therefore, it is very important that associations do not sit by and permit an owner to fall several months or more delinquent in the payment of assessments before pursuing collection efforts. Allowing delinquent amounts owed 12 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

13 to the association to become significant before taking action makes it more difficult to collect these amounts, as smaller debts are easier to collect than larger debts. Therefore, it is very important to pursue delinquent balances before they become too large. Decrease the Number of Warnings: While the number of delinquency warnings provided is ultimately up to the association, it is generally recommended that delinquent owners be provided no more than two (2), and preferably only one (1) warning or late notice from the association before the file is turned over to legal for commencement of collection efforts. Utilize Statutory Remedies: In addition to traditional collection measures, it is important that associations avail themselves of statutory remedies such as suspension of use and voting rights, and demands for rent. These remedies are discussed in detail later in this Guidebook. Shortened time frames for commencement of collection efforts and fewer pre-collection warnings will allow associations to reduce the likelihood of their delinquency rate growing to unmanageable proportions. Generally, an association should set definite timeframes for turning delinquent owners over for collection, and of course, stick to them! In any event, regardless of the collection policy that the association adopts, it generally must apply the policy uniformly to all owners. Q: What can the association do about an abandoned unit with mold or other harmful conditions? A: If an owner is ignoring his or her obligation to maintain the property, the association should step in and maintain such property in situations where doing nothing may cause the damage to spread to other units or to the common elements or areas. A classic example of this problem is an abandoned unit where the lack of air conditioning results in mold growth. As a practical matter, in a lender foreclosure situation, it is difficult if not impossible, to recoup the costs of repair from the owner. Therefore, where work on the unit has to be done, the association should place the lender on notice of the issue by making a demand on the lender to either repair the unit, or pay for the necessary repairs. It is unlikely that the lender will respond to the demand. Therefore, the association will ultimately need to make the repairs. As it is unfair for the lender to benefit from the association s repairs to the unit without paying for such repairs, if title to the unit is transferred as a result of mortgage foreclosure, the association has a much better chance of recouping its repair costs where it can show that prior notice and demand was made upon the lender. CANFL.com Toll Free 855-WE-LOBBY ( ) 13

14 ASSOCIATION FORECLOSURE VS. LENDER FORECLOSURE: TO PROCEED OR NOT TO PROCEED Q: If the bank has already filed a mortgage foreclosure action against a property, is it still prudent for the association to move forward with its collection action? A: In most cases, the answer is Yes. Associations should be proactive in their collection efforts. Many associations sit by and do not pursue foreclosure on a delinquent property if that property is already subject to a mortgage foreclosure. While this may be viewed as a cost-saving measure, in many cases it results in significant lost revenue and opportunity to the association. Unless the property in question is simply uninhabitable, the association should take an aggressive stance, and move its own foreclosure action to conclusion as quickly as possible. In many cases, the association can obtain title to the property and rent the property; recouping all or a significant amount of the past-due amounts. Many lenders are initiating, but not completing their mortgage foreclosures for a variety of reasons, not the least of which is the fact that they really do not want to take title to these properties. There is little incentive for a lender to take back title to undervalued property in light of the fact that (a) the rest of the community will continue paying to maintain the lender s collateral and (b) the lender s liability is statutorily capped at the lesser of the sum of twelve (12) months past due assessments or one (1%) percent of the original mortgage debt when it eventually gets around to foreclosing; regardless of how long it takes to foreclose. Consequently, a mortgage foreclosure that could be completed in approximately one (1) year is much more likely to last two (2) years or even longer. In addition, in many cases the lender is not proceeding on its foreclosure case because it simply cannot move forward at this time. Recent problems with mortgage foreclosure cases which include instances of robo-signers and lost or incomplete notes or assignments, are playing a major role in grinding the mortgage foreclosure market to a halt. Meanwhile, the association is not collecting assessments on the property, and oftentimes, the owner remains in possession of the property, enjoying access to and use of the common elements/areas for free. In other instances, the owner is leasing the property out and collecting the rent, while not paying the association. Finally, sometimes the home is simply left vacant without proper maintenance (which may lead to additional problems such as rodent or pest infestation, leaks and/or mold issues), or may even be occupied by unknown tenants. 14 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

15 Overall, associations should strongly consider moving forward with foreclosure actions, even if the property is subject to a mortgage foreclosure action. If the association moves forward swiftly, it may obtain title to the property, and either rent the unit until the lender completes its process or even attempt a short sale. Renting the property is often the best option for the association, and is an opportunity to recoup unpaid assessments, legal fees and costs. In some cases, the association may be able to collect even more than the amount of the original delinquency. There are, however, certain limitations involved in pursuing this course of action. Therefore, the board of directors should consult with association counsel on a case by case basis to determine the most prudent course for the association given the specific facts involved. In any event, by foreclosing the board will maintain control over the property, its condition and its occupancy. The bottom line is that given the present market climate, waiting around for the bank to complete its mortgage foreclosure and take title to the property is NOT, in our opinion, a viable option. MECHANISMS FOR MOVING THE LENDER S FORECLOSURE: Q: Why should the association pay its attorney to monitor a lender s foreclosure action? A: To Protect the Association s Rights: It is important to remember that the lender s mortgage foreclosure action in which the association is named is a lawsuit. As such, if the association does not at least answer and monitor the progress of the action, the lender may obtain a judgment that prevents the association from enforcing its statutory rights. To Take Action to Move Lender Case Forward: In the current economic climate, associations should consult with legal counsel and consider taking affirmative action within these mortgage foreclosure cases to bring them to a faster conclusion as discussed below. To Defend the Lender Action: Alternatively, if the association is renting out a property that it acquired in its own foreclosure action (or is collecting rent pursuant to the new statute), it may wish to defend itself in the lender s action to actually prolong the process. Even if the association s defense is unsuccessful, it will result in the lender s foreclosure taking longer and the association collecting more rent in the interim. To Assist Association s Action Against the Owner: Where the association has a pending foreclosure action against an owner, it is important to monitor the lender s foreclosure action to determine the feasibility of moving the association s action forward. CANFL.com Toll Free 855-WE-LOBBY ( ) 15

16 In short, if the association does not allow its attorney to answer and monitor the lender s foreclosure, it may waive many of the rights and options otherwise available. The benefits of preserving these rights and options generally outweigh the attorney s fees and costs incurred by the association. Furthermore, if the association allows counsel to monitor the lender s foreclosure action, the association s attorney will receive copies of all pleadings filed in the case. This is important to keep the association apprised as to the status of the case, and especially its conclusion, so that a demand for statutory past-due assessments can be made promptly. Q: What options are available to an association to compel lenders to speed up their foreclosure actions and/or bring their foreclosure actions to a conclusion? A: There are options available to the association to attempt to compel a lender to complete its mortgage foreclosure action in the event that the delinquent property is uninhabitable (and therefore not suitable for rental), or where the association otherwise prefers not to pursue its own foreclosure action. Generally in a mortgage foreclosure action, as with any litigation, the Plaintiff moves the action forward at its discretion. Courts are reluctant, and sometimes without authority, to compel the lender to foreclose. However, this general trend is beginning to shift as an increasing number of judges are finding in favor of associations that aggressively and creatively pursue relief in lender foreclosure actions. Therefore, associations should consult with counsel, and carefully consider the various options listed below. Set the Lender Foreclosure Action for Trial: As a Defendant in the mortgage foreclosure action, upon completion of certain events, an association may set the lender foreclosure action for trial. If the judge orders the case to trial, the lender will likely have to try the case (which it is often not willing or prepared to do), or negotiate a positive result with the association to avoid trial. If the judge orders the lender s action to trial, the association is likely to benefit from the outcome. Motion to Dismiss the Lender Foreclosure Action: If the lender has not taken any action on its foreclosure action for ten (10) months or more, the Rules of Civil Procedure allow the association to warn the lender that if it does not move the case forward prior to the expiration of one (1) year, the association will move the court to dismiss the case for Lack of Prosecution. This strategy cannot be used after setting the case for trial. However, depending upon the circumstances, it may be the better strategy as lenders often ignore these warnings, and judges generally tend to be willing to dismiss a case for lack of prosecution. In addition, if the lender files something to avoid the dismissal, the association can still set the case for trial as described above. 16 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

17 Motion for Sanctions: In the event the lender is not moving its mortgage foreclosure action forward, the association may consider filing a motion for sanctions. Arguably, by leaving the mortgage foreclosure action open without the intent to move the case forward, the lender and its attorney are acting in bad faith. If a motion for sanctions is successful, the association may be awarded monetary amounts from the lender, and possibly from the lender s attorney as well. The lender would then be forced to either move the mortgage foreclosure case forward or negotiate a resolution with the association. Schedule Pending Motions for Hearing: Many times, a delay in the lender s case is the result of a pending motion that was never scheduled for hearing. In these circumstances, the association, as a party in the case, may schedule the pending motion for hearing. This strategy will compel the case forward. Set Case Management Conference: If the lender has not taken action in its mortgage foreclosure case for a period of time, the association may schedule a case management conference with the court. At the conference, the judge may force the lender to proceed on the case or grant other relief beneficial to the association. To avoid the above-described measures, many lenders will move the mortgage foreclosure action forward and obtain a Final Judgment of Foreclosure, but will cancel the subsequently scheduled foreclosure sale. This is yet another stall tactic on the lender s part to avoid taking title to the property. However, the association is not without options to force the lender s hand. Q: What options or strategies are available to community associations when a lender obtains a judgment of foreclosure, but cancels the sale of the foreclosed property? A: It is now quite common for a lender to obtain a final judgment of mortgage foreclosure and then cancel the foreclosure sale. When this takes place, title to the property is not transferred. As such, if the association does not take action to compel the foreclosure sale, the property remains in limbo with no one paying assessments or maintaining the property. This leaves the association at the mercy of the lender, who often has little or no incentive to proceed with the sale and take title to the property. The lender is reluctant to complete the sale process as in doing so its statutory obligation to pay the lesser of twelve (12) months past due assessments or one (1%) percent of the original mortgage debt and all assessments, including special assessments, interest and late fees accruing after the date of taking title is triggered. CANFL.com Toll Free 855-WE-LOBBY ( ) 17

18 If this situation arises, the association may consider taking legal action. For example, the association can seek an order from the court requiring the lender to: Set a sale date; Set aside the judgment; Dismiss its case; and/or Pay monetary sums to the association resulting from the lender s bad faith in postponing the foreclosure sale. If the association takes this aggressive approach, the lender may be spurred to negotiate a resolution with the association to avoid a hearing, or if a hearing takes place, the judge may impose the relief requested by the association. On December 10, 2010, the 5th District Court of Appeal published an opinion that lends support to an association s right to compel a lender to complete its foreclosure sale. In LR-5A-J, etc. v. Little House, LLC. et al., the Court held that there was no abuse of discretion by the trial court in granting a condominium association s motion to set the lender s sale date. In short, the authority to cancel a foreclosure sale rests with the trial court, and not with the lender. This ruling does not mean that a bank can never cancel its foreclosure sale. It does, however, indicate that a court has the discretionary right to force the lender to go through with its sale after a judgment is obtained. This decision provides legal authority for an association to exercise the aggressive strategy described above, and attempt to force the lender to complete the foreclosure sale. Q: If the association has already taken title to property that it cannot rent, can it somehow compel the lender to take title? A: Yes. The association can attempt a strategy which has been referred to in the media as a reverse foreclosure. While not all courts are in favor of this remedy, it has been granted in certain limited circumstances. Once title to the property is acquired by the association through its own foreclosure action, as a defendant in the stalled lender foreclosure action, and record title owner of the property, the association may notify the court that it has no objection to the lender s foreclosure. As the former owner s interest in the property is foreclosed through the association s action, and the association is not contesting the lender s case, it makes little sense to keep the lender foreclosure action open. As a result, some judges are ordering the lender to take immediate title to the property. This action is recommended only as a last resort. If the association has title to the property, it should always first attempt to recoup the delinquency through renting the property. 18 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

19 ADDITIONAL OPTIONS FOR COMBATING DELINQUENCY: BLANKET RECEIVERS AND DEMANDS FOR RENT: Q: What are Blanket Receivers? A: One of the most frustrating issues for many associations in dealing with delinquent owners arises where the delinquent owner is renting the property and collecting rent, yet continuing to fail or refuse to pay association assessments. When this situation exists, frustration comes not only from the fact that the delinquent owner is profiting from the rental of the property while not paying the association, but also from the fact that the tenant is benefitting from the use of the common facilities that the other owners are paying to maintain. Florida Statutes now permit associations to collect rents directly from tenants of delinquent property owners. However, prior to these recent statutory changes, our Firm had already enjoyed significant success in obtaining similar relief through the courts in the form of the appointment of a Blanket Receiver. In a Blanket Receiver Order, the court appoints one receiver for an entire association with the power to collect rents from all tenants or unrelated occupants of delinquent units or lots. If an owner or tenant fails to abide by such an order, both face sanctions, and the tenant faces eviction. If the judge grants the request to appoint a Blanket Receiver, there is the significant economic benefit of only having to file one case to obtain relief for all units or lots, rather than one case for each. While the recent statutory changes permit the association to collect rents directly from tenants of delinquent owners, these changes do not eliminate the benefit of appointing a receiver. One such benefit is that the court may extend the Blanket Receiver order beyond the statutory allowed collection of rent to allow the receiver to enter abandoned units and rent those units until the lender forecloses. If the court grants this additional relief, the association receives the rents from the property, and has a mechanism to ensure that abandoned units are maintained. Q: What do the recent statutory changes regarding collection of rents mean to affected community associations? A: Effective July 1, 2010, associations have the statutory right to collect rents from tenants of delinquent owners without having to petition the court to appoint a Blanket Receiver. Upon receipt of the notice, the tenant is obligated to pay his or her rental payments directly to the association until the owner s account is current. If the tenant fails to comply with the demand, the association has the right to proceed with eviction of the tenant in the same manner that a landlord may evict a tenant for non-payment of rent. CANFL.com Toll Free 855-WE-LOBBY ( ) 19

20 While this statutory change offers associations a valuable tool in the continuing effort toward collection of delinquent accounts, it does not offer the scope of remedies available under a Blanket Receiver Order. For example, the statute does not allow for rental of abandoned units. As such, associations with a high number of abandoned units or lots may wish to consider attempting to obtain a Blanket Receiver Order. In addition, the statutory demand for rent should be utilized as a supplement to and not a substitute for traditional collection efforts. Associations are urged to discuss with legal counsel the possible implications of pursuing the direct collection of rents without simultaneously proceeding with collection efforts against the delinquent owner. Q: One of the delinquent owners in our community told his tenant not to pay rent to the association. The tenant has now asked the manager for advice. Should the manager or a board member offer advice to the tenant? A: No. Tenants, and even delinquent owners, often seek advice from managers or board members with regard to these types of matters. Whenever a legal question is posed to a manager or board member, those individuals must not give legal advice. Rather, the tenant should be referred to the language of the demand letter, which states that a tenant who pays an association cannot be successfully prosecuted by the landlord for non-payment of rent. If the tenant still refuses to pay the rent, the association should consult its legal counsel as to whether to begin eviction proceedings or petition to obtain a receiver to enforce the statutory remedy. SUSPENSION OF USE AND VOTING RIGHTS: Q: Can the association suspend use rights for delinquent units/lots, and if so, how can it enforce such suspensions? A: The recent statutory changes to the Condominium and Homeowners Association Acts provide mechanisms to suspend certain rights, including voting rights and other use rights of delinquent owners. However, certain use rights cannot be suspended, such as utilities, parking, and the right of entry to the community. Therefore, associations should consult with counsel to discuss whether a proposed suspension is appropriate. While potential risks increase as more amenities are suspended, suspensions are often extremely effective in convincing owners to pay. Many associations are devising ways to enforce such suspensions including the use of key fobs, association employee monitoring of the common areas, and recently even fingerprint readers. 20 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

21 Q: Is there anything else we can do to compel owners to pay their assessments on time? A: If the association s governing documents provide authority to approve leasing, the association may refuse to approve new leases where the owner is delinquent in the payment of assessments. However, these associations may wish to consider whether this is a prudent choice given the statutory right to collect rents. In addition, while refusing to approve a lease for delinquent units may seem like a sound policy, associations may wish to consider negotiating with the owner rather than simply denying the lease. For example, common deals include allowing all or a portion of the rent to be diverted to pay assessments by separate agreement or addendum. An agreement signed by the owner and tenant generally provides the association stronger and more efficient collection remedies in the event of delinquency. As a result of recent changes to Florida Statutes, including but not limited to the ability to collect rents directly from the tenant of a delinquent owner, and the ability to suspend use rights to the common elements/areas for delinquent units, associations are in a much better position to take a proactive stand against delinquency. While these statutory remedies are great tools for the association s collection arsenal, they serve to supplement and not to replace traditional collection efforts. ASSOCIATION OWNERSHIP..AND BEYOND.. THE ASSOCIATION AS OWNER : Q: If the association takes title to a property, is it legally obligated to pay the mortgage or taxes on that property? A: No. The association is not legally obligated to pay the mortgage or property taxes on property that it takes title to through foreclosure. However, if the association has the opportunity to sell the property, it cannot do so unless the mortgage and taxes are paid. Most associations rent the property without paying these amounts until the lender forecloses or there is a tax sale. If the association desires to negotiate a short-sale with the lender after taking title or to attempt other measures to increase revenue collected from these units, it should consult with legal counsel. Q: Is the association able to rent out a property that it foreclosed on, even if the association s governing documents contain a No Leasing policy? A: Yes. Both the Condominium and Homeowners Association Acts clearly provide the association with the CANFL.com Toll Free 855-WE-LOBBY ( ) 21

22 power to purchase property at its foreclosure sale and to hold, lease, mortgage, or convey such property. There is no restriction in the statutes for no rental communities. Therefore, even in no rental communities, while owners may not be permitted to rent their property, an association that purchases a unit or home as a result of its foreclosure action can rent the property. This point is further supported by the bylaws of many communities which often provide that the board can, among other things, rent association-owned property. Q: If the association rents a property that it has taken title to through foreclosure, is extra insurance coverage or a special lease agreement required? A: The association should consult with its insurance agent and attorney as to any insurance coverage that may be necessary. The association may already have the required coverage, and if it does not, the additional cost is worth the investment, and is usually inexpensive. The association also needs to use a lease form that discloses to the tenant the possibility that the property may be foreclosed upon by the lender prior to the scheduled expiration of the lease. This is true even though in the event of lender foreclosure, the tenant will usually have significant time before being required to move out. Generally, tenants are willing to accept these terms and possibility of inconvenience for a below market price rental rate. There are many other strategies in connection with renting foreclosed units which can be employed to increase association revenue and protection. As such, associations are encouraged to consult with counsel for additional information. LOOKING TOWARD THE FUTURE: Q: How much should we budget for bad debt in 2011? A: In most communities, there is no longer any reliable expectation that 100% of the assessments owed each year will be collected. As a result, budgeting for bad debt each year has become a necessity. Naturally, the amount to be budgeted will vary by community, and is a question that should be discussed with the association s accountant and legal counsel. One general approach is to determine the existing percentage of the budget that is delinquent, round upward or downward for the next budget year depending upon the future economic forecast and community needs, and then add that amount to the budget for next year. Q: Are there any predictions as to when this crisis will turn around? A: Most experts do not anticipate the market stabilizing for at least three (3) to four (4) more years. It will probably take longer in certain areas and in communities that were built or converted to the condominium form of ownership at the height of the market ( ). Until then, associations are encouraged to utilize the tools provided in this Guidebook to lessen the impact of this crisis on their communities. 22 KGBLawFirm.com Toll Free 855-KGB-FIRM ( )

23 WHAT YOU NEED TO KNOW... Owners have a legal obligation to pay assessments, and boards have a fiduciary duty to pursue collection of those assessments. Remember, small balances are much easier to collect than large balances. Therefore, it is important not to let delinquent balances become excessive before proceeding with collection efforts. When pursuing delinquent assessments, in addition to adhering to its internal collection policies and procedures, boards must follow strict statutory guidelines. As a general rule, it is recommended that associations aggressively pursue the collection of delinquent assessments through the collection process, which includes lien and foreclosure. The filing of a bankruptcy petition invokes an Automatic Stay, and all collection activity against the property owner must stop. However, under certain circumstances, an association may seek relief from stay. Associations are encouraged to accept payment plans from delinquent owners, provided that such plans do not extend too long and contain adequate protections in the event of default. To combat the effects of delinquency on the community, it is recommended that associations budget for bad debt and adopt a clear collection policy. Other than when a first mortgage lender takes title pursuant to foreclosure sale or deed in lieu of foreclosure, when a delinquent owner sells or transfers his or her unit or lot, the new owner is jointly and severally liable with the prior owner for all unpaid assessments. In most cases, it is recommended that associations proceed with lien and foreclosure regardless of whether the property is also subject to a lender foreclosure action. In many cases, the association can obtain title to the property and rent the property; recouping all or at least a significant amount of the past-due amounts before the lender foreclosure is completed. Given the present market climate, waiting around for the lender to complete its mortgage foreclosure and take title to the delinquent owner s property is NOT, in our opinion, a viable option. It is generally recommended that boards authorize legal counsel to respond to and monitor lender foreclosure actions, as doing so will protect the association s rights and allow legal counsel to provide the board with options and strategies for proceeding forward with its foreclosure action or compelling the lender to move its case to conclusion. An association that takes title to property through foreclosure is not legally obligated to pay the mortgage or taxes on such property, and may rent the property even if the association s governing documents do not allow leasing. CANFL.com Toll Free 855-WE-LOBBY ( ) 23