AN ACT (S. B. 456) (No ) (Approved August 5, 2016)

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1 (S. B. 456) (No ) (Approved August 5, 2016) AN ACT To amend the first paragraph of Section 12 of Act No. 21 of May 20, 1987, known as the Controlled Access Law, as amended, to establish the responsibility of involuntary acquirers regarding dues on account of maintenance fees and the operation of the controlled access system not paid by previous owners, and define that involuntary acquirers shall be mortgage lenders that acquire a real property when collecting their credit; amend the first paragraph of Section 41 of Act No. 104 of June 25, 1958, as amended, known as the Condominiums Act, to define that involuntary acquirers shall be mortgage lenders that acquire a real property when collecting their credit. STATEMENT OF MOTIVES Act No. 21 of May 20, 1987, as amended, known as the Controlled Access Law, allows the residents of a development or community to control vehicle and pedestrian access to their streets. Said Act provides for the creation of Homeowners Associations which would establish a monthly fee to be paid by all residents on account of maintenance fees and for the operation of the controlled access system. The obligation to pay said fees constitutes a lien over the property. The voluntary acquirer of a property located in a gated community in accordance with the Controlled Access Law is jointly responsible to the transferor for the payment of any sums owed by the latter. However, the Act fails to provide for the responsibility of involuntary acquirers to pay such dues.

2 2 As defined by the Supreme Court of Puerto Rico, the involuntary acquirer of a property is originally a creditor whose main interest is not to become the owner of a property but to protect his credit. Asoc. Condomines v. Naveira, 106 D.P.R. 88 (1977). In Asoc. Condomines, supra, the Supreme Court stated that: [the well-founded reason for this distinction between voluntary and involuntary acquirer lies on the different interests of one and the other. The voluntary purchaser is a person who, fully aware of the liens and encumbrances of the apartment, acquires it because it is a good deal. The involuntary acquirer is originally a creditor whose main interest is not to become the owner of the apartment but to protect his credit which has been generally constituted before the accrual of the debt for common expenses of the condominium. As for condominiums, Section 41 of Act No. 104 of June 25, 1958, as amended, known as the Condominiums Act, establishes that an involuntary acquirer shall only be responsible for debts arising from common expenses that have not been satisfied during the six (6)-month period preceding the time of acquisition of the property. As a result of the financial crisis that the Island has been undergoing for several years, the number of foreclosures has increased. According to statistics of the Office of the Commissioner of Financial Institutions (OCIF, Spanish acronym), foreclosures increased by 20% in 2012, that is 3,814, or 626 more than in OCIF has stated that, nearly 18,800 mortgages which amount to $2.8 billion were undergoing foreclosure in early After the foreclosure process, the banks foreclosed properties administrative units usually take care of most properties. Said units are in charge of promoting the sale of real property in order to satisfy the mortgage balance.

3 3 This Legislative Assembly is well aware that, on many occasions, homeowners associations collect from banks the total debt for unpaid maintenance fees accumulated by previous owners. Some homeowners associations understand that mortgage lenders are voluntary acquirers because they have acquired the property with their credit in the first auction as provided in Section 104 of Act No. 210 of December 8, 2015, known as the Commonwealth of Puerto Rico Real Property Registry Act. Banking institutions usually interpret it as them being involuntary acquirers of the properties acquired in a public auction, therefore, they should only respond for the fees that accumulate from the time they acquire the property subject to the Controlled Access Law, or during six (6)-month period preceding the acquisition thereof, and any current balance in the case of apartments subject to the Condominiums Act. They argue that they do not act as bidders or conventional buyers, but rather as financial entities that, in seeking to protect their credit, make a credit bid to obtain the property object of the auction, and thus recover their investment. Given the differences in the aforementioned legal interpretation, and the context within which a large number of foreclosures have been carried out in the past years, mortgage lenders have been facing many claims from homeowners associations requiring full payment of debts related to unpaid maintenance fees, which sometimes represent several thousands of dollars. It is worth noting that banks have no knowledge whatsoever regarding debts accumulated on account of unpaid homeowners association fees. Banks usually learn of such debt when they obtain a debt certification from homeowners associations shortly before the sale of the property to a third party. Disputes regarding the debt claimed by homeowners associations frequently affect the lenders efforts to sell foreclosed properties to third parties, and recover the debt secured by a mortgage.

4 4 This Legislative Assembly deems it necessary to clarify that involuntary acquirers shall be the mortgage lenders that, in order to protect their credit, acquire a property as part of a foreclosure process. Furthermore, this Legislative Assembly deems it appropriate to do justice to homeowners associations in housing developments subject to the Controlled Access Law. Through this Act, the provisions of the Controlled Access Law are conformed to those of the Condominiums Act regarding the collection of fees from involuntary acquirers, that is, the right of homeowners associations to collect maintenance fees accumulated during the six (6)-month period preceding the acquisition of the property by the bank, as well as any current balance that may have accumulated after the acquisition thereof. BE IT ENACTED BY THE LEGISLATIVE ASSEMBLY OF PUERTO RICO: Section 1.- The first paragraph of Section 12 of Act No. 21 of May 20, 1987, as amended, is hereby amended to read as follows: Section 12.- Joint Liability of Voluntary and Involuntary Acquirers.- The obligation of the owner of a property for his proportional share of the expenses indicated in Section 10 of this Act shall constitute a lien on said property when it was constituted pursuant to Section 8 of this Act. Therefore, the voluntary acquirer of the property thus encumbered shall be jointly liable to the transferor for the payment of the sums he owes pursuant to Section 10 of this Act until the time of the transfer, without prejudice to the acquirer s right to claim restitution against the other grantor for the amounts he has paid as joint debtor. The involuntary acquirer of a real property subject to this Act shall be responsible only for debts arising from the expenses set forth in Section 10 that have not been satisfied during the six (6)-month period preceding the time of acquisition of the property, as well as for any balance that may have accumulated from the acquisition of said property by the involuntary acquirer, which balance shall be paid on monthly installments or

5 5 within the term provided by the Homeowners Council, Board or Association. For purposes of the above provisions, an involuntary acquirer shall be a mortgage lender that acquires a real property when collecting a debt subject to this Act. Section 2.- The first paragraph of Section 41 of Act No. 104 of June 25, 1958, as amended, known as the Condominiums Act, is hereby amended to read as follows: Section 41.- Obligation of Owner for Common Expenses, Lien.- The obligation for the proportional share of the common expenses of the owner of a unit shall constitute a lien on said unit, once the same is entered in the Property Registry. Therefore, after the first sale, the voluntary acquirer of a unit shall be jointly responsible with the transferor for the payment of the owed amounts, pursuant to Section 39 of this Act, until the time of the transfer, without prejudice to the right of the acquirer to recover from the other transferor those amounts paid as a joint debtor. However, an involuntary acquirer shall only be responsible for debts arising from common expenses that have not been satisfied during the six (6)-month period preceding the time of acquisition of the real property, as well as for any balance that may have accumulated from the acquisition of said property by the involuntary acquirer. For purposes of the above provisions, an involuntary acquirer shall be a mortgage lender that acquires a real property when collecting a debt subject to this Act; such balance shall be paid on monthly installments or within the term provided by the Homeowners Council. Section 3.- This Act shall take effect immediately after its approval.

6 6 CERTIFICATION I hereby certify to the Secretary of State that the following Act No (S. B. 456) of the 7 th Regular Session of the 17 th Legislative Assembly of Puerto Rico: AN ACT to amend the first paragraph of Section 12 of Act No. 21 of May 20, 1987, known as the Controlled Access Law, as amended, to establish the responsibility of involuntary acquirers regarding dues on account of maintenance fees and the operation of the controlled access system not paid by previous owners, define that involuntary acquirers shall be mortgage lenders that acquire a real property when collecting a debt; amend the first paragraph of Section 41 of Act No. 104 of June 25, 1958, as amended, known as the Condominiums Act, to define that involuntary acquirers shall be mortgage lenders that acquire a real property when collecting a debt. has been translated from Spanish to English and that the English version is correct. In San Juan, Puerto Rico, on this 22 nd day of November, Juan Luis Martínez Martínez Director