Associations Should Amend Governing Documents to be Better Prepared for Next Economic Downturn

May 26th, 2017

Posted in Business & Corporate Law

Community associations experienced a record number of delinquencies during the economic recession that began in 2007-2008.  As a result, associations were forced to dedicate most of their resources to the collection of delinquent assessments.  Community associations were also severally impacted by the mortgage foreclosure crisis.  The increased amount of cases created a traffic jam for courts resulting in prolonged foreclosures, which decreased the associations’ chances of recovering all the past due amounts.      

During mortgage foreclosures, owners typically do not continue to pay assessments (assuming timely payments have been made up to the foreclosure action).  Also, if the mortgage holder ends up with title to the property, it is likely that the mortgage holder’s liability will be a fraction of what is actually owed.  When a mortgage holder forecloses and acquires title to a home within a community association, its liability for past-due assessments may be limited to the lesser of 12 months of past due assessments or 1% of the mortgage (often called “safe harbor”).  A mortgage holder’s liability may be further limited depending on the provisions of the association’s governing documents.  Some association’s governing documents contain “lender friendly” language, which could prevent the association from collecting from the mortgage holder any past due assessments attributable to the former owner.

As the economy and housing market continues to gradually recover, we have seen a decrease in delinquencies and foreclosures.  Associations should take advantage of this and address potentially unfavorable language in their governing documents, particularly as to mortgagee liability.  Associations are strongly encouraged to contact legal counsel to discuss their documents specifically to determine whether an amendment to the governing documents is appropriate.

Share Button