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Condominium and HOA Collections – Recent Federal Court Decision May Result in Lenders Seeking Limitation or Elimination of Liability for Past Due Amounts

March 6th, 2014

Posted in Condominium & Homeowner Association Law

On January 2014, a federal court in the Southern District of Florida held that Condominium Association and Homeowner Association’s individualized charges (i.e. interest fees, late charges, collection costs, and attorney’s fees) cannot be collected from the first mortgagee that takes title after a mortgage foreclosure.  This recent decision mirrors other similar decisions rendered by federal district courts and state circuit courts on this topic. 

What has caused more discussion, and probably future debate and interpretation, is the court’s ruling that the language of the declaration of condominium in the instant matter precluded the condominium association from collecting the “Safe Harbor” amounts designated by Florida’s Condominium Act.  By way of brief background, the “Safe Harbor” amount is used to describe the limited liability of a first mortgagee for unpaid assessments and common expenses accruing prior to the issuance of a certificate of title to the first mortgagee in a foreclosure proceeding, or alternatively prior to the execution of a deed in lieu of foreclosure by a delinquent owner to a first mortgagee.  Presently, a first mortgagee’s liability pursuant to Section 718.116(1)(c) of the Florida Statutes is limited to the lesser of twelve (12) months of regular periodic assessments and common expenses, or 1% of the original mortgage amount.

The court in U.S. v. Forest Hill Gardens East Condominium Association Inc. and Forest Hills Gardens East Property Owners’ Assoc., Inc. held that language in the condominium declaration, which provided that a first mortgagee was only responsible for assessments that came due after taking title, prevented the Association from collecting any amounts due and owing prior to the issuance of a certificate of title to the lender, including a prohibition of even application the “Safe Harbor” provisions of Section 718.116(1)(b).  The court ruled that despite the original version providing for lender liability becoming effective on July 1, 1992, and despite the fact that the mortgage was recorded well after the statutory amendment providing for lender liability, the Association’s declaration of condominium controls and thus the lender was not responsible for pre-title amounts due and owing.

The decision is surprising for condominium associations as most mortgages foreclosed on were recorded after the original iteration of the safe harbor statute in 1992.  While homeowner associations have recently seen adverse decisions as to their ability to collect past due amounts given that the comparable joint and several liability provision on the Homeowner Association Act did not come into existence until 2007 (and because many mortgages foreclosed were recorded prior to the statute taking effect), condominiums have held the position that the mortgages recorded after 1992 would be subject to the existing law at the time despite adverse language in the governing documents eliminating liability to lenders for pre-title amounts.  The Forest Hill Gardens East case thus represents a sharp change in common understanding.

It is important to note that the Forest Hill Gardens East case is not binding authority.  However, condominium associations should be prepared for references to be made to this case by lender counsel when arguing over a lender’s liability (or lack thereof) for pre-title assessments and other charges.

In order to eliminate any future arguments, condominium associations and homeowner associations are strongly urged to discuss and review with counsel amendments to the respective governing documents and the provisions relating to first mortgagee liability for pre-title assessments and other charges.  Further, associations are strongly urged to discuss with counsel their collection policies and whether certain actions may be taken to obtain payment of past due amounts without relying and waiting upon first mortgagees to foreclose and take title.  While subject to another post, associations have the ability to foreclose on assessment liens and take title to properties with existing mortgages and can take steps to pay down the past due amounts owing through the rental or sale of properties.

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