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Foreclosure Sales and What They Mean for Your Community

12 Sep 2019

For many community associations, collection of past-due assessments plays a major role in the annual legal budget (although in successful collections, the attorney’s fees and costs incurred are collected from the delinquent owners). These past-due accounts create a myriad of challenges, such as lenders’ foreclosure actions or owners’ bankruptcies, in addition to the association’s collection efforts themselves, which are often addressed simultaneously with these challenging issues. We strongly recommend associations to be proactive by automatically submitting accounts to counsel for collection once the past-due balance reaches a defined threshold (i.e., 2-3 months) past-due balance, pursuant to the association’s collection policy. Such policies impress upon owners that ignoring their payment obligations will not be tolerated. At the same time, a willingness to waive interest and/or late fees, or accepting payment over time (based upon the account’s history, lender’s status, and other factors affecting such business decisions) can assist the community in avoiding many of these challenges and impressing upon owners that they have elected a strong and capable, but human, board of directors and/or manager.

When owners fail or refuse to resolve past-due assessments and related charges, the only option in many circumstances is to obtain a money judgment and/or foreclose. The purpose of foreclosure (and specifically, foreclosure sales) is to satisfy the debt and the association’s money judgment, if any. Accordingly, when the sale occurs, if the plaintiff is the highest bidder, it need not pay the amount of its bid to complete the sale; the plaintiff’s sale bid is merely “offset” by the judgment amount, and the judgment is satisfied to the extent of the plaintiff’s final bid. In contrast, all other bidders must place a deposit before bidding, and a third party winning bidder must also pay the balance of its bid before noon the day after the sale. If no third party bids, the plaintiff (whether the association or a foreclosing lender) purchases the property for the minimum $100.00 sale bid. Accordingly, the results of a completed foreclosure sale are that: (1) the plaintiff is paid in full because a third party paid more than the judgment amount for the property, or (2) the plaintiff takes title, and the judgment is “satisfied” to the extent of the plaintiff’s highest bid. In the latter situation, a “deficiency” (damages against the former owner(s) in the amount of the judgment minus the winning bid) may also arise, thus affording the association an additional potential collection remedy. Indeed, the foreclosure sale only completes one part of the collections process.

The end of the association’s fiscal year often coincides with the annual meeting, during which a review of the annual budget and the installation of one or more new directors and/or officers is common. Another recommended practice in connection with such year-end reviews is to evaluate the percentage of accounts which are past-due, and the anticipated cost of collection, as compared to the potential pitfalls of choosing whether or not to foreclose. It is also suggested that the association re-evaluate its collections policy during that time.

SCENARIO 1: ASSOCIATION PURCHASES PROPERTY AT ITS OWN FORECLOSURE SALE

Due to the expectation that a mortgage exists, associations are commonly the highest (and indeed, only) bidders at their own foreclosure sales. Even after the sale, any lienholder not eliminated through the foreclosure action (i.e., the holder of a superior first mortgage, a “superpriority” county tax or code enforcement lien, etc.) could foreclose and take ownership of the property from the association. This risk should be considered at each major step in addressing both the option to foreclose, and after the foreclosure sale is complete. For the same reason, an updated title search should be obtained through counsel after foreclosing, to confirm what liens may affect the association, as the new owner. Once that question is answered, the association should weigh its options to recover the past-due assessments or more through its (potentially temporary) ownership. As an aside, the above factors make the purchaser at a lender’s foreclosure sale (which presumably would eliminate all encumbrances other than those which are superior to that of the first mortgage) the proper subject of collection immediately following the transfer of ownership.

In addition to a title search, real property purchased by an association should be immediately insured, as the liability for damage caused by, or on, association-owned property is the same as that of any other property owner. The cost of such insurance should be considered in preparing the association’s annual budget, depending whether any property is at a near-complete stage in the foreclosure process or if foreclosure has already been completed.

If the association intends to keep the property, and a tax certificate has been sold, the option to pay or effectively ignore (albeit temporarily) the property taxes due should also be evaluated. As discussed with respect to the obligation to insure the property, this cost should also be considered in preparing the association’s annual budget.

Selling the property avoids the risks associated with “un-foreclosable” liens, and could even mean profiting despite foreclosure and lien-satisfaction costs. We unfortunately find many lenders hesitant or unwilling to discuss a sale with an association owner, citing federal and Florida debt collection laws which prohibit discussion of payment with anyone other than the promissory note signor(s). Accordingly, mortgaged properties are commonly difficult for associations to sell, although some investors are willing to limit the purchase to whatever interest the association has in the property (i.e., accepting a quit claim deed rather than a full closing including certain warranties as to the “quality” of title).

Renting the property could also mean significant ongoing income to the association, if the cost of placing the property in rentable condition is not prohibitive. However, even if no foreclosure action has been filed, if the association rents property encumbered by a “superior” lien, it is recommended that counsel prepare the lease or an addendum thereto, whereby the tenants agree that any lienors’ foreclosure will not result in the association’s breach. The possibility of a shorter rental period (due to the completion of a superior lienholder’s foreclosure action) should also be considered by the association in budgeting for the year ahead.

SCENARIO 2: ASSOCIATION IS NOT THE SUCCESSFUL BIDDER AT ITS OWN FORECLOSURE SALE OR A LENDER’S FORECLOSURE SALE

Any purchaser at a foreclosure sale other than the association becomes obligated for payment of any post-transfer assessments, just as in any other transfer of ownership. The pre-title amounts due, however, depend upon who purchased the property.

When a third party purchases property at the association’s foreclosure sale, the full judgment amount is disbursed to the association by the Clerk of Court. Payment being the goal of the foreclosure action, the Clerk’s disbursement concludes all collection other than seeking post-judgment assessments, the purchaser’s obligation for which may (or may not) be limited by the association’s governing documents.

The right of associations to screen rentals and/or sales of property, or rights of first refusal for property which is to be sold (both of which must be based upon the association’s governing documents), generally do not apply to the purchaser at a court-ordered foreclosure sale. Accordingly, anyone who pays more than the association’s judgment could purchase and use the property. In some instances, the association’s rights are reinstated with respect to third party purchasers or lenders who later seek to sell/lease the property. The association’s counsel should be consulted in each instance where these provisions may come into play.

Where the lender names the association in its foreclosure action and a third party purchases the property via the lender’s foreclosure sale, Florida law provides that such purchasers generally owe all unpaid pre-title assessments, but not interest, late fees, attorney’s fees, or costs, which have accrued. However, any demand or estoppel certificate issued to such purchasers should be sent by the association’s counsel, after carefully reviewing the governing documents to determine whether such third party purchasers may be considered “intended beneficiaries” of certain pre-title debt limitations which are included in some community associations’ governing documents. In limited cases, these provisions may apply to state that the third party purchaser is not obligated to pay any pre-title sums, despite the terms of the governing documents.

Florida law is even less association-friendly with respect to the pre-title sums due from a foreclosing lender. Specifically, where a lender names the association in its foreclosure action and then takes title at its own foreclosure sale, such foreclosing lenders pay only the amounts discussed in the association’s governing documents, or the statutory safe harbor amount. This safe harbor provides that such lender/owners are only obligated to pay the lesser of (1) 12 months of unpaid assessments, or (2) 1% of the original mortgage debt, to satisfy their obligation for pre-title sums.

By way of an example, if the association spent $5,000 in attorney’s fees and costs foreclosing, and the (now foreclosed) owner owed 9 months of unpaid assessments at $200/month (i.e., totaling $1,800), a third party purchaser would owe $1,800 for pre-title sums, and a foreclosing lender who named the association would owe $1,800 (or less if the original mortgage debt was less than $180,000), for assessments which accrued prior to the date of the certificate of title.

In either of the above cases where a lender forecloses and names the association, the association should be aware of a rarely enforced right to seek a money judgment against the former owner for the unpaid deficiency discussed on the first page of this legal update. The rarity of enforcing this right is caused by (1) the low likelihood that the former (now-foreclosed) owners will be “collectable,” because they may not have insufficient assets to satisfy the deficiency, (2) the ability to avoid a deficiency judgment through a bankruptcy discharge; and (3) the cost of collection (which can range from $3,000 to $10,000 or more), which is generally prohibitive given the low balances due to associations who follow the policy of submitting accounts once they become 2-3 months delinquent. This may be appropriate where the balance due is significant and the owner is believed to have significant assets.

Finally, the association’s declaration and any included language incorporating changes to Chapters 720 and 718, Florida Statutes, will play an integral role in determining what anyone other than the Association owes following a transfer of title. Accordingly, it is recommended that the association’s counsel be consulted before any past-due notice is issued following a transfer in title due to a foreclosure sale (including by management), to ensure that the association is actually entitled to recover the amounts it is demanding. Regardless of whether the association chooses an aggressive stance on collections, the decision  as to what is collectable (just like any other business decision of the Board and/or management) should follow the association’s careful consideration of all pertinent legal and factual information.