My View: Is your community association leaving money on the table?

Although there may be beginning signs of an economic recovery, a mid-October report published by RealtyTrac Inc. highlights a continuing problem for Florida. RealtyTrac Inc. reports that one in every 318 homes in Florida was in some stage of foreclosure in September 2012. This rate is twice the national average, and Florida leads the country in this statistic for the first time since April 2005. Unfortunately, the foreclosure crisis continues to threaten the financial stability and viability of many community associations.

A major problem facing community associations in this regard is their inability to fully collect unpaid assessments when a unit or lot is foreclosed upon by a bank holding a first mortgage. Under Florida law, a foreclosing first mortgage holder is only required to pay a portion of the unpaid assessments attributable to the subject property, often referred to as the “statutory cap,” when they acquire title. The statutory cap requires the first mortgage holder to only pay the lesser of 1% of the original mortgage or 12 months of past due assessments to condominium and homeowners associations. If a community association is dealing with a large number of foreclosures, the statutory cap can result in crushing levels of “bad debt.” This bad debt often requires community associations to increase assessments to cover the shortfall.

This problem became even more acute based on the ruling in a recent district court case entitled, Coral Lakes Community Association Inc. v. Busey Bank, N.A., 30 So. 3d 579 (Fla. 2d DCA 2010). In this case, the court held that in which a community association’s declaration provides that a first mortgagee has no liability for assessments accrued prior to its acquisition of title (via foreclosure) or provides for liability less than the statutory cap, the language of the declaration controls the language of the statute.

In other words, the Coral Lakes court decided that the assessment collection provisions contained within the association’s governing documents trumped the provisions contained within Florida law. Courts throughout the state are now routinely following this decision and applying it to condominium and homeowners associations. The effect of this case is that many community associations may be unable to recover any of the unpaid past due assessments from a foreclosing bank for the period of time prior to the bank acquiring title to the property.

As such, every community association’s board of directors should review the provisions of their governing documents to determine how they allocate past due assessment liability. If the governing documents contain language, which limits or completely restricts the payment of unpaid assessments by a foreclosing bank (accrued prior to taking title), the board should consult with the association’s attorney to discuss the possibility of amending the governing documents. Otherwise, it is possible that your community association could be foregoing its ability to recover large sums of assessment income from a foreclosing bank.

David G. Muller is a shareholder with the law firm of Becker & Poliakoff, P.A. in Sarasota and focuses his practice on the representation of community associations. The subjects discussed in his columns are not intended as specific legal advice and are subject to principles that may change from time to time.