Today, condominium residents are feeling the pain of their neighbors’ financial struggles, particularly in the form of budgetary shortfalls created by unit owners defaulting on their obligation to pay assessments. Assessments, which represent each unit owner’s share of the funds required to pay the association’s common expenses, are the life-blood of an association. The revenue generated by assessments enables the condominium association to undertake the maintenance, management, and operation of the condominium community. Unfortunately, the current slump in the housing market, particularly in Florida, has hit condominium communities especially hard.
Many unit owners simply cannot afford to pay their assessments. Many speculators looking to flip their units for a quick profit have simply disappeared. Additionally, condominium associations may not receive assessment payments from residents whose units are in foreclosure. Whatever the reason, the result is that many condominium associations are not receiving the revenues required to manage and maintain condominium property.
Associations in this situation are often caught in a “lose-lose” situation: raise assessments and risk causing additional unit owners to default. The alternative of doing more with less does not come without risk either. For example, an association choosing to cut amenities or delay necessary maintenance can render the community less attractive to prospective purchasers, or allow the community to fall into a state of disrepair, thereby continuing the vicious cycle.
Fortunately, there are various options authorized by law to maximize the likelihood of successfully collecting unpaid assessments. Importantly, such options, including those listed below, may not be applicable, or may actually be prohibited, in certain situations. For example, suspending a unit owner’s right to use association property may constitute a violation of the automatic stay under the Bankruptcy Code. Thus, legal counsel should be sought before embarking upon one or more of the following options.
Suspension of Rights to Use Common Elements and Voting Rights
Failing to remain current with monies due to the association, including assessments, may jeopardize a unit owner’s right to enjoy the use of the common elements. If a unit owner is delinquent for more than 90 days, the association may suspend the unit owner’s right to use common elements, common facilities, or any other association property until the balance is paid.
The Condominium Act provides that a suspension may be extended to include a unit owner’s occupant, licensee—for example a social guest, or invitee—for example a business guest. However, such a suspension cannot apply to any limited common elements intended to be used only by that unit, common elements that must be used to access the unit, utility services provided to the unit, parking spaces, or elevators.
It is important to note that such a suspension may only be imposed after it has been approved at a properly noticed board meeting. Additionally, once the suspension has been imposed, the association must notify the unit owner of the suspension in writing by mail or hand delivery. If applicable, such notice must also be given to any occupants, licensees, or invitees covered by the suspension.
A delinquent owner’s right to participate in the association’s decision-making process can similarly be limited. Until all amounts are paid in full, an association may suspend the voting rights of a member who is more than 90 days delinquent in paying any monies due to the association.
Charge Interest and an Administrative Late Fee
Assessments and installments on assessments that are not paid when due, bear interest at the rate provided in the condominium’s declaration, if not unlawfully excessive. If the declaration does not include an interest rate, then the appropriate interest rate shall be 18 percent per year.
If authorized by the declaration or the bylaws, an association may charge an “administrative late fee” of up to $25 or five percent of each installment of the assessment, whichever is greater. This fee may be charged for each delinquent installment for which the payment is late. Any payment received by an association must be applied first to any interest accrued by the association, then to any administrative late fee, then to any costs and reasonable attorney’s fees incurred in collection, and then to the delinquent assessment.
Monitor (Nudge) Foreclosure Cases Filed by Lenders against Unit Owners
Since the number of lender-initiated foreclosures has soared in the past few years, it is not surprising to learn that foreclosure rates in some condominium communities approached fifty percent. Since these lenders typically hold superior rights, many associations are reluctant to take action during a lender’s case. Unfortunately remaining passive can prove costly.
During foreclosure there is often little incentive for unit owners to pay assessments. Primary lenders (first mortgagees) are not responsible for unpaid assessments until after the lender takes title to the property. However, once a lender (or its successor) takes title to the unit through foreclosure, it generally becomes liable for the lesser of: 1) unpaid common expenses and regular periodic assessments coming due during the 12 months immediately preceding the acquisition of title; or 2) one percent of the original mortgage debt.
Seeking to delay their liability for unpaid assessments, lenders often allow their foreclosure cases to languish in court. Given the importance of collecting unpaid assessments, even in part, associations should not tolerate long delays. Steps can be taken to commit the lender to a schedule, and remind the lender (and the court) that an interested party will not tolerate unwarranted delays. So, if one or more units seem to be lost in foreclosure, an association should consider discussing its options with legal counsel.
Deficiency Claim
Since a lender’s liability for past due assessments is limited by statute, it is likely that a deficiency for unpaid assessments will remain once the lender’s foreclosure is final. Since unit owners are liable for these unpaid assessments, condominium associations may consider pursuing a deficiency claim against prior owners.
In practice, deciding whether to pursue a deficiency claim will often hinge on the collectability of prior unit owners. Therefore, significant effort will focus on discovering whether a prior owner has sufficient, non-exempt assets to justify the effort and expense.
Those who filed for bankruptcy during their foreclosure will likely be uncollectible, whereas those who purchased one or more units for investment purposes may have unprotected assets. Legal counsel should be consulted to create a profile of optimal targets for a deficiency claim.
Demand Rent Payments Directly from Tenant
Since the struggling real estate market made it virtually impossible to sell condominium units, many owners opted to generate revenue by renting their units. Too often, however, many unit owners failed to use their rental income to pay their condominium assessments. The recent strengthening of the rental market has served to increase the occurrence of this problem.
If the owner of a rented unit is delinquent in paying any amounts due to the association, including assessments, an association may essentially intercept the tenant’s rent by demanding that the tenant make rent payments directly to the association. The Condominium Act outlines the manner in which an association can go about demanding receipt of a tenant’s rent payments. However, given the technical nature of the process, which was amended on July 1, 2011, a condominium association should seek the advice of legal counsel before moving forward with this option.
File and Foreclose on a Lien for Unpaid Assessments
In the past, filing a lien for unpaid assessments has been an effective collection strategy because many unit owners had too much equity to risk foreclosure for a relatively small amount of money. The mere notice of a lien was often enough to compel payment. Today, the relative rarity of encountering a unit owner with positive equity means that condominium associations must contemplate the next step—foreclosing on the lien.
Since those who are delinquent with their assessments are probably also delinquent on their mortgage, many associations previously dismissed foreclosure as a viable option because of the lender’s superior lien. What is the point of foreclosing if the lender can step in at any point and essentially nullify the association’s effort and expense? Things have changed.
The volume of foreclosure filings, coupled with many lenders stalling their cases, may provide associations with a window of opportunity. Associations committed to an aggressive foreclosure campaign can take advantage of a strong rental market to generate revenue by turning their foreclosed units into valuable rental properties.
This approach, however, is not without risk. For example, given the costs of foreclosure and unit renovation, the association may not have enough time to turn a profit if a lender quickly asserts its superior rights to the property. Nevertheless, associations discussing the risks and benefits of lien foreclosure with their legal counsel may find the option more palatable than ever.
Condominium unit owners have common interests beyond the pool and the clubhouse. Because residents share expenses, they have a vested interest in the financial health of their fellow unit owners. With fewer residents contributing, associations must be proactive and (cautiously) aggressive when pursuing unpaid assessments. Otherwise, associations will quickly discover that the financial hardships of some unit owners will be felt by all.
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