It's The Law: Fees and short sales

Condominiums might be able to forgive assessment liability

Q: I am on the Board my Condominium Association. One of our owners is far behind in assessments and is now trying to do a short sale. The mortgage holder will not allow deduction from the sale proceeds of anything more than six months of assessments. We want a new owner who will start paying assessments, but there is some debate about our ability to release the unit from liability for arrearages. Can we forgive part of the arrearages?

A: Your question is certainly timely. Many condominium associations face assessment problems with owners who bought high and now cannot afford to sell low because their mortgage is bigger than the value of their unit. Many of these owners should not have been able to get a mortgage at all, and lack ability to pay both mortgage and assessments. Their hope for quick resale of the unit for a profit has become the Association’s liability.

Many of these owners are attempting a short sale. Such sales are for a price that is short of the amount needed to pay-off the mortgage and other expenses. To complete a short sale, the owner must get the mortgage holder to agree to release the mortgage lien in exchange for something less than full payment. As part of that review process, mortgage holders will confirm the minimum net they will accept to release the property, and in some cases specifically limit expenses to be paid from the gross proceeds of the sale.

Mortgage holders consider a number of factors in their review of a short sale application. These factors include market value of the property, local sales activity, and position the mortgage holder would hold if it acquires the property at a foreclosure sale. To encourage lenders to finance condominium purchases, Florida’s Condominium Act has long limited liability of a first mortgage holder acquiring title through foreclosure to the lesser of 1 percent of the original mortgage debt or six months of assessments. In reviewing your short sale, the mortgage holder has apparently decided it would rather foreclose and take title if it cannot limit the past assessment liability in the short sale to six months of assessments.

Many Attorneys believe Associations cannot forgive liability for assessments. That position is based on a literal reading of Florida Statute section 718.116(9)a. That statute provides, in part “a unit owner may not be excused from payment of the unit owner’s share of common expenses unless all other unit owners are likewise proportionately excluded from payment.” The statute was applied in one court case to hold a unit owner personally liable for unpaid assessments following a foreclosure sale which brought insufficient proceeds to pay all of the assessments after the mortgage on the unit was satisfied.

Section 718.116 also provides: “a unit owner, regardless of how his or her title has been acquired … is liable for all assessments which come due while he or she is the unit owner. Additionally, a unit owner is jointly and severally liable with the previous owner for all unpaid assessments that came due at the time of transfer of title.”

The recent mortgage meltdown hype caused many to carefully review the statutes and look for a way to reduce a claim for arrearages to facilitate sales. Emphasis in that search has been on Florida Statutes section 718.111(3), which includes the following: “the Association may institute, maintain, settle or appeal actions or hearings in its name on behalf of all unit owners concerning matters of common interest to most or all unit owners.” In addition, section 718.114 provides: “an Association has the power to enter into agreements.”

Using somewhat circuitous logic, some association attorneys now propose that associations can exercise their power to settle actions by releasing the unit from liability for assessments to affect a short sale. Such Associations do not necessarily release the current owner from Liability, but agree that the unit and new owner will not be required to pay part or all of the arrearages. They claim compliance with the non-forgiveness statute by stating that all owners in a similar short sale position will be treated likewise.

To the best of my knowledge, this theory has not been court tested. However, both the courts and the Division seem to search for results that will help operation of associations in the real world. Perhaps the best example of that search are the cases in which various courts and Florida’s Division of Condominiums, Timeshares and Mobile Homes arbitrators have held that what would appear to be material alterations in common elements requiring unit owner approval are not alterations when they are necessary for maintenance or to prevent damage to association property.

What was once a clear “no” has become a “maybe” on the issue of assessment forgiveness. You should discuss this issue with an experienced Association Attorney; and because there is often a time-limit on short sale approval, that consultation should take place soon.

William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

Questions for this column can be sent to: William G. Morris, e-mail: wgmorrislaw@embarqmail.com or by fax, (239) 642-0722.

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