40 March 2014 FLCAJ | www.flcaj.com

lowly but surely, Florida community associations with “old” documents are losing battles to banks and other lenders. A recent decision by a Florida Federal District Court, U.S. v. Forest Hill Gardens East Condominium Association., Inc., Case No.: 13-80513-CV (S.D. Fla., January 3, 2014), may be one of the most significant

decisions affecting Florida community associations pocketbooks this year. The facts of this decision can be summarized as follows: Forest Hill Gardens is a residential development located in suburban West Palm Beach. It includes two condominiums. There is also a “master” property

Foreclosures

FLORIDA LAW

BY MICHAEL J. GELFAND, ESQ.

S

HAVE ASSOCIATIONS WITH “OLD” DOCUMENTS SEEN THE LAST OF THE “SAFE HARBOR” FOR LENDERS?

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owners association to which the condominium unit owners pay assessments. Mortgages on two units were foreclosed upon by the mortgagee banks. Because the mortgages were insured by the U.S. Depart-ment of Housing and Urban Development, HUD obtained title to the units. In response to HUD’s request for an estop-pel letter outlining monies due, the condominium and the property owners asso-ciations demanded unpaid assessments as well as interest, late charges, collection costs, and attorney’s fees. The Federal District Court first addressed HUD’s liability to the condominium associa-tion for unpaid assessments that accrued before HUD took title. The Condominium Act’s so called “safe harbor” in

§718.116(1)(b)(1) generally limits first mortgage lender liability to the lesser of unpaid common expenses and regular periodic assessments, which accrued in the 12-month period before title was issued or one percent of the mortgage. Judge Hurley, who previously was a circuit court judge in Palm Beach County, noted that the term “common expenses” encompasses costs, which benefit the entire condominium. Judge Hurley held that interest, late charges, collection costs, and attorney’s fees sought by the condominium association “simply do not fit within the statutory or common sense understanding of ‘regular periodic assessments.’” The court also asserted a public policy ratio-nale to allow prompt sales following a foreclosure. “[B]y limiting a foreclosing first mortgagee’s liability to certain, readily verifiable fig-ures ... provides certainty to the resale process and removes potential impediments to reconstituting the condominium community.” To determine what was actually due to the condominium associa-tion, the Federal Court looked to the Declaration of Condominium, which provided: Non-liability of mortgagee of record: when the mortgagee of a first mortgage of record obtains title to a unit as a result of foreclosure of its first mortgage, or when the mortgagee of a first mortgage of record accepts a deed in lieu of foreclosure, such acquirer of title, its successors and assigns, shall not be liable for the share of common expenses or assessments by the Association pertaining to such unit, or chargeable to the former unit owner of the unit, which became due prior to the acquisition of title as a result of the foreclosure or the acceptance of such deed in lieu of foreclosure.

42 March 2014 FLCAJ | www.flcaj.com

Second, managers and directors should have their association counsel review their association’s declaration of condominium or declara-tion of covenants to confirm the exact language drafted by the community developer, or as amended. Until recently, many developer drafted dec-larations of condominium and homeowners associations declaration of covenants ex-cused lenders from the pay-ment of assessments accruing before a property was fore-closed. If an association desires to strengthen its claim to delinquent assessments from foreclosing lenders, the asso-ciation may have to amend its declaration. The amend-ment provision must be care-fully followed, which may impact the extent to which this situation can be cured. Lastly, Florida community associations should consult with their association counsel to determine how this decision may impact their communi-ties and what can be done to limit the decision’s impact. It is noted that the U.S. v. Forest Hill Gardens decision is not a Florida appellate court decision; thus, there is a potential for a reviewing, appellate court to determine that the “safe harbor” does supersede declarations. The potential of a different deci-sion on appeal is real because the decision did not address the “safe harbor” effective date language. Michael J. Gelfand is a Partner in the law firm of Gelfand & Arpe, P.A., in West Palm Beach, Florida. You may reach him by e-mail at Michael@flcaj.com or by phone at (561) 655-6224. !

This special lender dispensation text was not unusual when the Declaration was recorded in 1980. The association argued that this provision was superseded when the Florida legislature amended the Condominium Act to include the safe harbor provision in 1992. Judge Hurley rejected the association’s argument and noted that there is no reason why a condominium association cannot grant more favorable treatment to a foreclosing first mortgagee than that required by statute. “The association could have, had it chosen to, revised its declaration to incorporate by reference a future enactment of the Condominium Act,” Judge Hurley stated. The court concluded that HUD was exempt from all liability for unpaid assessments at the time of the foreclosure. This means that HUD did not have to pay even one percent of the mortgage! The Federal District Court next addressed HUD’s liability to the property owners association. Apparently, HUD did not assert that the property owners’ covenants had the same type of lender special dis-pensation that was found in the Declaration of Condominium because the court concluded that HUD was liable for common expenses and unpaid assessments that accrued prior to its taking title. But, just as in the condominium association claim, HUD was not liable for interest, late fees, attorney’s fees, and collection costs. So what is an association to do? First, remember the old adage, “Hungry pigs get fed, greedy hogs go to slaughter.” Those associations who continue to seek “everything” may only incentify lenders to chal-lenge associations.