June 7, 2010

Last week, on June 1, 2010, the Governor signed into law legislation addressing a number of issues of importance to community associations.  I know that all of you who serve on community boards of directors—as well as us practicing in the realm of community association law—have been waiting, hoping for some form of relief for our communities.  In a few, upcoming blogs, I will discuss the changes to Chapters 718, 719, and 720 of the Florida Statutes which are anticipated to impact the manner in which community associations operate their properties.  With this blog, I will begin the discussion with the changes to the statute which are intended to assist community associations with regard to owner delinquencies and collections.

To begin, as many of you on condominium boards of directors know, Fla.Stat. 718.116 provides that owners of condominium units are responsible for all maintenance fees and assessments which accrue against their units.  When an individual buys or becomes an owner of a condominium unit, he or she becomes liable for all maintenance fees and assessments due on the unit from the date that he or she takes title to the unit, forward, as well as all maintenance fees and assessments which accrued prior to his or her ownership.  The only exception to this statutory liability for past sums due had been for the holders of first mortgages that became owners to condominium units through foreclosure of their mortgages (or through deeds in lieu of foreclosure of their mortgages).  Those first mortgage holders, though liable for all maintenance fees and assessments due from the date that they took title to a unit, would have their liability for past maintenance fees and assessments limited to the lesser of six months of maintenance fees and assessments OR 1% of the original balance of their mortgages.  Now, the statute has been amended to increase the first mortgage holders’ liability for past maintenance fees and assessments to the lesser of twelve months of maintenance fees and assessments OR 1% of the original balance of their mortgages.  See Fla.Stat. 718.116(1)(b)1.  The problem with this statutory change is that its impact in the current financial crisis may be very limited.

A couple of years ago, the homeowners’ association statute (Chapter 720 of the Florida Statutes) was amended to add a provision which made first mortgage holders liable for the lesser of twelve months of maintenance fees and assessments OR 1% of the original balance of their mortgages.  See Fla.Stat. 720.3085.  (Prior to the addition of Fla.Stat. 720.3085 to the homeowners’ association statute, there had been no statutory provision imposing past maintenance fees and assessments upon first mortgage holders after the foreclosure of their mortgages.)  With this amendment to Fla.Stat. 720.3085, homeowners’ associations—many for the first time—pursued first mortgage holders for a portion of the maintenance fees and assessments which accrued prior to the first mortgage holders acquisition of title to lots.  In February of this year, however, in Coral Lakes Community Ass’n, Inc. v. Busey Bank, N.A., 35 Fla.L.Weekly D431a (Fla. 2DCA 2010), the Second District Court of Appeal indicated that application of Fla.Stat. 720.3085 to mortgages which were executed prior to the statutory amendment would be an unconstitutional impairment of contract.  In other words, a first mortgage holder, prior to the statutory amendment, would give a loan with expectations of very limited liability—or no liability—for maintenance fees and assessments accruing before acquiring title to a lot.  Then, after giving the loan and after amendment of the statute, application of the amended statute would change that first mortgage holder’s rights and obligations from those in existence at the time that the loan was given.  This change would be an impairment of the first mortgage holder’s rights and would, thus, be unconstitutional.

The same analysis may apply with regard to the amendment to Fla.Stat. 718.116(1)(b)1.  If a first mortgage holder gave a loan for a condominium unit purchase or refinance, with expectations that its liability for maintenance fees and assessments accruing before gaining title to a unit through a foreclosure would be limited to the lesser of only six months of maintenance fees and assessments OR 1% of the original balance of its mortgage, then the current statutory change increasing the liability to the lesser of twelve months of maintenance fees and assessments OR 1% of the original balance of the mortgage could be considered an unconstitutional impairment of the first mortgage holder’s “contract”—its note and mortgage.  If this is the case, then it could be that the liability increase of the amended statute will only apply to mortgages executed on or after July 1, 2010.  In other words, it may be that the statutory amendment will have no application to the holders of the first mortgages in this current financial crisis.

In addition to the foregoing, potential liability increase for first mortgage holders, the statute was amended to place into effect provisions to “encourage” delinquent owners to bring their accounts and financial obligations current with their community associations.  In condominium associations, Fla.Stat. 718.112 has been amended to expand ineligibility to serve on a board of directors to individuals more than ninety days delinquent in any financial obligation to the association—the statute had applied to delinquencies for, only, regular maintenance fees; now, it applies to delinquencies for regular maintenance fees, special assessments, fines, and any other “monetary obligations”.  See Fla.Stat. 718.112(2)(d)1 and 718.112(2)(n).  Additionally, Fla.Stat. 718.303(3) has been amended to allow suspension of a unit’s use rights to common elements and facilities in a condominium if the unit’s owner is more than ninety days delinquent in paying a “monetary obligation” to the condominium association.  (A condominium association CANNOT, however, suspend the right of a unit owner to use limited common elements of his or her unit, access his or her unit, use parking spaces, use utility services, and use elevators.)  The suspension of use rights must be imposed by the board at a properly-notice board meeting, and notice of the suspension must then be provided to the owner and occupants via mail or hand-delivery.  Also, Fla.Stat. 718.303(5) now permits a condominium unit owner’s voting rights to be suspended if the owner is more than ninety days delinquent in paying any “monetary obligation” to the condominium association.

The authority to suspend use and voting rights had already been present for homeowners’ associations through Fla.Stat. 720.305, but a homeowners’ association’s governing documents was required to contain provisions allowing such suspensions.  The change to Fla.Stat. 720.305 eliminates the governing-document-basis for suspensions of use rights, but it also deletes the ability of an association to impose suspensions without notice and an opportunity for a hearing before an independent association enforcement committee.  Now, before use rights are suspended for delinquencies of over ninety days, an association must give at least fourteen days’ written notice, with the opportunity for a hearing before a committee of owners (not board members or officers).  If a suspension is imposed, notice must, again, be provided to the owner and occupants of the suspension.

Finally, and perhaps the most important provisions to assist community associations in collections, a community association is permitted to pursue a unit’s tenants when the unit’s  owner is delinquent in paying his or her “monetary obligations” to the association.  Chapters 718, 719, and 720 of the Florida Statutes have been amended to grant this authority to all forms of community associations.  See Fla.Stat. 718.116(11), 719.108(10), and 720.3085(8).  Basically, if an owner is delinquent, to any extent, in paying any “monetary obligation” to an association, the association may demand that the tenant begin paying the association “the future monetary obligations” related to the unit.  Upon receipt of the notice, the tenant is obligated to make the payments to the association until the association releases the tenant from the obligation.  The association must notify the owner, via mail, that it made the demand upon the tenant.  If the tenant fails to comply with the demand, the association has the right to proceed with eviction of the tenant in the same manner that a landlord may evict a tenant for non-payment of rent.  In the past, an association had the ability to collect rent, but only through appointment of a receiver in a foreclosure action.  This statutory change grants associations the ability to pursue a delinquent owner’s rental income without first bearing the expenses of a foreclosure proceeding and appointment of a receiver.

As you can see with from foregoing discussion, the legislature has attempted to address some of the delinquency and collection problems faced by community associations.  These changes will not solve all of (and probably not even most of) an association’s delinquency and collection issues, but they are, at least, a baby-step in the right direction.

Charles Otto