Wednesday, February 24, 2010

Recent Case Could Mean More Financial Problems For Some HOA’s.

The Second District Court of Appeal in Florida recently issued a decision in the case of Coral Lakes Community Association, Inc. vs. Busey Bank, NA. holding that a Ft. Myers Homeowners’ Association could not collect the past due assessments provided by Florida Statutes §720.3085, from the First Mortgagee taking title to a Lot in the community by foreclosure sale. While this is only one DCA opinion, its potentially significant negative impact on many homeowners’ associations cannot be ignored. It is important to place the decision in perspective, as well as to determine what options for minimizing its impact may be available to the HOA’s that are most likely to be affected. This opinion does NOT impact condominium associations.

Notably, this case and the Appellate Court’s decision, rest on a specific set of facts. That is not to say that the decision cannot be expanded to apply to other fact patterns and other jurisdictions. However, in the interest of gaining perspective, the specific facts and circumstances involved are important. One of the most significant factors contributing to the Coral Lakes decision is the specific language contained in the Association’s Declaration removing the obligation of a first mortgagee to pay for any unpaid assessments on a Lot, coming due prior to the time that the mortgagee acquires title by foreclosure sale or by deed in lieu of foreclosure. In addition, the case involves a mortgage that was recorded at the time such Declaration provision was in existence and under an older version of Florida Statutes §720.3085.

In Coral Lakes, the Association’s Declaration specifically provides that first mortgagees taking title to a Lot by foreclosure sale or by deed in lieu of foreclosure, are not liable for any assessments coming due prior to the mortgagee’s acquisition of title, unless the payment of such funds is secured by a claim of lien recorded prior to the recording of the foreclosed or underlying mortgage. The Court reasoned that because the first mortgagee was a third party beneficiary to the Declaration, and the Declaration was a contract between the association and its members, applying amendments to Florida Statutes to impose liability where it would otherwise not exist, impairs the contractual rights of the mortgagee. Moreover, as the mortgage involved in this case was entered into prior to the effective date of the statutory amendments imposing mortgagee liability for unpaid assessments, the statutory changes could not be retroactively applied. The Court noted that the Association could have protected itself by amending its Declaration to provide that the association lien for unpaid assessments related back to the date of recording of the Declaration, or that its lien was superior over intervening mortgages.

Needless to say, this decision has the potential to negatively affect many homeowners’ associations that are already struggling financially. However, its application may not be as broad as many banks will likely attempt to argue. As stated previously, the case relied heavily on the specific language of the Coral Lakes Declaration. In addition, the decision relied upon a version of the Florida Statutes that has since been further amended to require lenders to pay HOA’s the lesser of 12 months past due assessments or 1% of the original mortgage debt in the event a mortgagee takes title to a Lot by foreclosure sale, or by deed in lieu of foreclosure. Although the Court in Coral Lakes, implied that the result of the case would have been the same under the current statute, we are not so quick to agree. It is important to understand that the decision rendered in Coral Lakes only reflects the position of one court under very specific facts and circumstances. While banks are sure to argue in favor of broadly applying this Court’s decision, counsel for homeowners’ associations will argue just as strongly to limit its application. Unfortunately, only time and further challenge will reveal the true significance of this decision.

So, what can homeowners’ associations do today to determine and/or limit their possible exposure to the fallout from this decision? First and foremost, associations are urged to consult with legal counsel to determine if the provisions of their declarations leave them susceptible to the negative impact of the Coral Lakes decision. If your Declaration does not contain language significantly limiting or eliminating the liability of first mortgagees for unpaid assessments, it is unlikely that this single decision will have a tremendous impact on your community. However, if your declaration contains a provision similar to that contained in the Coral Lakes case, you will want to discuss possible methods of limiting the impact of this ruling on your community with your association’s legal counsel. In many cases, it may be possible to distinguish the facts of the Coral Lakes case from those facing your community. In addition, it may be possible to amend your declaration in an attempt to minimize the association’s existing exposure, as well as to attempt to avoid any future exposure to the impact of this decision. There are no guarantees, however, that amending your documents will cure this problem with regard to already recorded mortgages IF you have “Coral Lakes”-type language in your documents.
Again, you cannot determine whether or not this decision has the potential to negatively impact your community’s rights to pursue lenders for past due assessments until you review the language contained in your own set of governing documents. You and your legal counsel should review them to see if (a) you have language limiting a lender’s liability and (b) you have language incorporating future changes to the HOA Act into your documents.

1 comment:

  1. I am curious as to other opinions the possible scope of this ruling. I have read opinions from various attorneys claiming the extent of the ruling is wider than the author seems to think.