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CONDOMINIUM FORECLOSURES
VS. THE RIGHTS OF MORTGAGE HOLDERS 1

One of my condominium Presidents asked me to advise him and his Board about the process of foreclosing a condominium lien and how the rights of the Association relate to the rights of a mortgage holder. For purposes of this opinion, a first mortgage holder will be referred to as a "Bank", even though the first mortgage may be held by a bank, an individual, mortgage company, pension fund, or other entity.

Discussion - The laws governing condominiums in Florida are set forth in Chapter 718 of Florida Statutes, The Condominium Act (hereafter the "Act"). Section 718.116 sets forth a comprehensive scheme by which the Association is given power to assess its members for common expenses and collect such assessments through the Court when they are not paid by an owner.2

The process must begin with a demand letter sent to the owner at his last known address, according to the records of the Association. The letter must be sent by regular and certified mail and must give 30 days to pay the account. If not paid within that time, the Association has the right to file a lien on the property. Another letter must be sent to the owner by regular and certified mail and must give 30 more days to pay the account. This letter must advise the owner that a lien has been filed and that a foreclosure suit may be filed after 30 days if the account is not paid. This is commonly called a Notice of Intent to Foreclose ("NIF").

The Association may foreclose its lien in the same manner as a mortgage is foreclosed. This means that an action to foreclose a lien is filed in the Court, and if the Association proves that the owner did not pay the assessments properly adopted by the Association, and that the Association otherwise complied with the requirements for recording a valid lien, giving proper notice before suit, obtaining valid service of process and establishing the amount owed, the Court will enter a judgment of foreclosure. The judgment states that if the amount owed is not paid by a certain date set by the Court, the property will be sold by the Clerk at auction to satisfy the Judgment. The highest bidder will be awarded the title. If there are no bidders other than the Association, the title will be awarded to the Association. ( This is the most common result in this economic climate). The judgment amount will include all assessments unpaid until the date the judgment is entered, plus late fees (when permitted by the condominium's documents), interest, court costs, and reasonable attorney fees as determined by the judge. In a typical condominium foreclosure, it takes approximately 4-6 months from filing the suit to obtaining judgment, but this will vary based on the difficulty obtaining service of process on all defendants, and the defenses, if any, alleged by the Defendants. Until the start of the foreclosure crisis in late 2007 or early 2008, a sale would usually be scheduled by the Clerk approximately 30 days after the entry of judgment. As of June, 2009, due to the enormous number of cases that are virtually overwhelming the capacity of the Court, sales were being scheduled five months into the future! As of November, 2010, the delay has been reduced dramatically, and sales are usually being scheduled within 60 days.

In most cases, there is one mortgage on the property, but sometimes there is more than one. The "Act" gives the Association's lien a priority over claims to the property except for a first mortgage, the real property taxes, and other limited exceptions that rarely apply. To eliminate the claims of the parties who do not have priority, the Association's foreclosure suit must name such parties as a Defendant and serve them. Such parties may include, for example, anyone with a recorded judgment against the owner, a second mortgage holder or holder of a equity line of credit, or a tenant in possession. If these "subordinate" interest holders are served and the property goes to sale, their rights in the property are "foreclosed" ( in essence, eliminated). However, the rights of the Bank and its first mortgage on the property, being superior to the rights of the Association, are not affected by foreclosing your lien. Thus, if the title is awarded to the Association at the foreclosure sale, the mortgage is still there as a "lien" on the property and it can be foreclosed by the Bank.

While the Association is not legally obligated to pay the mortgage, if the mortgage is not paid, the Bank can foreclose it. Often times, the Bank's foreclosure suit is filed soon after the Association's or even before it. Since the Association's lien rights are subordinate to the Bank's, the Bank should name the Association as a Defendant. This is why almost every mortgage foreclosure against a condominium unit includes the condominium Association as a Defendant. In addition, The Act provides that by joining the Association in the suit as a Defendant, the Bank may limit the amount of unpaid assessments it must pay the Association if it acquires the title. The amount is limited to 12 months of unpaid assessments, or 1% of the Bank's original mortgage amount, whichever is less. This "safe harbor" provision only applies to the holder of a first mortgage, or its successors or assignees, who joins the Association as a Defendant. Thus, if the Bank does not join the Association, or if the title is awarded to anyone who did not hold the mortgage, the entire unpaid assessment balance may be collected by the Association from the new owner. This points out why it is very important to know the history of the mortgage that is foreclosed and whether the party to whom the title is awarded ever was the actual holder of the mortgage. For example, when a final judgment or a bid at the auction is assigned, or a third party buys the property, the party to whom the title is awarded has not been the holder of the mortgage, and in that case, it cannot claim the benefit of the safe-harbor provision.

Once the title is awarded by the Clerk (10 days after the foreclosure sale if there is no objection to the Sale), the new owner is obligated to pay all assessments and other charges that become due thereafter. The Association is entitled to collect from the Bank in the same manner as it may collect from any other unit owner. A letter should be promptly sent to the Bank, demanding the money it owes. If a Bank who is awarded the title does not pay the assessments it owes within 30 days after the title is issued to them, the Association may file a lien on the property and foreclose it in the same manner as it may against any other owner.

The recipient of the Certificate of Title becomes the owner with the same rights as any other owner, including the right to sell or lease the unit. Usually, when the Association is nearing a foreclosure judgment, if not much sooner, the mortgage is not being paid. It is usually only a matter of time before the mortgage foreclosure suit is filed, if it is not filed even before the Association obtains its title. The dilemma for the Association occurs when the Bank files suit when the Association is not close to obtaining its own judgment. If there will be only a short time between the Association's foreclosure sale and the Bank's, then there is little, if any, time for the Association to sell or lease the property in order to recover the Association's money. If there is a long time period, then there is a chance that the Association can recover its money. The best option in this market is usually by leasing the property. Given the depreciation in all real estate in South Florida in the past two years, many condominiums have little, if any, equity. Therefore, they cannot be sold to satisfy the mortgage, and there will be no money to satisfy the condominium's account.

Until the foreclosure crisis and depreciation in South Florida real estate values, Banks would pursue their foreclosures diligently because they knew they could sell the property to recover their money, usually in a short time. Conditions have changed so much in the past 2 years that the Bank's cannot sell the property and recover their money. Often, the values are substantially lower than their mortgage balance. Since the property is "under-water", the Banks are not seeking to obtain the title diligently. They are hoping for a recovery in the market, or that the owner will somehow find the means to refinance or cure the default, or sell the property where the Owner incurs the costs of sale instead of the Bank. Occasionally, a short sale will be approved and the Association can recover most, if not all, of its money. Furthermore, by not acquiring the title, the Banks do not become obligated to pay the safe-harbor amount, plus the assessments, taxes, insurance, management fees, and other costs of ownership from the date of acquiring title. Thus, many Banks file their foreclosure suits, but do not pursue them diligently, or they get a sale scheduled and then postpone it. This serves to postpone the time, by many months, that the Association has a non-paying unit. I've seen foreclosure cases go on for well over one year. Multiply this by the many units being foreclosed in every condominium and you can understand why many condominium Associations are in serious financial difficulty. Add to this the moratoriums some bank's have imposed on themselves because of problems discovered in the foreclosure process, such as robo-signers of affidavits, and you can see that the bank's may continue for a very long time.

Thus, it is very difficult for an Association to determine how to proceed in each particular case. Much depends on unknown factors, such as the strategy of the Bank and whether it pursues its case diligently or not. What is the loan balance relative to the property's fair market value? Will the Bank allow a long-term payment plan with the owner to cure the default? Will it modify the loan? Will it appear to be pursuing the case diligently, but then postpone the sale, literally at the last minute? Will the owner file for bankruptcy? Does the Owner care about keeping the property and will he try to pay the Association? Can the Association find a tenant on a month-to-month basis?

Please remember that every owner is also personally liable to the Association for its share of assessments. This means that even if a Bank forecloses the mortgage, the Association may obtain a money judgment against the owner. A judgment can be collected for twenty years. In every foreclosure suit I file, I also include a Count for a money judgment. Occasionally, such as when the Bank forecloses, it will be best for the Association to elect that remedy.

It is clear that every Association must pursue its collection rights from the owner diligently. An account that is past due by two months should be assigned for collection. In my view, waiting until the account is delinquent a longer time greatly reduces the chance of recovery. Every association should know the actual residential address of its owners. Not knowing where to send a demand letter, or where to serve a lawsuit on the owner, can delay your case by many, many months and make the difference between a successful collection and no collection at all! Until the general economy, and the South Florida real estate market in particular, improve, condominium Associations will continue to face difficult financial times and difficult decisions in pursuing its collection rights.


1This article was first written in June 2009, and updated in November 2010.

2Since the statute is quite lengthy and complex, this letter is only a summary of the significant provisions. Reference should always be made to the statute in a particular case. Citations to the section number are omitted in many instances for the sake of brevity.

Michael E. Rehr, Esq.
9500 So. Dadeland Blvd
Suite 550
Miami, FL 33156
Telephone (305) 670-8993
mrehr@rehrlaw.com

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