Condominium and community association owners are apparently taking advantage of the old adage"the best defense is a good offense".
There seems to be a new trend – not a good one – where owners file lawsuits as a result of the amount claimed by the association as due on an estoppel certificate. Condo and HOA laws require the association to issue an estoppel certificate or statement indicating what is due and owing with respect to the property in connection with a sale or other transfer. In most cases the new owner must pay for any delinquency accrued on the account. The former & current owner are jointly and severally liable for the overdue balance. However, the law does not prevent the new owner from seeking reimbursement from the seller/former owner. Consequently, in practically all voluntary sales (including short sales or distressed sales), the title company or other agent handling the transaction will request an estoppel certificate from the association and ensure those amounts are paid in connection with the closing. In some cases the buyer and seller negotiate for the buyer to take over installment payments of a special assessment, but most of the time the title insurer (and attorneys) will insist on payment of all outstanding obligations.
First mortgagees acquiring title as a result of foreclosure (or deed in lieu of foreclosure) are entitled to a “safe haven” – they are not responsible for all past due amounts, just the lesser of 12 months of assessments or 1% of the original mortgage amount, with limited exceptions.
Associations that acquire title were also subject to this joint and several liability but that has changed as a result of HB 1195 somewhat. The new law states:
An association, or its successor or assignee, that acquires title to a unit through foreclosure if its lien for assessments is not liable for any unpaid assessments, late fees, interest, or reasonable attorney’s fees and costs that came due before the association’s acquisition of title in favor if any other association … which holds a superior lien interest on the unit.
Over the past year or two I have learned about many lawsuits filed by new owners when the association tried to collect amounts it arguably wasn’t entitled to collect. In some of the cases first mortgagees were billed for late fees for the entire duration of the delinquency, attorney’s fees incurred by the association in connection with the bank’s foreclosure and a host of other charges that became due before the Certificate of Title (in addition to the 12 months or 1%). In other cases, buyers or mortgagees were billed for the entire delinquency on the account, even if the association was the previous owner. Kate Berry, in an article for American Banker, explained that mortgage servicers typically will not front the funds to pay HOA/condo dues and expenses even though the Freddie Mac and Fannie Mae require the servicer to pay until the property is sold.
These lawsuits haven’t made their way through the appellate courts, so we don’t have precedent to rely upon yet. Nonetheless, it is my hope that this ‘trend’ will prompt association boards to have frank and open discussions with counsel regarding the appropriate amount to bill new owners for past-due balances, to minimize the risk of a lawsuit and avoid the time, expense and effort necessary to defend a lawsuit.