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The Association Foreclosed On A Delinquent Owner. Is The Mortgagee Entitled To The Rental Income?

Condominium and Homeowner Associations are never anxious to take on properties abandoned by owners.  Yet with the mortgage crisis many properties were left vacant for years.  In the interim, unpaid assessments continued to accrue and the properties were ripe for vagrants and were left to deteriorate, risking damage to the common elements or adjoining property owners.  As a result, many associations were compelled to foreclose, and, in many cases, had to take possession of the property.

 

For the Association, hiring a law firm to handle the foreclosure is often the easiest first step; however, once title transfers to the Association the real work begins for the Board.  While the Association is not financially responsible to the bank for the mortgage payments, the mortgage will continue to encumber the property and prevent the Association from selling the property free and clear of the first mortgage.  As a result, the Association is left with two choices upon taking title: sell the property to an investor “as is” or rent the property.

 

If the Association chooses to retain title and rent the property can it be compelled to turn over the rental income to the bank holding the mortgage before the bank forecloses on its loan?

 

Recently, the Third District Court of Appeal considered just this issue.  See UV Cite III, LLC v. Deutsche Bank National Trust Co., No. 3D16-2341 (Fla. 3d DCA 2017).  In UV Cite III the original borrower had defaulted on the mortgage and abandoned the property in 2008.  The bank filed suit in January of 2016 seeking to foreclose the mortgage.  In the interim, the condominium association had foreclosed on the property for nonpayment of assessments and deeded the property to an investor, UV Cite III, LLC in 2015 who rented the property.

 

Within a few months of filing for foreclosure, the bank filed a Motion to Sequester Rents alleging the owner failed to pay property taxes and that it would be unjust to allow the current owner to continue to collect rents and thereby profit from litigating (i.e., fighting) the bank’s foreclosure action.  The lower court granted the bank’s Motion to Sequester Rents and ordered the tenant to pay its rent directly to the court registry with the money eventually being paid to the bank at the end of its case.  This order was appealed.

 

The Appellate Court reversed holding that “absent an agreement between the parties to assign rents or some form of injunctive relief, a trial court has no authority to order a deposit of money into the registry of the court if the money was not the subject of the litigation.” Id (internal citations omitted).  The Court explained that Deutsche Bank’s foreclosure complaint failed to seek a judgment for rent collected, there was no evidence of an assignment of rents provision in the mortgage, and the bank failed to seek injunctive relief, i.e. seek a receiver of the property.  Note that even if there were an assignment of rents provision, it is likely that the assignment would be limited to rental income received by or on behalf of the borrower and not a new owner of the property who has no contractual relationship with the bank as it pertains to the delinquent mortgage.

 

Although banks tend to learn from their prior judicial missteps only time will tell whether they revise the standard contractual language that makes up the mortgage documents and/or their foreclosure complaints to add additional counts in an effort to divert rental income from the property to their benefit.  Even then, the equities favor the Association more than the bank.  For instance, the Association is essentially preserving the value of the property and the community itself by collecting funds to address the Association’s maintenance repair and replacement of obligations which are both statutory and contractual in nature.  Additionally, the Association as a subordinate lien holder to the first mortgagee is attempting to reduce not just the amounts owed in unpaid maintenance but also in interest, late fees, legal fees, and costs that would otherwise be written off and cripple the Association’s ability to meet its financial obligations. Simply put, the Association is not profiting from the rental income, but rather mitigating its damages and ultimately helping the bank out.

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