QUESTION: We know that the economy is improving but our condo association still has a couple of units whose owners have not paid anything in a long time. As a member of our board, I suggested that we file a lien, foreclose and take ownership because the banks that hold the mortgages haven't done anything yet. Then we could rent the unit and receive payments. Another board member said that this means we probably couldn't collect past due amounts because we'd be collecting from ourselves. He said there was a recent court case about this. Is he right?
ANSWER: There are court cases that seem to favor those banks and investors who buy properties in foreclosure. If a condominium association forecloses on a lien and receives title to a unit by foreclosure auction they own the unit. If the first mortgage lender then completes its own mortgage foreclosure as the first mortgagee and a third-party obtains the title, that party becomes the owner.
The problem is that an association pursuing past due assessments seeks payment from the previous owner, themselves. This is exactly what happened in a recent case and the courts ruled that the party acquiring title from the bank foreclosure sale had no obligation to pay the association.
It is important to know that this situation only occurs when the association becomes the unit owner because it foreclosed on a lien or because they accepted a deed in lieu of foreclosure from the owner. Also, the problem could possibly be avoided if the association takes title to the property in the name of an LLC, a Limited Liability Company registered in Florida. The LLC would have to be owned by the association.
A Limited Liability Company (LLC) is a hybrid business entity that has characteristics of both a corporation and a sole proprietorship. An LLC is a business entity but is not a corporation. It does, however, have the characteristic of a corporation that limits the liability of its "members." It is often more flexible than a corporation, and it is well-suited for companies with a single owner or, in the case of the condominium association, an "owner" that has a simple purpose for forming the LLC, such as taking ownership of a delinquent owner's unit.
Lien foreclosures are a good way to turn a unit into a rentable asset but it's important to be mindful of the potential consequences. This is a good example of the need to seek the advice of an attorney before taking any steps to foreclosure or take ownership.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.