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02/23/10: Condo Associations Can Also Foreclose

Housing Counsel

By Benny L. Kass

Q: I am the President of a small (6 unit) condominium association here in the District of Columbia. Five of the unit owners religiously pay their monthly condo fee, but one does not. At the present time, she owes over $3,500. What options do we have? We understand that the unit owner is also delinquent on her mortgage payments. Can we foreclose on the unit, and if so, what do we have to do about the existing mortgage?

A: I have long maintained that associations should adopt a “zero tolerance” policy regarding condominium fees. You have to look at your association Bylaws; they will spell out how much advance notice must be provided to owners before any legal action can be taken. In some cases, only 30 days notice is needed, while in other associations, the notice requirement can be as high as 45 or 60 days.

Your association should adopt a collection policy. This will spell out the steps that the condominium will take when a unit owner is in arrears. If you do not have such a policy, you should consult an attorney who can assist you. I know that small associations are always reluctant to spend money on lawyers, but it is important to have a formal policy.

One defense unit owners can raise when confronted with any action taken by the board of directors is that the board is acting arbitrarily; I often hear owners complain that the board is “picking” on them, and not going after other owners with the same problems.

And that will be a good defense should the matter go to court. A formal collection policy will resolve this – assuming of course that the board consistently adheres to that policy.

If you have a property manager, he/she should immediately send a letter of demand, explaining that the unit owner owes X number of dollars, and that legal action will be taken if payment is not made immediately. If there is no manager – and many small associations opt to self-manage – the President or Treasurer of the association should send that letter.

Once you have complied with the notice requirements, and if the owner still has not made any payment, the board has two alternatives.

First, it can file suit in the Small Claims Court of the District of Columbia. The jurisdictional amount there is $5,000, so do not let the amount owed go over that limit. Otherwise, you will have to sue in the Superior Court and that is much more expensive and takes a long time before any court order will be obtained. Usually, if you file in the Small Claims Court, you will be before a Judge (or a Magistrate) within 30-60 days.

You will need legal counsel to assist you with this lawsuit. From my experience, once a unit owner knows that you are serious and have filed suit, a settlement is often reached. Typically, the unit owner agrees to start making future payments on a timely basis, and will also start making additional payments so as to pay off the arrears.

Most legal documents provide that if the association prevails in court, it can collect legal fees from a delinquent unit owner. However, there is no guarantee that those fees will be awarded by the Court.

If, on the other hand, it is clear that the unit owner has no money, then filing suit becomes a meaningless gesture. There is no cash register at the back of the courthouse for the association to collect when it gets a money judgment.

The other option is to foreclose on the unit. Once again, you need legal assistance. You have to do a title search to determine what liens – such as a mortgage, a real estate tax obligation or even moneys owed to the Internal Revenue Service – exist against the unit in question. Once you and your attorney are satisfied that foreclosure makes sense, the process begins. There are professional auction companies in the District of Columbia that will assist you. Generally, the association will have to pay a minimum of $2000 to cover the auctioneers fees and the advertising that is required before the foreclosure takes place.

From my experience, many foreclosures are terminated because the unit owner suddenly discovers he/she has money to pay off the delinquency. Most unit owners do not want to lose their home, and when faced with this reality will somehow come up with enough cash to satisfy the association.

If the foreclosure actually takes place, one of two things will happen. A third party – often an investor – will consider this a good deal and will be the successful bidder. If that happens, the investor will have to pay off the existing mortgage (or negotiate a deal with the bank). You will not get the back condo fees paid, but the new owner will be required to start paying future fees as soon as he takes title to the unit.

But if no one buys, the association will end up owning the unit. Here’s a little secret that is often misunderstood. The association did not sign any legal documents with the lender – such as a deed of trust or a promissory note – and thus has no legal obligation to the lender. The concept is to force the lender to foreclose on the unit, since the mortgage still exists and remains a cloud on the title. While the association cannot refinance without paying off the mortgage, it certainly can sell it to a third party – who will have to pay off the loan. And the association can use the unit for its own purposes – such as for association business – or it can rent the unit out.

Unfortunately, in today’s market economy, lenders are often reluctant to foreclose on condominium units. Especially in the District, where the lender is obligated to pay the association up to 6 months of back condominium fees. This is known as a “super -lien, which exists in only some 13 states throughout the country. Maryland and Virginia do not have such liens.

There is often a game being played between the lender and the association: who will foreclose first. My suggestion is designed to end this game, and put the burden back on the lender.

There are always risks involved, and before you pursue any collection actions, make sure you are getting good legal advice.