11/15/10: Mortgage Termination: New Hope For Condominiums?
By: Benny L. Kass
Condominium associations face serious financial problems when a unit owner (or owners) stop paying their condo fees. Association budgets are established on a yearly basis, and are based on the assumption that a large percentage of owners will be current with their payments. But as more and more owners are facing financial problems of their own, they opt not only to pay their mortgage but also their condo fees.
A condominium generally has a couple of alternative enforcement mechanisms. They can file a lien against the unit – consistent with applicable State law -, they can accelerate the balance of the yearly assessment and file suit against the owner, or they can foreclose on the unit.
The first two options may not generate any money for the association. Filing a lien will only assure that if and when the unit is sold, the association will be paid. But in today’s market, if the unit is under water, there may be no equity in the property to allow the association to be paid.
A court judgment is often meaningless if the debtor just does not have any money. There is no cash register at the back of the courthouse.
And foreclosure will often end up with the condominium owning the unit, since no one wants to buy and have to pay off the existing large mortgage. The foreclosure by a condominium does not eliminate any first mortgages that may exist against the property.
So, a game of “who will blink first” is played. The mortgage lender does not want to foreclose since it may end up owning the unit -thereby having to pay condo fees, real estate taxes and insurance. And the condo is in the same position.
However, recent developments in Florida may be the solution to this dilemma. It is called “mortgage termination” or “reverse foreclosure”.
Ben Solomon is an attorney with the Association Law Group (ALG), who practices community association law in Florida. Through his firm’s efforts, his association client foreclosed on a Ms. Paez, an owner who was delinquent on her condominium fees. Solomon then filed a lawsuit against Citibank – the lender who held the first mortgage on the Paez unit. The lawsuit basically told the bank “foreclose on the unit or abandon the mortgage”
Solomon’s lawsuit pointed out that the existence of the Citibank’s mortgage was a restraint on alienation – a concept deeply ingrained in our legal system. This means that if a property cannot be sold (i.e. alienated) because of some impediment, and there is no time limit on when the impediment will be removed, a court may determine that the impediment is an unreasonable restraint on the ability of the property owner to sell.
According to the Solomon complaint, since the mortgage exceeded the fair market value of the property, there were no bidders when the condo association foreclosed. Furthermore, according to the complaint filed in court, “no buyer will purchase the property from the Association with an outstanding first mortgage” held by Citibank. This, Solomon told the court, is unreasonable. “Florida courts have consistently held that the rule disfavoring unreasonable restraints on alienation is based on the principle that the free alienability of property promotes economic and commercial development.”
Solomon and his law firm presented alternative positions to the court. First, they asked to court to remove Citibank’s mortgage from the records. Alternatively, the asked the court to force Citibank to foreclose, and in fact the association agreed to waive any and all defenses that could normally be raised against that foreclosure action.
Citi capitulated. It released its mortgage, which allowed the condo association to sell the property for whatever price it could get on the open market. Once a new buyer took title, that new owner would be responsible for paying condo fees and real estate taxes, instead of the association.
Solomon also filed a similar action against HSBC on behalf of another association client. On January 12, 2010, a judge in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, issued an order vesting title in the lender, without its having to go through the procedural steps required in a foreclosure action.
Why is this significant? In the District of Columbia, if a lender forecloses, it has to pay the condominium up to six months prior condominium fees. But if the unit owner has not paid for more than six months, the condo will lose a significant amount of money. In Maryland and Virginia, lenders do not have to pay the association any previous unpaid condo fees.
Accordingly, the Solomon approach forces a lender to “put up or shut up”; start the foreclosure now, or lose your mortgage. “Although this particular legal strategy is for extreme cases,” he said, “it demonstrates there is more associations can be doing to collect past due maintenance assessments from owners and lenders. Associations need to be more aggressive than ever during these difficult economic times, even when traditional collections methods have failed.”
This approach worked successfully in Florida, a state plagued with an unbelievable number of condominium foreclosures. If you are on the board of directors of your association, you should confer with your legal counsel to determine its validity in the Washington metropolitan area.