This article is reprinted with permission from Law360.
First mortgage lenders acquiring title to collateral consisting of condominium units or homes in a homeowners community are afforded protection against assessment liability under both the Florida Condominium Act (Chapter 718 of Florida Statutes) and the Homeowners' Association Act (Chapter 720 of Florida Statutes).
This protection, in the form of a cap on delinquent assessment liability, is commonly referred to as the "safe harbor." Currently, both statutes limit a first mortgage lender's liability to the lesser of 12 months of unpaid assessments for the period immediately prior to the acquisition of title or 1 percent of the loan amount (718.116(1)(b)(1)(a) and 720.3085(2)(c)(1) of Florida Statutes).
Real estate lawyers are generally familiar with the safe harbor, but most litigators are not, which has, in many cases, caused the loss of the liability limitation the safe harbor provides. The discussion below summarizes the most likely ways the safe harbor may be lost and raises other issues relevant to lenders operating in the condominium or homeowners arena.
Failure to Join the Association
Both the Condominium Act and the HOA Act require that the association governing the project be named as a defendant in a first mortgage lender's foreclosure action. While normally an owner delinquent in mortgage payments will also be delinquent in payments due to the association, if the association has not filed a lien against the delinquent property, the title report showing the parties who have lien claims may not indicate the association.
In such case, the foreclosing attorney may fail to name the association. If the foreclosure action involves condominium assessment liens, then the omission may be corrected before the foreclosure judgment by adding the association as a defendant prior to completion of the action, otherwise the safe harbor will be lost. If the lien arises from nonpayment of HOA assessments, it does not appear there is any way to correct the omission of the association as a defendant in the initially filed complaint without the loss of safe harbor.
Failure to Pay Safe Harbor Amount
The Condominium Act provides that a first mortgage lender taking title to a unit through foreclosure must pay the safe harbor amount, typically the last 12 months' worth of assessments, within 30 days of taking title. It is likely that if the payment is not made within this 30-day period, the limitation of liability will be lost, although there are no reported cases on this issue.
Assignment of Foreclosure Judgment or Bid
Foreclosing lenders expecting to be acquiring title as a result of the foreclosure typically do not want to take title in their own names in order to shield themselves from property owner liability, such as environmental or negligence claims, which may be asserted against an owner. Instead, they typically form a wholly owned entity to take title.
Courts have narrowly construed the limitation on the availability of the safe harbor, which runs under the statutes to only "first mortgagees and their successors and assigns." They have concluded that any party taking the interest of the first mortgagee after a judgment has been rendered cannot be a "successor or assign" of a mortgagee since no mortgage exists after a foreclosure judgment.
The judgment has the effect of extinguishing the first mortgage. Therefore, once the mortgage has been extinguished by obtaining a foreclosure judgment, any party, even one wholly owned by the foreclosing lender, taking an assignment of the judgment or the bid at the foreclosure sale, is not entitled to the safe harbor upon their acquisition of title since they did not succeed to ownership of the mortgage. This reasoning makes it imperative that if the holder of the first mortgage intends to acquire title in a separate entity, the mortgage must be assigned to that entity before the foreclosure judgment is obtained.
The safe harbor is specifically limited to holders of a first mortgage on the property covered by either the Condominium Act or the HOA Act. Junior mortgagees are not entitled to any safe harbor and so would be liable for 100 percent of all delinquent assessments upon acquiring title.
Enhanced Safe Harbor
While the current Condominium Act and HOA Act both currently provide for a first mortgagees' liability of up to 12 months' worth of assessments, both statutes have changed over time. The Condominium Act, following 1992 until July 2010, obligated a first mortgagee for only six months' worth of assessments. Similarly, there was no obligation for assessments under the HOA Act until July 2008.
Drafters of condominium and homeowners documents reflected the law in effect at the time the documents became effective. If the association failed to amend its documents as the limits increased, they may reflect a lower limit on assessment liability for a first mortgagee, or, in the case of a homeowners' community, the absence of any liability.
In such cases, the courts have ruled that the association is bound by its governing documents and not the current state of the law. Counsel for the foreclosing first mortgagee should therefore make sure that any payment demanded by the association does not exceed the limitation contained in the governing documents.
Lenders hiring foreclosure counsel for property covered by the Condominium Act or the HOA Act should be cognizant that there are requirements that must be fulfilled in connection with the foreclosure to obtain the benefit of the safe harbor, and the condominium documents should be reviewed for possible additional benefits to the lender. Such lenders should make sure that such counsel are either versed in the requirements of these statutes and the association's governing documents or work with lawyers who are.