Florida homeowners’ associations (or HOAs, for short) may have difficulty in collecting past-due assessments from mortgage holders, based on authority from a recent ruling by the Florida Second District Court of Appeals. In Coral Lakes Community Association, Inc. v. Busey Bank, N.A., et. al., the Second District affirmed the lower Court’s summary judgment in favor of the bank, ultimately holding that the bank did not have to pay the Association for any portion of the prior owner’s delinquency.
As of July 1, 2008, Florida law provides that when a first mortgagee acquires title to a unit in a homeowners’ association, whether by foreclosure or by deed in lieu of foreclosure, the first mortgagee’s responsibility to the association for unpaid assessments that became due before the mortgagee acquired title are limited to the lesser of: (a) the unpaid common expenses and regular periodic or special assessments that came due during the 12 months immediately preceding the acquisition of title, and were not paid; or (b) one percent of the original mortgage debt. (See section 720.3085 of the Florida Statutes.)
However, in Coral Lakes, the Association’s Declaration provided that anyone obtaining title to a lot pursuant to the foreclosure of a first mortgage, or where a first mortgage holder accepts a deed in lieu of foreclosure, such person acquiring title would not be liable to the Association for any money due the Association by the prior owner, which became due prior to acquisition of title, unless the payment of such funds was secured by a lien that was recorded prior to the recording of the foreclosed or underlying mortgage. In its opinion, the Second District opined that this provision was ”…likely added to the Declaration to induce lenders to aid homeowners in purchasing property in the community by awarding them priority over the HOA’s claims for unpaid assessments.” The homeowners executed the note and mortgage in favor of Busey in May of 2006, prior to the 2008 change to F.S. 720.3085.
The only disputed issue at summary judgment was whether F.S. 720.3085 applied to the Bank under the circumstances, or whether the Bank was excused from paying the unpaid assessments that had accrued pursuant to the terms of the Declaration.
In affirming the lower Court’s summary judgment in favor of the Bank, the Second District held
…that because of the Declaration’s plain and unambiguous language subordinating any claim for unpaid HOA assessments to a first mortgagee’s claim upon foreclosure or deed in lieu of foreclosure, it controls and absolves the Bank, as first mortgagee, from liability for any assessments accruing before it acquires the parcel.
Citing to a 2006 Second District case, the Court further noted that “[f]irst mortgagees in this community, although not parties to the Declaration that is the contract between the HOA and its members, are clearly third-party beneficiaries of this contract.”
What does this mean for Florida HOAs?
The Second District’s decision appears to have been solely focused on whether the statutory change in F.S. 720.3085 could operate to defeat clear and unambiguous language contained in a previously-recorded declaration (i.e. a “…prior, established contractual relationship.”) However, the Court admittedly did not address the issue of whether, in amending F.S. 720.3085, the legislation effectively rewrote the Association’s Declaration. This, the Court commented, “…was not the basis of the trial court’s summary judgment.” At a minimum, Florida HOAs should closely examine their governing documents to see what they currently provide, and to determine if changes are possible and advisable, and what effect any changes would possibly have.
