Robert L. Tankel, P.A.

The process by which communities go through the collection of assessments is more important than ever. The recent mortgage meltdown, coupled with massive speculation in real estate, has caused a crisis in the world banking system, and, on matters closer to home, community associations are currently more heavily impacted than at any time since the passage of the Condominium Act in 1963.

While homeowner associations have been in existence for a long time, likewise, there is no precedent for the massive rounds of foreclosures or collections that community associations face. Unlike the federal government, community associations cannot run deficits and are often limited to some arbitrary increase in assessments, without a super majority vote prior to approving increases for those who do pay, to make up for the shortfall of those against whom unpaid assessments become uncollectible.

What follows is an outline concerning the rights and remedies of the associations in Florida. This presentation is limited to entities governed by Chapter 720, Florida Statutes, and will be referred to as "HOAs", but he legal themes are applicable to condominiums as well.

There are a number of fundamental misunderstandings that I want to clear up before I discuss the matter in detail, along with a time line. The most fundamental of them is as follows: "I don't want to foreclose, because if I take title, I don't want to have to pay the first mortgage!"

Guess what? If the association forecloses and takes title, it does not have to pay the mortgage!

In order to understand anything about the collections process, I need to understand the nature of the obligation to pay assessments and, for that matter, to pay a lender when property is purchased.

When a homeowner purchases property, the owner signs a note, which is a contract between the lender and the buyer. The contract sets forth, among other things, the amount borrowed, the interest rate, the payment schedule, and a provision that if the note is not paid, the lender may sue the owner and obtain a money judgment against the owner if the note is not paid. That is a contract solely between the owner and the lender. The Association is not a party to that contract, and therefore, there is no promise to pay the lender a nickel.

When an owner borrows money to buy any property, that owner is almost always required to sign a mortgage. That mortgage is a security interest in the property. It is not a promise to pay, it does not involve the Association, nor any other party. It simply puts the World on notice that somebody borrowed money, because usually the note is referred to in the mortgage, and states that in the event that the note is unpaid, a remedy of the lender is to foreclose the mortgage and take title away from whoever may own it.

Similarly, when someone buys property in a condominium or HOA, the Declaration is a contract between the Association and the owner. That Declaration provides that if an owner does not pay assessments, the Association may sue the owner and obtain a money judgment against the owner, or file a lien and foreclose against the owner.

The law and just about every Declaration provides that the mortgage of a first mortgage holder is superior to any claim of lien against the property that may be filed by the condo association or HOA. Why is that? Because no lender would lend, and real estate commerce would come to a halt, if lenders knew that their security interests could be wiped out by the foreclosure of a lien for unpaid assessments.

So, to dispel that notion, the Association is not obligated to pay anybody anything if it forecloses!

What are the steps taken in the collection process?

What is the time line and what are the rights of the parties?

At the beginning, it is vital to note that every association needs to make sure that it follows its own budgeting requirements. Strict compliance with the budget provisions set forth in the Declaration of Condominium or Bylaws, or if an HOA, theGoverning Documents and notice requirements of law must be followed to the letter. If there is a mistake made in the adoption of an increase in the budget or a special assessment, that mistake could be fatal to the ability of the Association to collect payment. Courts do not look kindly on associations that do not "dot their i's and cross their t's" because it is a violation of the contract between the owner and the Association.

In the collection process, enforcement of unpaid assessments is enforcement of a contract, and the contract must be followed to the letter or significant issues, including denial of the ability to collect the amount due and the award of prevailing party's attorney fees, can be encountered. What is the moral of the story? Make sure that your assessments, budgets and special assessments are properly noticed, levied, and that proper minutes, notices and records exist to substantiate that.

Since the beginning of the real estate crisis (I believe that we're only about, at most, one-third of the way through, so batten down the hatches), I have developed a much more aggressive posture in the recommended steps that clients take. They are, in no particular order of importance, as follows:

1. Adopt a uniform collection policy. Make it crystal clear that assessments are due on a certain date, that notification of unpaid assessments will be sent by regular mail, within a certain relatively short time period (10 or 15 days) after the due date as a "friendly reminder" and start the formal collection process as soon as allowed under your Documents. I understand that times are hard; however, it is vital that owners in your community are aware that this is one bill they must not ignore.

First of all, no association has more assets than Visa or MasterCard, or just about any other creditor. Moreover, if you don't pay a credit card bill, just about the worst that can happen is that you can get sued and have a money judgment against you. Under Florida law, the holder of a money judgment cannot sell homestead property to satisfy that judgment. However, an association can sell homestead property for unpaid assessments. Many people don't realize that the remedy of the Association can lead to sale of their home on the courthouse steps.

2. In 2007, the legislature modified the steps that associations must follow in order to properly collect unpaid assessments. Essentially, the Legislature added up to about 120 days to the collection process if a matter goes to foreclosure. I don't understand why the Legislature has such sympathy for people who do not pay their obligations, but that is something to take up with your own Legislator. What that means is that it requires you to take formal legal action as soon as possible.

3. The burden on management companies in tracking all of these delinquent owners is severe. They are forced to hire personnel, invest in new computers, software programs, and incur a number of costs in order to keep up with the crushing number of delinquent owners. Perhaps in recognition of this, in 2007, the legislature changed the law so that, as part of the initial letter, "actual costs" incurred by the Association can be recovered as part of the initial demand. I strongly suggest to all of my clients that they discuss this with management in order to authorize imposition of a cost recovery system, so that management can offset its internal costs in providing these additional delinquent tracking services to the associations.

Managers are caught between a rock and a hard place; they must either pass on these increased costs in the form of higher "per door" fees, which means that people who pay their assessments on time will be forced to pay for the costs of keeping track of delinquents, or delinquent owners can pay for the costs that they impose on the management company, allowing it to hold down the "per door" costs to all owners. I believe this is a "no brainer," and I have suggested that every client authorize imposition of this cost.

Explanation of steps in the collection process:

1. The first formal action taken is commonly referred to as the "45-day letter." or in a condo, a "30-day letter"   While this is not required to be sent by a lawyer, the law does provide that, in connection with this letter, the Association may recover legal fees, interest, late fees, and actual costs incurred (HOA's only) in the preparation and sending of the letter. Given the fact that this might be the practice of law, and that most managers and management companies are not set up to handle this type of payment, the vast majority of my clients have authorized management to send the "friendly letter" referred to above, but to have my firm send the initial letter and authorize, as part of the collection policy, management to work with my firm from the inception of the matter to its conclusion.

A practical reason for this is that managers who send their own letters out must then be able to account for the monies collected; the actual costs need to be deducted and distributed to the management company, while the assessment, late fees and interest are disbursed to the Association.

That money is placed in my trust account which, by law, I cannot touch until it clears. At such time as it clears, I disburse the funds. Part of the problem for managers is that they are commingling the Association's money with their own, and can find themselves in a real legal predicament is a person pays, the company disburses, and then the check bounces. All in all, this is a business decision of the Board to make, but I recommend that the initial letter be sent by counsel.

Traditionally, about one-third to two-thirds of the delinquent owners pay, in full, upon receipt of this initial demand letter, or the lien, discussed below.

2. Preparation of the lien, recording, and follow-up demand: If the account remains unpaid, the next step is to prepare a Claim of Lien, along with another 45-day (30 days for a condo) demand letter, and include additional interest, costs, late fees, and attorney fees. That letter must be sent by certified mail, return receipt requested, as well as by regular mail. A Claim of Lien is simply a notice to the World that the Association claims a property interest in the lot subject to the Declaration, and the demand letter warns that if the amounts due are not paid, the Association may either foreclose the Claim of Lien or seek a money judgment against the delinquent owner (more about that later).

Preparation of the Claim of Lien has been held by the Supreme Court of Florida to be the practice of law. When I started practicing law in Tampa Bay 22+ years ago, a number of management companies were actually preparing "mechanic's liens" or some other type of document as an additional service to their clients. At that time, I could not understand why they were doing it. It's the same reason why I do not understand why management companies want to send out the initial 45-day (or 30-day) letter, even though they can recover their costs. It simply didn't make sense to me from an economic viewpoint. Regardless of whether or not it is the practice of law, preparation of a Claim of Lien has certain liabilities that run with it. If the lien is defective, for example, and a complete title search is not prepared and the lien does not properly name the owner, or there is a mistake in the legal description, or it is recorded in the wrong county, or a number of any other matters, management has just opened itself up to liability because the process starts over and no additional monies can be charged or reimbursed for that effort under either the Documents or the statute.

That action never made economic sense to me, and as a result, I have always recommended that lawyers who have malpractice insurance and are held to a certain standard of care when dealing with their clients, take both the liability for the preparation of the collection documents, including the lien, and can charge and collect a fee for that.

As noted above, our historical average for collections being cleared at this point are about two-thirds of the delinquent owners. Given that the two-step process of the initial letter and follow-up Claim of Lien over a 90-day period is somewhat new, I have not broken out the statistics as to what amounts are collected at what point. If anything, the percentage of people paying in full by the end of the deadline outlined in the Claim of Lien and demand letter is down to perhaps 55%. I do not know if this is because people just don't understand that their property can be taken away from them, and they think that the lien will just sit there and rot until they sell or refinance, or if they indeed have no money. I tend to think that it is the former and not the latter. HOA and condo association assessments are relatively small amounts to pay, and there is a misperception on the part of the general public as to what the rights of the Association are.

Enforcement of the lien and the obligation to pay through the courts:

When a delinquent owner has not paid in full after the expiration of the lien demand period, then legal action is required. Several steps must first be taken before a legal action can be filed in court.

First, a completetitle search is obtained. This costs us $200 and I pay for it and advance the cost to the association client.  An analysis must be done on the title report, because the lawyer must sue everyone with an inferior interest in the unit, such as second mortgage holders and judgment holders; otherwise, it will not obtain "clean" title with respect to inferior encumbrances on the property. Additionally, the proper persons need to be named in the suit. Frequently, owners will take title in the name of a trust or a corporation and the Association never gets a copy of the deed. In a legal action, everyone must be named, and their proper name must appear in the body of the lawsuit.

When a Complaint is prepared, the Association seeks two remedies: The first remedy is foreclosure of the lien. This is the remedy that I almost universally seek. This remedy results in the sale of the property on the courthouse steps if the owner (or someone else) does not pay before the lawsuit concludes. Foreclosure is what is known as an action in equity.

The second count of a lawsuit is an action at law, for money damages. I hardly ever ask for money damages, for several reasons. First, a money judgment is not cash in the pocket of the Association. A money judgment must be executed (collected), and substantial additional legal work needs to be done with regard to determining what assets might be available to satisfy the judgment (remember, the lien right is superior to homestead, so a foreclosure can divest the owner of title, even to a homestead property, while enforcement of a money judgment cannot be used to sell homestead property).

Additionally, Florida law gives debtors a number of other exemptions from payment on a judgment, such as head of household wages. Because of this, and because the Association generally must elect its remedies, I choose foreclosure. The property is not going to skip town and the property does not go bankrupt. A judgment which results in sale of the property provides finality to the process.

After the lawsuit is prepared, which is known as a Complaint, it must be filed with the Clerk of Court along with payment of approximately $350.00 for the cost of filing suit. My firm pays this and advances this cost to the Association. A summons for each defendant must be issued, and the Sheriff or a process server must serve the lawsuit on all defendants. The cost of service of process varies, from approximately $20.00 to over $100.00. The lawsuit is served, and although I could seek a Clerk's default after 20 days, I generally wait 30 days because a debtor may take the position that a 30-day period allowed to "dispute" a debt is "overshadowed" by the 20-day Florida Rule of Civil Procedure. In order to comply with the FDCPA and avoid being sued by other community association lawyers, I wait 30 days to file a default.

A default judgment entered by the Clerk will only be issued if the defendant files no papers. Even though a letter written to the Clerk is not known as a "responsive pleading," the Clerk will not issue a default if any paper, no matter how improper or informal, is filed. In the vast majority of situations, no papers are filed, and I obtain a default from the Clerk, about 45-60 days after service of process.

Once a default is entered by the Clerk, it cuts off the ability of the Defendant to file any defenses to the lawsuit.

The next step is filing for a summary judgment. A summary judgment is where I allege that there are no facts in dispute; the owner owes the money and did not pay it. I obtain an affidavit from management or the Association to confirm the amount due and file our motion for summary judgment. I then ask for a hearing, which usually takes about 30 days to get hearing time. At that hearing, the Court almost always rules in favor of the Association, because there are no defenses for failure to pay assessments, and enters a Final Judgment which states that if the amount awarded, including all monies due the Association, interest, costs and legal fees are not paid, a sale will take place on the courthouse steps about 30 to 45 days later. At that point, I must file a notice of the sale in the newspaper.

After the publication, if the debt is not paid, the sale takes place. In order to save on documentary stamp taxes, I start the bidding for the unit at $100.00. I proceed to bid up to the amount of the judgment, and not a dollar more. If the Association is outbid, the high bidder must make payment and the Association will be paid in full, and the high bidder becomes the owner of the unit. If no one outbids the Association, the Association becomes owner of the unit.

At that point, the Association is entitled to possession of the unit, and our Final Judgment reserves the right to obtain a Writ of Possession, which essentially means that the Sheriff can be called to remove the former owner and put their belongings in the street, if necessary. Of course, the goal is to obtain payment, so if the Association takes title, there are a few options available to it, as follows:

1. The Association can rent the unit from month-to-month. Do not buy casualty insurance, as it does not matter if the unit burns down or is damaged by other casualty; the lender will eventually take title and be responsible for the property. I have found that listing the property at http://www.craigslist.org/ with a month-to-month rental, without a security or last month's rent, will result in getting a tenant fairly quickly. If the Association can rent the unit for several months, it should be able to recoup all of its amounts due, as well as reimburse my firm for all fees and costs incurred.

2. The Association can sell the property to someone, recoup some, most or all past due assessments, and start getting ongoing payments from the new owner. 

There are a couple of other nuances involved in the collection process, such as bankruptcy, which is described elsewhere. Every matter is decided on a case-by-case basis, and needs to be analyzed accordingly.

The bottom line is that these are very dangerous and treacherous times for associations, and prompt action needs to be taken in all cases to protect the interests of your community.

Act Quickly, Act Intelligently, Act Cost Effectively!