Monday, July 1, 2013

Florida House Bill 7119 - Who is the "previous owner"?

Governor Scott recently signed House Bill 7119 - Homeowners Associations (HB 7119) into law. One of the key provisions of this bill is that the association is now exempt from the definition of "previous owner" when it come to the "safe harbor."  In a previous post, legislative summary, it mentions that there will be more discussion on what this provision exactly means for associations. Follow the jump to see what impact this will have on homeowners associations across the state, and what impact it wont have?????

Unfortunately, in my opinion, it's not going to help as much as some of the community association lobbyists say it will. Clearly, it's a benefit for associations and the change in the statute in no way makes the homeowners association worse off.  In practice though, the situations where it makes a measurable difference to the association are limited. 

First, what is the change?  HB 7119 amends Fla. Stat. § 720.3085(2)(b) to read: 
"A parcel owner is jointly and severally liable with the previous parcel owner for all unpaid assessments that came due up to the time of transfer of title. This liability is without prejudice to any right the present parcel owner may have to recover any amounts paid by the present owner from the previous owner. For the purposes of this paragraph, the term "previous owner" shall not include an association that acquires title to a delinquent property through foreclosure or by deed in lieu of foreclosure. The present parcel owner's liability for unpaid assessments is limited to any unpaid assessments that accrued before the association acquired title to the delinquent property through foreclosure or by deed in lieu of foreclosure." (the new language is underlined)
Prior to this change, when a homeowners association foreclosed on a parcel, and took title to that parcel, whatever amounts owed the association would be forfeited. Essentially, the association was trading the money it was owed in assessments for title to the property. In situations where the house is in good rental shape and the total amount owed is low, this trade off makes sense for the association. If the house is not rentable, the association paid good money to a lawyer to remove an owner with no chance of generating revenue from the house. Of course, there are often non-financial reasons why an association may want to remove an owner from the community, but unless the house is in good condition, from a pure financial standpoint it rarely makes sense for the association to foreclose.

Keep in mind though in our situation,  when the bank ultimately forecloses on the property the association will have been the "previous owner." So when the association took title to the parcel, it broke into the chain of owners. The association does not owe itself money, so there's nothing for the bank to pay the association.  
So what? The legislature, on the heals of the Aventura Management, LLC v. Spiaggia Ocean Condominium Association decided to make an exception to the definition of "previous owner." Now, the association is exempt from that term.  So when a homeowners association forecloses and takes title the parcel falls into the limbo stage. The association doesn't have to pay itself current assessments, nor does the owner that was foreclosed on continue to have to pay current assessments (they are still on the hook for unpaid assessments while they were owner). The change is that when the bank ultimately forecloses their mortgage and looks to see if they owe money pursuant to Fla. Stat. § 720.3085(2)(c) the association is NOT considered the "previous owner." The "previous owner" would be the owner of the parcel when the association foreclosed. 

Why isn't this a great advantage to associations?  First and foremost, IT DOES NOT APPLY TO CONDOS OR CO-OPS!!!  Condos and Co-ops almost always have higher assessments and therefore larger delinquencies. This change ONLY applies to homeowners associations.  Second, the numbers aren't going to vary much as a result of this change.  Back in 2008, the Florida legislature changed the "safe harbor" requirements for lenders. The liability for assessments went from the lesser of 6 months or 1% of the mortgage amount to 12 months or 1% of the mortgage amount. But banks aren't stupid. I recall hearing, and my experience supports this, that in >80% of the time when safe harbor is applied 1% of the mortgage amount is the lesser of those two. This means that the legislature can raise safe harbor to the lesser of 100 months of assessments or 1% of the mortgage, it doesn't matter. I don't see this changes in statute regarding "previous owners" to be terribly different than that. 

I really can't think of a situation where this changes the decision making process for a homeowners association foreclosing on a parcel.  It certainly might return a few extra dollars to homeowners associations, but nothing significant enough to change the typically analysis of whether to foreclose on the parcel or not.  Banks aren't dumb, and just like in 2008 where the "safe harbor" was increased (but not really), there's a reason why this language wasn't added to Chapters 718 or 719.  

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