Subordination of Mortgages

Jul 2, 2015 by in Mortgage Foreclosure

An Appeals Court decision in the Fourth District Court (Palm Beach County) on May 27, 2015, abbreviated “Pudlit v. Westwood Gardens HOA” (Pudlit), has concluded that the Declaration of Covenants and Restrictions (DCR) controls the ability of an association to collect past due assessments after a mortgage foreclosure sale, despite the clear language of Florida Statute 720.3085. Third party purchasers at a judicial sale are not required to pay any past due assessments, if the association documents contain contrary language. This will apply to associations whose documents relieve any purchaser, not just the first mortgage holder, from any liability for past due assessments. The reasoning for the decision rests on the constitutional prohibition against retroactive application of a statute that impairs a contract; in this case, a mortgage. The language of F.S. 720.3085 cannot be relied upon to determine liability for past due assessments.

Without explaining the legalese of the Pudlit decision, each association’s particular mortgage subordination clause in the DCR must be carefully reviewed before making a demand for any past due assessments. There is no question that after the sale the title holder, including banks, must pay assessments as they come due. Condominiums are also affected, but the “Safe Harbor” under F.S. 718.116 has been in place since 1992. That statute was not under review in Pudlit.

Why did this happen seven years after F.S. 720.3085 was first enacted? In my opinion, greed on the part of some association’s counsel brought this issue to a head.  There certainly has been more kickback recently from counsel for third party purchasers, primarily over attorney fees, but also over high delinquent balances. My office has successfully negotiated with lender and REO attorneys to quickly settle accounts. Other attorneys failed to negotiate or review DCR and insisted on full liability when making a demand on the new owner (whether the first mortgage holder, junior lienholders, and third parties) after a mortgage foreclosure sale.  Differing opinions on the interpretation of F.S. 720.3085 also caused confusion of the collection of past due assessments among association attorneys.

So now what do HOAs do? The good news is that mortgage foreclosures are slowly becoming less of a problem, as property values rise and the severely underwater properties have been foreclosed. Tighter lending practices should also lessen future mortgage foreclosures. However, to take a proactive approach, associations should consider an amendment to their DCR specifically incorporating the language of F.S. 720.3085. Any amendment will not affect current mortgages, but new mortgages will be subject to the amended language of a properly and tightly drafted subordination clause. My office has associated with general counsel to assist in amending DCR for those associations interested in doing so. To date, not a single association client I represent in collections has been sued for collecting unlawful amounts.  We will continue to diligently review all DCRs to ensure only lawful demands are made on new owners.

In conclusion, I want my clients, both management and individual associations, to understand that I have maintained that F.S. 720.3085 was not an impairment of contract based on the legislative history and intent of the statute. Of course, in hindsight, relying on Florida’s legislative intent and meaning is a losing proposition. While my office has been able to collect both the safe harbor amount from banks, and all past due assessments from third party purchasers, the Pudlit case has now made it clear that the DCR language controls, and not the statute.

Please feel free to call on any of our attorneys to discuss this memo, ask questions or to prepare a plan going forward.


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