Community Associations Update - August 2013
Welcome to our special Foreclosure issue, containing quick and handy summaries of what you need to know in Maryland, Virginia, Delaware and Washington DC.
Foreclosure Procedures in Virginia
By: Thomas Mugavero, Esq.
There are two ways to foreclose on a condominium unit in Virginia; each has its own advantages and disadvantages.
Lien
First, a condominium association can file a lien under Va. Code § 55-79.84 for unpaid assessments; at any point within 36 months of the filing of the lien, the association can proceed to foreclosure on that unit. The condominium lien would have priority over any other debts of the unit owner, save for first deeds of trust and real estate tax liens. When the unit is sold, the proceeds would be put towards paying the first deed of trust, any outstanding real estate taxes, then the condominium lien and the costs of foreclosure.
This lien, however, can only capture the last 90 days of unpaid assessments; anything that accrued earlier than that would not be part of the lien, and would not have the priority that the lien enjoys. As a practical matter, therefore, an association would have to be very pro-active in making sure that assessments liens were recorded; otherwise, any historic unpaid assessments would probably not be satisfied upon foreclosure. Note, as well, that while the costs of the foreclosure itself enjoy a certain priority after the sale of the unit, the Association’s costs of collection and attorneys’ fees unrelated to the foreclosure sale do not, and that money would not be recovered.
Judicial Foreclosure
The alternative approach is judicial foreclosure. This can help an Association recover more of the unpaid assessments, but it is a more complex procedure. First, the association must bring a suit against the unit owner for the unpaid assessments; such suit could encompass years of unpaid assessments. In addition, depending upon the provisions in the association’s governing documents, a successful suit could also include an award of attorneys’ fees and costs, which would be rolled into the overall judgment against the unit owner. Once the judgment is entered by the court, the association would have all the methods prescribed by the Virginia Code for collection on the debt, including garnishing the unit owner’s wages and attaching his or her bank accounts. The limitation period for collecting on a judgment lien in Virginia is twenty years.
If those methods fail to satisfy the judgment, the association has the option of filing a circuit court action for a creditor’s bill in equity, essentially asking the Court to order the sale of the property in order to satisfy all existing judgment liens. As with the lien approach, any proceeds of the foreclosure sale would be used first to pay the costs of foreclosure, any outstanding real estate taxes, and any first deed of trust. Only after these claims are satisfied would any remaining assets be put towards satisfaction of the association’s judgment lien.
Conclusion
Under either of these approaches, a few points must be made. First, before any action is taken on foreclosure, the association must do a complete title search, to determine exactly what liens exist on a property and what the outstanding real estate taxes are. The results of that search may well determine whether foreclosure would result in any recovery by the association – obviously, the larger the amount of the first deed of trust and outstanding taxes, the less money would be available for unpaid condominium assessments. Candidly, given the current state of the market, it is unlikely that any foreclosure sale would generate sufficient income to satisfy both a first deed of trust and the unpaid assessments. For that reason, we recommend that foreclosure proceedings be undertaken only as a matter of last resort.
Finally, there are two other potential benefits of a threat of foreclosure that are not strictly monetary. First, the risk of losing one’s home may drive the unit owner to bring his account current, or at least make a substantial payment towards that end. Second, and to the extent that the unit owner was teetering on the brink of bankruptcy, a threat of foreclosure may drive him to file for bankruptcy; in such a circumstance, the plan of reorganization may include payment of all future assessments, at the least.
The D.C. Foreclosure Process
By: Keisha Garner, Esq.
After the "Great Recession" that began in 2008, many individuals have fallen behind on their mortgage payments and/or condominium or homeowners assessments. However, Boards of Directors have a fiduciary duty to their members to ensure the financial stability of their communities, so they may need to consider the option of foreclosing on a unit in order to get a new owner in the property who will pay the assessments.
In the event of a delinquency in assessments, normally the Association will make several attempts to reach the owner requesting that the overdue payments be made. However, under Section 42-1903.13 of the D.C. Condominium Act, Associations have an automatic lien on each unit to secure payment of that unit’s condominium fees. This lien encumbers the title to the unit, in a manner similar to a mortgage, and the lien is good for 3 years from the date on which the assessment or any, became due and payable. The D.C. Condominium Act also gives the Association the power to enforce these liens by foreclosing on the property.
The first step in preparation for foreclosure is obtaining a title report on the property. The title report shows all mortgages, judgments, liens and delinquent taxes on the property. The D.C. Condominium Act establishes a priority of payment for various claims from the proceeds of a foreclosure sale. First in line for payment are the costs of the sale; second are any delinquent taxes; third is the first mortgage; and fourth is the Association’s lien. However, if the first mortgage was recorded after March 7, 1991, the Association has priority over the first mortgage for six months’ worth of assessments. A review of the title report will give the Association an idea of any claims which must be satisfied prior to the Association’s claim and assist the Association in estimating whether there is enough equity in the property to justify a foreclosure sale.
Foreclosure sales in the District of Columbia are held at an auctioneer’s office. The auctioneer also advertises the foreclosure sale. Once a foreclosure date is set, a “Notice of Foreclosure Sale of Condominium Unit for Assessments Due” is filed with the D.C. Recorder of Deeds. A copy of the Notice is forwarded to the owner along with a foreclosure letter and a copy of the newspaper advertisement. These documents must be sent to the owner at least 35 days prior to the scheduled foreclosure sale. These documents place the owner on notice that a date and time have been set to sell the property at auction. Any other lien holder on the property should also receive a copy of the foreclosure letter.
Once the Notice of Foreclosure Sale of Condominium Unit for Assessments Due is filed, the foreclosure sale must be advertised three different times during the 15 days before the sale. The delinquent owner has the right to cure his or her delinquency any time before the sale. However, the delinquent owner is responsible for paying not only the Association’s lien, but also all foreclosure costs.
In response to the foreclosure, some owners file petitions in bankruptcy. If this occurs, the sale must be cancelled, and the Association must attempt to collect the money owed to the Association through the bankruptcy court. If the foreclosure sale is conducted, the auctioneer will sell the property to the highest bidder. After the sale, the proceeds are distributed in accordance with the priority established by District of Columbia law as discussed above. The new owner is now responsible for paying the assessments from the date of the sale forward. In addition, if there are renters in the property, the new owner is responsible for their eviction.
If you have questions about how to proceed with a foreclosure for your Association, please contact our office.
Lien Foreclosure in Maryland
By: Roberto Montesinos, Esq. & Tiffany Releford, Esq.
With assessment collections continuing to be problem for many community associations in Maryland, manager and board members alike are exploring alternative methods for collecting delinquent assessments. Here is a summary of the general process and timetable for the lien foreclosure procedure in Maryland.
The first step is to ensure that the association’s lien filing(s) against the property at issue are updated through the current fiscal year. After that, then order a title report and contact the mortgage lender to obtain payoff information. The mortgage claim is superior to that of the association, and the full amount owed to the lender generally must be paid when the association sells a unit at foreclosure. Therefore, we must ascertain the amount necessary to pay the lender in full. With this information, the board can estimate whether there is enough equity in the property to justify a foreclosure (i.e., whether the sale proceeds will be enough to cover the mortgage, the Association’s lien, and the costs of the foreclosure). This preliminary analysis is critical to perform in order to assess the likelihood of having the property sold at the foreclosure auction. For example, if the analysis reveals that the amount owed on the mortgage is greater than the appraised value of the property, a prospective buyer will almost certainly be deterred from purchasing the property. This is because the property will be sold subject to the mortgage if the amounts of the sale are not sufficient to pay the mortgage off. In this instance, foreclosure would not be advisable.
If the board determines to move forward with foreclosure, we will then draft and send a Notice of Intent to Foreclose. After the Notice is sent, a 45-day notice period must expire before any further action is taken. The Notice explains the owner’s rights with respect to foreclosure of the property and provides a timeframe in which the owner must cure the delinquency in order to avoid foreclosure. A Loss Mitigation application must also accompany the Notice of Intent to Foreclose. This application offers the owner an opportunity to explain the circumstances surrounding the default in payment, and, if the homeowner qualifies, initiates the mediation process.
Under newly revised laws, an owner must be given an opportunity to mediate in certain circumstances. If mediation is not required, the association can immediately move forward with filing a Petition to Foreclose with the Circuit Court for the County where the property is located. The Petition must be served on the homeowner. An Order is typically received within 8 to 10 weeks of filing the Petition. If mediation is required, there will be a delay in the entry of an Order until the mediation process has concluded. Unfortunately, the new laws surrounding loss mitigation and mediation are not well settled and, as a result, receive dissimilar treatment in different counties. Accordingly, there is no set timetable for the length of the mediation process.
Once an Order authorizing foreclosure is received, a bond for the Trustee appointed by the Court must be obtained and the sale scheduled with an auctioneer. The sale must then be advertised for three consecutive weeks in a local newspaper. Notice of the sale also must be given in writing to the delinquent owner and to other lien holders. After these steps have been completed, the actual foreclosure auction is held on the front steps of the Circuit Courthouse.
At the conclusion of the auction, a report of the sale must be made to the Court, and an advertisement of the outcome of the sale must be run in the newspaper. After the advertisement runs, if no objections are filed with the Court, the sale will be ratified. This process takes approximately 3 months.
At the same time that the report of sale is being advertised, a closing is held at a settlement company to transfer title to the successful bidder at the foreclosure sale. An accounting is filed with the Court, showing how the proceeds of the sale were applied. The ratification cannot take place until this accounting has been filed with the Court.
Please note that while law firms initiate many foreclosures, most cases do not make it through the entire process detailed above. In some cases, the owner files a petition in bankruptcy, which stops the foreclosure process. In many other cases, the owner pays the Association all amounts due, including costs and attorney’s fees. In addition, the mortgage holder may come in and satisfy the association’s lien in order to preserve its interest in the property.
If you have questions about how to proceed with a foreclosure for your Association, please contact our office.
Foreclosures by Community Associations in Delaware
By: Chad Toms, Esq.
Under the Delaware Uniform Common Interest Ownership Act (“DUCIOA”), certain community associations are authorized to foreclose liens just like foreclosing a mortgage on real estate. In Delaware, all mortgage foreclosures are by judicial process and typically take more than ten months to complete when initiated by a secured mortgage lender. When a homeowner defaults on a mortgage, a lender or association may begin the foreclosure process with the filing of a complaint in court in the county where the property is located. Once judgment has been granted in the association's favor, the association must first try to recoup the delinquent fees from the homeowner's personal assets (i.e., garnishing wages and attaching personal property). Once those methods have been exhausted and part or all of the judgment remains unpaid, the association, like a mortgage lender, may proceed to foreclosure.
However, community associations may have one important advantage over mortgage lenders: recently, the State of Delaware extended its Mortgage Mediation Program to allow homeowners, at their option, to elect into a mandatory foreclosure mediation process. This takes time and delays the foreclosure timeline.
But it appears that no effort was made to extend the Mortgage Mediation Program to community associations seeking foreclosure for assessments, as assessments do not constitute a mortgage of real estate. Therefore, after getting the judgment and exhausting its ability to get repayment from the owner's personal assets, an association may go directly to sheriff sale. Of course, the proceeds of such a sale will not all go to the association: mortgage lenders, the State and Federal government, and other creditors may all have priority over the association. If the homeowner owes more than the unit is worth, then the primary, but not insignificant, advantage of moving to a foreclosure is the ability to get rid of a problem homeowner, and hopefully bring in a new dues-paying owner.
And of course the association will have to incur legal fees and costs to move through the entire process to get to the sheriff's sale.
Whether an association should move forward with a foreclosure is a judgment call, and each case will turn on its own facts and circumstances. Some factors to consider in making the decision include:
- Equity. Can the equity in the property be accurately determined? If a homeowner lacks equity as a result of a perfected mortgage, often the most a community can recover from a sheriff sale in Delaware is six months of assessments under DUCIOA section 81-316(b).
- Future Assessments. Is the association’s primary goal the collection of past or future assessments? A sale may not result in a recovery of past assessments but may result in transfer of title to a new owner or the lender, making the collection of future assessments timelier.
- Cost. The fees to the prothonotary and sheriff to conduct the sale can be substantial, even before consideration of attorney fees.
- Lien Priority. Where does the association stand in the line of priority and is the association obligated to expend funds at a sheriff sale to satisfy other encumbrances?
- Likely Purchaser at Sale. Who will purchase the property at the sale, if any? Is the association able and willing to take legal title to the property, and be responsible for taxes, utilities and other costs of ownership if no purchaser materializes at the sale? Does the association intend to become a landlord?
The decision to seek foreclosure of a lien should follow only after a careful analysis of the costs and benefits. Legal counsel can provide a detailed analysis to the Board to assist them in making an informed business decision.
If the association believes the benefits of a foreclosure outweigh the costs, it usually takes two to three months for the sheriff to properly advertise and give notice of the sale. The sheriff will post the sale notice on the property and in other public places at least two weeks before the sale date. The notice should include the date, time, and location of the sale, as well as a brief property description and the location of the property. The notice is also delivered to the borrower and other lien holders and published in local newspapers. Typically, the sheriff's sale takes place at the local courthouse or other governmental building. Confirmation of the sale should occur within several months after the actual sale date, and it is the purchaser’s responsibility to provide a deed to the sheriff to execute evidencing transfer of ownership.