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November 1, 1994 MEMORANDUM TO CLIENTS
WHAT TO DO WITH FORECLOSED PROPERTY? Many association leaders wonder what to do with property once they lien for past due assessments, foreclose and take title. Though rarely does an assessment collection result in a foreclosure, two statutes, one new, one revised, may affect decision making. For most associations the laws' changes will not alter what usually is the most prudent choice: to lien, foreclose, and then attempt to rent or sell the property; however, in a few instances an association may need to examine the situation further. The first law, Florida Statutes §697.07 is intended to affect cash flow through an assignment of rents. Most associations seek to rent or sell foreclosed property if the Association's "governing documents" authorize the transactions. Although renting or selling the property may sound like a good idea, problems can arise if the property is subject to a mortgage which has an "assignment of rents" clause, or if the association undertakes a regular business in renting or selling foreclosed property. Generally a mortgage's assignment of rents clause provides that all rents and profits, including monies from a sale, generated by the property shall be assigned to the mortgage holder upon the mortgagor's (the property owner who gave the mortgage) default of mortgage obligations. The most usual event causing a default triggering an assignment of rents is failure to pay the mortgage's installment payments. Revisions to Florida Statutes §697.07 were recently adopted to ensure the enforceability of a mortgage holder's rights to rents and proceeds. Florida Statutes §697.07 is relatively straight forward. It provides that a mortgage's assignment of rents clause shall be effective upon recording the mortgage's. The assignment is then enforceable upon the mortgagor's default and the written demand for the rents by the mortgage holder to the mortgagor. In a foreclosure action a mortgage holder can obtain an expedited hearing to secure rents. While the law does not specify notice of an assignment to an association, at least one lender has sought rents from an association. A court may interpret the law to require an association to deposit rents into the court registry. However, a mortgage holder's right to rents is not absolute. Notably, reasonable expenses concerning the property may be paid from the rents, presumably including assessments. Even as amended to assist mortgage holders, the statute's language does not eviscerate an association's rights. The statute clearly provides that the assignment cannot alter existing lien rights. It would be equitable for the courts to determine that assessments are a reasonable expense to protect, preserve and operate the property to be paid from the rents. Thus, although an association may not be entitled to keep the full amount of the rents, an association may be entitled to collect the monthly assessments, and perhaps additional funds as a managing agent for the property. Also, many lenders do not exercise their rights under an assignment of rents clause. Lenders and property owners are eagerly awaiting for decisions from the appellate courts interpreting the law. The second law, recently adopted as Chapter 94-288 is entitled "Crimes - Equity Skimming". This law, not yet assigned a statute number, appears intended to discourage individuals who intend to defraud destitute property owners by purchasing property subject to a defaulted mortgage, and renting the property but not paying the mortgage. Apparently the purchaser would promise the seller that the purchaser would pay the mortgage, but did not pay, leaving the seller with liability to the mortgage holder. The law applies to those who purchase two or more family dwellings in default in a three year period. While it is yet to be interpreted by courts, this law should not affect many associations. First, most associations do not have to purchase delinquent property. Second, association purchases are usually judicial sales in which the property owners rights are protected to the extent possible by law. Third, most associations do not know the status of a property's mortgage and would not have fraudulent intent. HOW MANY DIRECTORS?
As elections approach, many corporations ask how does a corporation, such as an association, determine how many directors are to serve? Usually the answer is found in the corporations Articles of Incorporation or Bylaws. Sometimes, the Articles and Bylaws are silent. If the documents are silent, then reference must be made to the Florida Not-For-Profit Corporations Act. Specifically, §617.0803 Fla. Stat. (1993), provides in pertinent part as follows:
(1) A board of directors must consist of three or more individuals, with the number specified in or fixed in accordance with the articles of incorporation or the bylaws. Generally corporate power is held by the directors; thus, if the Articles of Incorporation and Bylaws are silent, then the directors make the decision. Homeowners associations provide an exception. The Florida Not-For-Profit Corporation's Act specifically dealing with homeowners association voting and elections, §(617.306(1) Fla. Stat. (1992 Supp.), provides in pertinent part: Unless otherwise provided in this chapter or in the articles of incorporation or bylaws, decisions shall be made by a majority of the voting interests represented at a meeting at which a quorum is present. Thus, if a homeowners association's articles are silent, then the number shall be set by the members. NEW STAFF
We are pleased to announce that Patricia Schaefer had joined the firm's staff. Patricia will assist the firm's attorneys concerning assessment collection efforts. Before working with the firm, Patricia was a loan processor and thus knowledgeable about financial transactions and financing requirements, helpful information when processing assessment claims. If you call or stop by the firm's West Palm Beach office, then please say hello to Patricia.
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