The effects of the recession on real estate values, and the resulting wave of foreclosures throughout the country, has had a direct and immediate impact on the ability of many condominium councils to collect the assessments necessary to properly operate and maintain their communities. Unit owners who are unable to keep up with their mortgage payments often become delinquent in their fee assessment payments as well. When this happens, the entire association is negatively impacted, because a condominium’s financial viability is entirely dependent upon timely payment of assessments by all unit owners.
Because condominiums cannot operate without full participation of all unit owners in paying their share of the common expenses, the Maryland Condominium Act establishes a procedure in which a council of unit can obtain a lien on a delinquent owner’s unit that is enforceable by foreclosure. However, the current real estate climate has left many associations empty handed in spite of the fact that unpaid condominium fees remain due and are subject to a lien. This happens when the sale of a unit fails to produce sufficient proceeds to satisfy all existing obligations. This can occur when the condominium forecloses on its lien, or when the unit is subject to foreclosure by a mortgage lender. In either case, the resulting sale often produces less than the amount due under the mortgage. This deficiency means that there is nothing left from the sale to satisfy other amounts due on the unit, including unpaid fees and assessments.
It is generally good practice for a condominium council to diligently pursue all of the collection remedies that are available to it in a timely fashion. However, even this may not guarantee that all or any fees will ultimately be collected if the value of the unit has diminished to the point that its sale cannot satisfy all existing obligations.
Pursuing the lien process requires the condominium to incur legal fees and expenses. The first step is to provide the required notice to the delinquent unit owner. Notice of intent to create a lien must be given in accordance with requirements of the Maryland Contract Lien Act. Md. Real Prop. Code Ann. §14-201 et seq. The notice should present a specific and clear identification of the fees that are due, with the dates that payments were due, along with all other charges permitted by the condominium’s declaration or bylaws. These additional charges can include interest, late fees, and reasonable attorney’s fees, all of which should be separately delineated. The notice must also properly identify the condominium and the unit, reference the unit owner’s responsibility for payment of assessments, and state that the unit owner has a right to a hearing.
The notice must be presented by personal delivery to the unit owner or their agent, or by certified or registered mail, return receipt requested, sent to the unit owner’s last know address. If neither of these methods is successful, the notice can be mailed to the unit owner’s last known address, but must also be posted in a conspicuous manner on the door or entrance to the unit. This posting must be performed by the condominium’s agent in the presence of a competent witness.
Once notice has been properly served, there is sometimes an opportunity to reach an agreement to have the overdue amounts paid. However, the current economy has made such resolutions less likely. If there is no agreement, and no payments are made within 30 days after notice has been given, the condominium can then file a lien statement in the county land records. Such a lien is enforceable in the same manner as a mortgage or deed of trust that contain a power of sale at foreclosure.
It should be noted that the delinquent unit owner has the right, within 30 days of receiving the notice of intent to create a lien, to file a complaint in the county circuit court seeking a determination that probable cause exists for the establishment of a lien. In that event, the condominium has the burden of proof to show that a lien should attach, and should file an affidavit confirming the amounts due as stated in the notice, along with any additional amounts that have accumulated since notice was provided. If the court determines that probable cause exists to establish a lien, it will order that the lien be imposed.
Once the statement of lien is recorded, or a lien is imposed by court order, the condominium has a right of foreclosure. However, the condominium’s lien has priority over other liens on the property only from the date the statement is filed. That means that a pre-existing lien, such as a mortgage, have priority to be satisfied first. When the real estate market was rising, the condominium could sell a unit at foreclosure, and the mortgage would be paid, with the balance of the proceeds going to the condominium. Now, however, because of depressed real estate prices, a condominium foreclosing on a unit may find that the sale does not produce enough revenue to satisfy the pre-existing mortgage, let alone return anything to the condominium. Similarly, if the unit is subject to a foreclosure by a mortgage lender, the foreclosure sale may not produce sufficient funds to satisfy the entire mortgage balance, nor leave any funds to pay overdue condominium assessments.
The condominium can sue the unit owner for the deficiency, but the likelihood of collection is often problematic, particularly if the owner has no significant assets or files for bankruptcy. But such suit can result in some recovery by an agreed settlement or the imposition of a judgment that will allow for garnishment of wages and assets.
Due to these factors, a condominium needs to properly consider all circumstances surrounding a delinquent account, including the value of the unit; the likelihood of any recovery against the defaulting unit owner; the existence or likelihood of a foreclosure by a mortgage lender; and the cost to condominium of simply absorbing the debt among all of the remaining unit owners. If a condominium chooses to pursue its entitlement to a lien, it should act promptly. It should also notify any foreclosing lender of the lien and fees due. The lender will become responsible for the payment of condominium fees once it takes title at foreclosure until a new owner purchases the property and the sale is ratified by the court. The condominium should also contact any auditor appointed to oversee a foreclosure sale, and inform them of the condominium’s lien and fees that are due. Sometimes, an agreement can be reached with a mortgage lender as to the payment of some portion of delinquent fees. Sometimes, a sale can even be delayed with the hope that the market will improve. And the condominium should exhaust its remedies with respect to seeking to recover any deficiency from the unit owner. Only by pursuing all of these steps in a timely fashion can a condominium hope to obtain any recovery of unpaid fees in the current real estate market. The alternative is to write-off the debt, in which case all of the condominium owners will bear the expense of the fee delinquencies.
