The “6 Month Rule” in Foreclosures on Condominium Units
Owners who fall into foreclosure because they can’t make their mortgage payments are typically also delinquent in payment of assessments to their association. Some associations believe that pursuing an owner for delinquent assessments when that owner is in foreclosure is throwing good money after bad: after all, delinquent assessments may not be collectable because of the very financial problems that put the owner in foreclosure in the first place. However, there are several reasons why aggressively pursuing delinquent assessments is almost always the best course of action – including when a unit is in foreclosure. One of the most important reasons is the so-called “6 Month Rule”.
The 6 Month Rule gives associations the ability to recover up to 6 months’ worth of uncollected past due assessments when a unit is sold in foreclosure, even if the former owner can’t or does not pay them. The 6 Month Rule is found in Section 9(g)(4) of the Illinois Condominium Property Act. Candidly, it is not a well written statute… and trying to decipher it can make your head spin. Following is the full text of the section:
The purchaser of a condominium unit at a judicial foreclosure sale, other than a mortgagee, who takes possession of a condominium unit pursuant to a court order or a purchaser who acquires title from a mortgagee shall have the duty to pay the proportionate share, if any, of the common expenses for the unit which would have become due in the absence of any assessment acceleration during the 6 months immediately preceding institution of an action to enforce the collection of assessments, and which remain unpaid by the owner during whose possession the assessments accrued. If the outstanding assessments are paid at any time during any action to enforce the collection of assessments, the purchaser shall have no obligation to pay any assessments which accrued before he or she acquired title.
Although this section refers specifically to “condominium associations“, the same general 6 Month Rule applies to non-condominium common interest community associations under Section 18.5(g-1) of the Illinois Condominium Property Act.
In much simpler terms, the 6 Month Rule means:
- The purchaser at a foreclosure sale must pay the association the unpaid assessments that came due in the 6 months just before the “institution of an action to enforce collection of assessments” (a bit more on that, below).
- If the purchaser at foreclosure sale is the foreclosing bank, that bank does not have to pay the 6 months of assessments. Instead, whoever subsequently buys the unit from the bank has to pay them. (It seems that Illinois mortgage bankers have a strong lobby in Springfield!)
- The rule does not necessarily limit the association’s recovery to 6 regular monthly assessments. The rule refers to “the proportionate share, if any, of common expenses for the unit”. So far, no court has interpreted this language. It almost certainly includes any special assessments that came due during the 6 month period. It may also include any fines or legal fees that came due during the 6 month period (if the association’s declaration or rules specifically defines such things as additional assessments).
- The last sentence of the section essentially says the obvious: if the past due assessments were paid during the association’s “action to enforce collection”, then the foreclosure purchaser does not have to pay them.
So far, no court has defined what the “institution of an action to enforce collection of assessments” means. Some title companies have interpreted it to mean the filing of a lawsuit. However, many association attorneys believe that the service of a 30 Day Notice is all that is required because that is how a collection action is “instituted” under the Forcible Entry and Detainer Act.
The problem with either interpretation is that it creates a disincentive to promptly pursue delinquencies: because the rule awards assessments accrued during the 6 months immediately preceding the institution of the action to collect, it would seem that an association would be best served to wait until an owner was a full 6 months behind before “instituting” such an action. That is completely contrary to the notion that associations should take prompt action to pursue delinquent accounts – and was probably an unintended effect of the statute.
There is currently legislation pending that would double the 6 months to 12 months. That would be a boon to associations – but hopefully, that same legislation will simplify the rule and fix the problem that it inadvertently caused.
Until then, it is clear that an Association that does nothing to enforce collection of delinquent assessments will have no rights at all under the 6 Month Rule. The bottom line is that associations should – at a minimum – “institute” a collection action for collection of delinquent assessments with a 30 Day Notice.