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The “6 Month Rule” in Foreclosures on Condominium Units

By: Daniel Wolf | Posted: 10/29/13 | Filed In: Assessments, Associations, Collections, Common Interest Community, Condominium, Foreclosure

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.

 


Is it Worth Suing an Owner for Assessements if his Unit is in Foreclosure?

By: Daniel Wolf | Posted: 10/24/13 | Filed In: Assessments, Associations, Common Interest Community, Condominium, Foreclosure

For a number of reasons, the answer is usually yes!

An owner whose unit is in foreclosure because of an arrearage in mortgage payments is more often than not also delinquent in payment assessments to the association.  Owners facing the inevitable loss of their home in foreclosure frequently decide not to pay assessments because they assume (wrongly, as you will see) that once they lose the house to the bank, their obligation to the Association will simply ‘go away’.   Ironically, associations are often reluctant to bring suit for assessments against an owner in foreclosure for the very same reason:  they assume (also wrongly) that once the foreclosure is completed and the owner is gone, they simply lose out on the assessments.

The erroneous belief that losing a house to foreclosure wipes out the obligation to pay assessments probably comes from a misunderstanding of the difference between an owner’s personal obligation to pay assessments vs. the association’s lien for unpaid assessments.  In short:

An owner’s personal obligation to pay assessments arises from the terms of the association’s Declaration.  Nearly all Declarations state that an owner must pay his proportionate share of the association’s common expenses (i.e. assessments) on regular basis – usually monthly, but sometimes semi-annually or yearly.  The Declaration is really a form of contract between each owner and the association – if the owner breaches the contract by not paying the required assessments, then the association can sue to recover those unpaid assessments.

An association’s lien for unpaid assessments also arises from the terms of the association’s Declaration.  Nearly all Declarations state that the association has an automatic lien on a delinquent owner’s unit to the extent of any unpaid assessments.  The association’s lien is an encumbrance on the owner’s property just like a mortgage – so long as there is a lien for unpaid assessments, the owner can not convey “clean” title (for example:  when an owner sells his unit, he must pay off all past due assessments just the same way as he must pay off his mortgage).  In most cases, the association’s lien is “junior” to a bank’s mortgage lien.

In the majority of cases involving residential property, a foreclosure sale extinguishes – or “wipes out” – junior liens, including an association’s lien for unpaid assessments.   (There are exceptions – protection of an association’s lien in foreclosure is the topic of a separate future** article).

Here is the important thing to know:   wiping out the association’s lien for unpaid assessments does not wipe out the owner’s personal obligation to pay assessments!  They are two completely separate things.  Why is this so important?  Because with that bit of knowledge, you can understand the many important reasons it makes sense for an association to aggressively pursue delinquent assessments even if there is a foreclosure pending:

  • Pursuing delinquent assessments triggers the association’s rights under the “6 month rule“.
  • The association can get a money judgment that remains enforceable against the owner even after foreclosure.   If the association obtains a judgment for unpaid assessments, then it can enforce that judgment long after the foreclosure is over by garnishing the (former) owner’s wages, bank accounts or other assets.
  • Doing so fulfills the fiduciary duty that each director has to the association to pursue assessments.   The foreclosure process may take many months or even years.  The association’s directors would be remiss to sit idly by doing nothing while assessments continue to accrue.  And, some foreclosure cases get resolved through refinancing or loan modification – in which case the association is looking at an owner with substantial accrued arrearages.