Thursday, November 15, 2018

Condo Budgets, Assessments And Liens

LAW MATTERS

Florida’s legislature realized the importance of assuring the public that buying a condominium is safe in Florida. The first Condominium Act (Act) was adopted by the legislature in 1963 and has been periodically updated and expanded over the ensuing years.

Association finances have been given a lot of attention. The Act requires associations adopt a budget annually. The budget is divided into two main categories. The portion for general operation includes the cost of operating each year. It includes all expenses incurred by the association. The budget is a calculation of the assessments needed from unit owners to pay all anticipated expenses. The Act provides a list of categories that must be included in the operating budget.

The other section of the annual budget is referred to as reserve accounts. That is a budget for capital expenses and deferred maintenance. The Act mandates that reserves be budgeted for any item for which cost of replacement or deferred maintenance will be more than $10,000 plus roof replacement, building painting and pavement resurfacing without regard to anticipated cost.

The Act mandates that a proposed budget include fully funded reserves. Fully funded reserves means the association will collect enough reserve assessments from unit owners to have enough in the bank to pay for capital expenses and deferred maintenance when required. The proposed budget calculates estimated useful remaining life of an item, estimated cost to repair or replace and the amount of assessments needed each year so that the reserve account will be fully funded when needed. As an alternative, associations are permitted to maintain pooled accounts for two or more required reserves. A pooled account arrangement calculates the total amount that will be required to pay each year and sets assessments at a level so that the amount in reserves is equal to the amount that is expected to be paid out each year. Pooled reserves involve complicated calculations and the association’s accountant is usually involved.

Even in associations where the board adopts a budget, unit owners have the right to amend or reject a budget adopted by the board.

If the owners do not want to pay the level of assessments needed to fully fund both operating and reserve accounts, the owners by majority vote can adopt a budget with less than fully funded reserves. Owners of many associations exercise that right. When the roof needs to be replaced or the building painted, those associations will likely adopt a special assessment to cover the difference between the reserved funds and the actual costs. Special assessments are adopted by the board of directors without unit owner vote.

Some associations are more worried about the unknown. They adopt a budget with a general reserve for unanticipated expenses. A general reserve is actually a contingency account within the operating budget, because it is not allocated for a specific item or items. A contingency fund is the proper way to set aside some extra money for unanticipated operating expenses – not by artificially inflating the various categories. The board of directors has a fiduciary duty to adopt a zero based budget that accurately estimates actual expenses so owners are invoiced their proportionate share of the actual operating and reserves. Florida statutes prohibit invoicing any less frequently than quarterly. Florida statutes also mandate that the owners pay assessments in the same percentage that they own an interest in the common elements in the condominium.

It is important that owners pay assessments when invoiced. With a zero based budget, the association will not have enough money to pay its bills if the owners do not timely pay assessments. Most associations start collection action if payment is not received by deadline. Most associations invoice at least 30 days before the assessment is due and send at least one more notice before collection is pursued.

The association can file suit to collect delinquent assessments at any time. If the association wants to pursue a lien to collect its assessment, the legislature requires jumping through a number of hoops to be sure the unit owner is forewarned.

The Act requires the association provide an owner with at least 30 days written notice of intent to place a lien against the unit. If the owner does not pay within those 30 days, the association may proceed to record a claim of lien in the Public Records of the county where the condominium is located. After recording its lien, the association must provide the owner with another 30 day written notice if it wants to foreclose its lien. Only if the owner fails to make payment during those 30 days may the association foreclose.

That is a lot of protection for an owner who has been sent invoices and failed to pay, but the legislature feels those owners must be protected in case they did not get an invoice or face other problems interfering with payment.

Even though the Act provides protection for owners, it also provides powerful protection for the association. Some owners try to avoid attorney fees, interest and penalties by writing in a letter or the check itself “payment in full,” but paying only the principal of the overdue assessments. The Act provides such restrictions are ineffective and further mandates that the association apply any payment from the owner first to interest, penalties and late charges, then to cost of collection including attorney fees, and only after the foregoing are paid does the remainder get applied to assessments.

A lien for unpaid assessments is valid for one year. The association must file a lawsuit to foreclose the lien during that time or the lien expires. If the association forecloses its lien, the case proceeds much like a mortgage foreclosure, with some extra protection for the association. The Act provides that the association’s lien relates back to the recordation of the Declaration of Condominium. Normally, a lien takes priority based on the time it is recorded. Liens recorded earlier get paid first from proceeds of any foreclosure sale. By making condominium liens relate back to the time the original Declaration was recorded, the Act leaps the lien over other liens, with one exception. That exception is for first mortgages securing a debt for money borrowed to purchase the condominium.

Foreclosing like a mortgage means the association proceeds to a judgment determining the amount due from the owner, which includes interest, late fees, the association’s expenses of foreclosure, attorney’s fees, and assessments accruing prior to judgment. The judgment provides that if the amount is not paid within approximately 30 days, the Clerk will sell the property and pay the proceeds of sale, up to the full amount of the judgment, to the association. Proceeds of sale in excess of the judgment are held by the Clerk and may be available to other lien holders or even the former unit owner. Foreclosure sale transfers title to a new owner.

The Act does a lot to protect condominium owners but balances that by giving the association power of collection through judgment and judicial sale.

William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.

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