Purchasing a foreclosure or REO property?

Purchasing a foreclosure or REO property: When Association’s demand that you pay six months’ worth of expenses, do you have to?

            Under what circumstances and to what extent are purchasers of a condominium unit at a foreclosure sale or from a mortgagee liable to an association for unpaid assessments? The Condominium Property Act is ambiguous on this point.  

            Associations, unsurprisingly have defined “common expenses” to include assessments, fines, late fees, court costs and attorney fees. To be eligible to demand such “common expenses” according to the statute, the association must show that it has “instituted…an action to enforce the collection of assessments.” 

            However, the majority of the evidence suggests that instituting an action should require an official filing with a court. According to the Attorneys’ Title Guaranty Fund (“ATG”): “First, the next section of the statute provides separately for recording liens and actions to enforce them. 765 ILCS 605/9(h). That section allows the condo association or any unit owner to record notice of the lien, then separately states that, “upon the recording of such notice the lien may be foreclosed by an action brought in the name of the board of managers in the same manner as a mortgage of real property.” Thus, not only is recording of a lien insufficient to constitute an action, but the legislature considers an action to be substantially similar to a foreclosure of a mortgage. This coincides with the “usual legal sense” of the word “action” as “a lawsuit brought in a court; a formal complaint within the jurisdiction of a court of law.” Black’s Law Dictionary, 28 (West, 6th ed. 1990).”[1]

            “Second, although liens automatically perfect under the statute to preserve their priority, the separate discussion of recordation and foreclosure indicates that these liens are unenforceable until those subsequent steps are taken. Additionally, the section goes on to state that the lien will be extinguished if the unpaid fees are paid “at any time during any action toe enforce the collection of assessments” indicating that an action is not finite act like recording a lien, but an ongoing legal proceeding. 765 ILCS 605/9(g)(4).”[2]

            “Third, logically, the action should be a formal court proceeding so that both the rights of the condo association and those of the bank or third party buyer are best protected. If merely demanding payment of past due expenses constituted the action then sending a letter at the end of one month’s delinquency would set the measurement under the statute to the six preceding months. If the unit owner proceeded to not pay expenses, the subsequent months would not be included in the measurement. The Condo association’s proactive effort to recover unpaid expenses would prejudice its right to repayment of six months’ expenses under the statute.”[3]

            “Finally, in the reverse scenario, if a condo association could set a six month period by merely recording a lien, it could seek liens for unpaid expenses without any notice to the bank or buyer. It could easily falsify these private efforts to manipulate which particular six month period would be used to calculate the due expenses. However, if action is considered a court proceeding, the bank or buyer would be protected by the formal and public nature of that proceeding and be properly notified of the existence of the lien.”[4]

            For these reasons, instituting an action means filing a formal court proceeding as suggested by the legislature in the form of a foreclosure of the lien. If no such action is instituted, there is no six month period from which to measure the amount owed by the buyer, so apparently no amount will be due under 765 ILCS 605/9(g)(4).  What does this mean for your client? They may be able to purchase a foreclosed condominium without paying any back assessments or fees.  However, the Illinois House of Representatives and Senate is trying to change this to make every purchaser of a foreclosed condominium pays, even when there are no unpaid assessments. Let’s hope the Governor vetos the new bill. 

[1]  Attorneys' Title Guaranty Fund Inc." Attorneys' Title Guaranty Fund, Inc. N.p., 13 Mar. 12. Web. 14 Feb. 2014.
[2] Id.
[3] Id.
[4] Id.

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