Unpaid assessments can create a great deal of stress for an association, leaving both management and boards feeling helpless. However, an association is not helpless. Attorney David Byrne, of Ansell, Grimm & Aaron, PC, shared two recent scenarios where associations were able to recoup monies lost and ensure payment of ongoing assessments, all without breaking the bank, or in this case, the budget, by using creative and smart efforts.
Both circumstances resulted in court cases with outcomes in favor of the associations, noted Byrne. In the first, the association made a deal with a unit owner who had not been paying assessments. Specifically, instead of paying assessments, the debtor assigned, to the association, the unit’s use and occupancy rights. The association thereafter controlled, possessed and rented the unit. Byrne explained that the objective was the generation of funds to offset unpaid assessments, preserve the property values of neighboring units and ensure payment of ongoing, accruing assessments. During this time period, the debtor also stopped paying the mortgage. The lender foreclosed that mortgage; purchasing it for $100 at its own sheriff’s sale. Thereafter, the association demanded that the sheriff’s sale purchaser reimburse it for its unit-related repair costs.
Byrne explained that as part of its attack against the association and its strategy, the lender used two (2) arguments: (i) the association’s possession and use of the unit constituted trespass; and, (ii) the association’s demand that the lender (new owner) reimburse it vis a vis the unit’s repair costs constituted consumer fraud. First, the court dismissed the trespass claim. It found that the association was not a trespasser since the original unit owner’s assignment constituted permission. The court then dismissed the consumer fraud claim. The bank claimed that the association was committing consumer fraud by seeking its reimbursement of the repair costs. Byrne argued, New Jersey’s Consumer Fraud Act is only relevant in relation to the sale of a unit. Since the bank purchased the unit through a sheriff’s sale, since the association had nothing to do with that sale, and since the bank had no idea at that point the association would be seeking reimbursement of repair costs, the court ruled that there could have been no consumer fraud, explained Byrne.
This case should help convince, according to Byrne, associations that if they have consent to possess and rent a unit, they have the right to do so. In such an instance, those associations should not be “bullied” by a lender (whether a bank or a government entity), or a subsequent owner, to the contrary. “An association can use this case to argue against a lender that it is not trespassing when an owner gives it the right to possess the unit because it had consent to enter the property originally,” said Byrne. “This case can also be used to counter any lender’s, or sheriff sale purchaser’s, claim that an association attempt to procure reimbursement of its repair costs somehow violates New Jersey’s Consumer Fraud Act.”
Byrne added that associations have to spend money out of pocket to get such units fixed in order to rent them, generate revenue to protect the owners and preserve the unit at issue to protect the community’s property values. “Unless they recover dollars through the rental process sufficient to offset repair costs, they may be looking for the new owner to reimburse these costs,” he said.
“It’s important for both property managers and board members to know they have rights with respect to units that are in foreclosure that they have been renting and have had to fix. They shouldn’t just assume that a bank or a government entity has power to refuse their demands,” noted Byrne.
In the second case, the owner was delinquent with respect to both assessments and her mortgage. To resolve her assessment-related delinquency, she granted, permanently, to the association, the unit’s use and occupy rights. This agreement allowed the association to rent the unit indefinitely. Further, it allowed the association to keep all money generated by doing so, Byrne said. Since the association’s rights were not connected with the sums due from the owner, the association was free to enjoy the rental proceeds as long as possible. As was often the case then (and sometimes now), the lender did not properly and efficiently process and finish its foreclosure. According to Byrne, by the time that the bank finished the foreclosure, the association had received over $60,000 in rental payments as a result of this strategy.
After learning of the amounts enjoyed by her neighbors and community, the debtor claimed that the agreement was unfair. She argued that the association should not have been able to keep any of the money in excess of what she had owed. The court, in response, ruled that the agreement was in fact fair. By virtue of the agreement, the association released the debtor from her obligation to pay back money owed as well as ever pay assessments again. The association spent its own money to fix the unit and took a risk by freeing the owner from the obligation to pay assessments going forward, Byrne explained.
He added that the association was taking a risk by releasing the debtor of all liability because the bank’s foreclosure could have gone quickly. If it had finished quickly, the association may not have been able to rent the unit long enough to have made the release of the debtor a good idea. It may not have been able to recover all of the money it was owed. “When you tell an owner, ‘you never have to pay again,’ it’s a risk,” said Byrne. “In reality though, if the owner has no money anyway, that association is risking nothing because that debtor is likely never going to pay, even if further legal action is pursued.”
In this case, the association was able to rent the unit for much longer than anticipated even after the debt was paid. In the end, the court ruled that the association was entitled to keep all of the money that it generated. The association and its members benefited greatly from this approach. They were able to increase the extent of their building maintenance, while being able to limit assessment increases for two years, said Byrne.
“Managers and board members are often skeptical of my view that an association is allowed to generate revenue beyond the amount of any delinquency,” Byrne said. “Associations need to be confident that it is appropriate to generate money beyond the amounts due and/or accruing. There is absolutely no rule against it. This case reinforces that. No matter what anyone tells you, an association can do this. It need not be skeptical.”
In conclusion, Byrne suggests that boards watch for delinquent assessments and immediately determine whether the units are occupied and by whom — an owner or a non-owner. A strategy should then be developed based on the results of their investigation. There are very strong strategies that can be utilized if the units are empty or occupied by non-owners, Byrne noted. If the board is not informed of these strategies, it will not know what details are relevant and end up using a tired and old strategy that is not likely to be successful (while generating a great deal to the association in the way of legal fees). “Boards should understand that they have rights and viable options. Many times, boards throw their hands up because they think they can’t do anything, when in reality, it’s the opposite,” Byrne said, adding that associations should consult with their legal counsel for advice.