HOA COLLECTIONS … Fourth DCA Decision Slams HOAs

In a decision by the Fourth District Court of Appeal, Of the State Of Florida Homeowner Associations have been handed another setback regarding HOA collections of past due maintenance fees. On May 27, 2015 the court rendered a decision in the Appeal in Pudlit 2 Joint Venture, LLP v. Westwood Gardens HOA, Inc., Case No. 4D14-1385 that declares that if a delinquent unit is purchased by a subsequent purchaser and the association has this specific language in its governing documents (“the personal obligation for delinquent assessments shall not pass to his successors in title unless expressly assumed by them”),  then the new owner is NOT jointly and severally liable to pay the accrued delinquent fees.

The Fact Pattern:
The case originates from Pudlit 2’s (a subsequent purchaser) purchase of two properties that were in foreclosure in Westwood Gardens. After Pudlit 2 purchased the units and took title, the association made a demand for any unpaid maintenance fees, which would also include those that accrued before Pudlit purchased the properties, and indicated that they would file a claims lien foreclosure, according to the opinion.

Pudlit 2 remitted payment to the association under protest and then filed a legal action seeking damages for breach of declaration and declaratory relief. A trial judge had previously dismissed Pudlit 2’s claims, ruling that the state law (which can be found in720.3085), and not the association’s documents, should govern the dispute. The trial court held that the purchaser at the sale was jointly and severally liable with the previous parcel owner for all unpaid assessments that came due up to the time of transfer of title.” (based on fl. Statute 720.3085). The appeals court reversed that decision in part based on the language in the governing documents that specifically stated “The personal obligation for delinquent assessments shall not pass to his successors in title unless expressly assumed by them.”

The Unintended Consequences And Possible Scenarios For HOAs.
The court also rejected Westwood Gardens’ argument that the state law automatically overrules the association’s documents if a contrary provision is contained in the documents. They found that the association should have amended its governing documents according to the method under the contract if it had wanted to incorporate the state law.

The appeals court also noted that the statute specifically says it is not intended to impair contract rights between homeowners’ associations and their members.
This decision has the unintended consequences of providing owners with bad intentions a way to avoid paying maintenance fees forever. This can have a dramatic effect on HOA Collections.  If a parcel  owner in a HOA with similar language in their governing documents wants to avoid paying maintenance fees, they can easily quit claim deed their unit over to a third party (a wife, a husband, friend, family member or corporate entity) and the ledger is wiped clean. When this happens, the delinquencies begin again and a cycle of pain is created for the good paying owners of an association carrying this non-paying member. While it is true that the association can pursue the old owner for the unpaid fees, before the Pudlit 2 decision these fees were easily collected.

The Lessons Learned
The very first lesson is that when a unit goes delinquent the association needs to jump fast and put the unit in collections with a HOA collections specialist who will deploy a collections solution that will at the very least get the delinquency reported to credit bureaus. Maybe this delinquent unit owner may get away without paying but they should not do so without any personal consequences.

The second lesson is that board members, their managers and attorneys need to read through the governing documents of the association to see how they can be amended to prevent incidents like this from happening. If Westwood Gardens HOA were to amend their documents it would do nothing to prevent this from happening with units that already have owners and mortgages but subsequent owners will not be able to “game the system” in the future.

The third lesson is that “A third party beneficiary to a contract possesses the same constitutional right against the impairment of that contract as the parties to the contract.”  Simply stated that means that a potential purchaser can depend on the governing documents and benefit even before they purchase a property.

To view the decision please go to:

HOA Collections 4th DCA Decision Pudlit 2 v Westwood Gardens

Update June 11 2015

Motion for Rehearing filed by Westwood Gardens yesterday afternoon in the Pudlit 2 case was filed June 10. Stand by.

https://files.acrobat.com/a/preview/402f6430-761b-48af-94b9-5a74c4f1c5be