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Collection of Assessments from Third-Party Purchaser in Foreclosure Sales – Where Did 2018 Leave Us?

There have been a number of cases that came down in 2018 that further clarified (and muddied) the amounts that can be collected from a third-party purchaser at a judicial foreclosure sale.

Section 9(g)(1) of the Illinois Condominium Property Act (the “Condo Act”), creates a lien in favor of a condominium association when a unit owner fails to pay their assessments.

Section 9(g)(3) of the Condo Act states:

The purchaser of a condominium unit at a judicial foreclosure sale, or a mortgagee who receives title to any unit by deed in lieu of foreclosure or judgment by common law strict foreclosure or otherwise takes possession pursuant to court order under Illinois Mortgage Foreclosure Law, shall have the duty to pay the unit’s proportionate share of the common expenses for the unit assessed from and after the first day of the month after the date of the judicial foreclosure sale, delivery of the deed in lieu of foreclosure, entry of a judgment in common law strict foreclosure, or taking of possession pursuant to such court order.  Such payment  confirms the extinguishment of any lien created of this subsection (g) by virtue of the failure or refusal of a prior unit owner to make payment of common expenses, where the judicial sale has been confirmed by order of the court, a deed in lieu thereof has been accepted by the lender, or a consent judgment has been entered by the court.

Further, Section 9(g)(4) of the Condo Act provides that “[t]he purchaser of a condominium unit at a judicial foreclosure sale, other than a mortgagee…shall have the duty to pay the proportionate share, if any, of the common expenses…during the 6 months immediately preceding institution of an action to enforce the collection of assessments…”

Additionally, Section 9(g)(5) of the Condo Act states:

The notice of sale of a condominium unit under subsection (c) of Section 15-1507 of the Code of Civil Procedure shall state that the purchaser of the unit other than a mortgagee shall pay the assessments and the legal fees required by subdivisions (g)(1) and (g)(4) of Section 9 of this Act. The statement of assessment account issued by the association to a unit owner under subsection (i) of Section 18 of this Act, and the disclosure statement issued to a prospective purchaser under Section 22.1 of this Act, shall state the amount of the assessments and the legal fees, if any, required by subdivisions (g)(1) and (g)(4) of Section 9 of this Act.

Note that there is no “6 month” limitation set forth in Section 9(g)(5) with regard to the legal fees and costs that are owed by the third-party purchaser.

The Illinois Appellate Court in Sylva, LLC v. Baldwin Court Condominium Association, Inc., 2018 IL App (1st) 170520, clarified the meaning of the language of “initiation of an action” found in Section 9(g)(4) of the Act.  The First Appellate Court held that a condominium association does not have to first file a lawsuit against the prior owner for unpaid assessments before it can seek unpaid assessments from the new owner that purchased the unit at a foreclosure sale.  Rather, the Court held that the “institution of an action,” language did not require the Association to first file a lawsuit against the previous owner first before looking to the third-party foreclosure purchaser for the 6 months of unpaid assessments.  The Court reasoned that Section 9(g)(4) imposes an independent obligation on third-party judicial sale purchasers and, once that obligation is breached, a new statutory lien under Section 9(g)(4) arises in favor of the condominium association.  Accordingly, the Court held that there was no reason that a lawsuit against the previous owner should be a prerequisite to collecting from the new owner. The Court further reasoned that requiring an association to first file a lawsuit against the prior unit owner would create needless litigation.  Thus, the filing of a lien or a notice or demand letter to the prior owner is sufficient to trigger the “initiation of an action” language of Section 9(g)(4) such that an association can collection up to 6 months’ of assessments from a third-party judicial sale purchaser.

The Illinois Appellate Court in V&T Investment Corp. v. West Columbia Place Condominium Ass’n, 2018 IL App (1st) 170436, scrutinized Section 9(g)(5) of the Condo Act, among other provisions, and held that because the third-party purchaser “promptly” paid the assessments due after the judicial sale pursuant to Section 9(g)(3) of the Condo Act, the automatic lien created by Section 9(g)(1) was extinguished.  The Court further noted that Section 9(g)(4) makes no mention of legal fees and costs.  Accordingly, the Court held that any legal fees (and presumably costs) associated with the collection of assessments from the prior owner could not be collected from a third-party purchaser.

What can be learned from this?  There are several things that Associations can do to be proactive and protect themselves to ensure they collect the maximum amount when there is a foreclosure.

First, be diligent in collections.  Do not wait for unit owners to rack up substantial delinquent balances before you proceed to collect from them.  Larger balances are harder to collect and less likely to be fully recovered (especially when a foreclosure is involved).

Second, do your research and stay on top of the status of the foreclosure proceeding.  Some foreclosure actions can be quick while others can be drawn out for years.  When a unit owner first becomes delinquent in their assessments, determine the status of the foreclosure action.  If the foreclosure action has just been filed, proceed with collections and attempt to obtain possession of a unit (if not payment in full from the unit owner) and rent out the unit to collect as much of the balance before the bank is granted possession of the unit.  A message that seems to be repeated in all of these cases is that the Association should have (and could have) done more to collect from the prior owner and before the property was sold in foreclosure.

Third, send a demand notice pursuant to statute.  The demand notice is now considered the initiation of an action so that the Association’s rights to collect 6 months of assessments under Section 9(g(4) of the Condo Act are preserved.