What is Safe Harbor?
We frequently throw around the term “Safe Harbor” in our industry, but often forget to explain what it means. We asked our friends at Business Law Group to write an article explaining what it is and how it affects collections. Let us know if you have any questions!
What is Safe Harbor?
By Business Law Group
Collecting delinquent assessments can oftentimes be a straightforward process. When a delinquent first mortgage is thrown into the mix, the situation becomes a lot trickier to navigate.
An Associations ability to collect delinquent assessments from a new owner after transfer of title is governed by Florida Statutes 718.116 and 720.3085. New owners are typically jointly and severally liable for all unpaid assessments (no interest, late fees, legal fees, etc.) that were due up to the transfer of title.
However, the law makes a special exception for banks that take title by foreclosing on a first mortgage or accept a deed in lieu of foreclosure on a first mortgage. The first mortgagee (including its successors, assignees, or anyone who holds the note) will only be liable for the lesser of either assessments that came due in the 12 months preceding the title transfer or 1% of the original mortgage debt. This is a sweetheart deal for banks, allowing them to take title to units with very limited liability. This often puts Associations at a financial disadvantage.
Additionally, it is incredibly important to understand the governing documents of the association and what they say about the liability of first mortgagees. Some Declarations give the first mortgagee no liability as to assessments due before transfer of title in the aforementioned fashion. If the declaration contains no Kaufman or Pudlit language (which specify the Declaration adheres to the Act or statute “as amended from time to time”), the declaration will not update with the statute and this provision will be binding. This is an even worse position for the association to be in.
With the existence of the previously mentioned legal provisions, there is not a lot of incentive for the mortgagees to pursue quick collections. Often times a bank will wait for an upturn in the market until pursuing a collection or even completing a foreclosure.
It is paramount that an Association has an experienced legal team to assess your governing documents and particular circumstances in order create the most profitable game plan for your Association. It is also vital to pursue quick and diligent collections in order to avoid the potential problems created by first mortgagees.