CONDOMINIUM UNITS IN FORECLOSURE DURING A RISING REAL ESTATE MARKET
In 2017, Illinois had the fourth highest rate of foreclosure filings in the United States. While the overall number of foreclosures being filed is decreasing, foreclosures continue to present issues for condominium associations throughout the state.
Generally speaking, a mortgage foreclosure of a condominium unit is a straight forward process. When a condominium unit owner fails to pay his or her mortgage, the bank files a lawsuit asking that the condominium unit be sold at public auction and that the funds from the sale be applied to the unpaid mortgage. Over the past decade, it has been a near certainty that a condominium unit sold at foreclosure auction would fetch a price less than what was owed to the bank. While the condominium association was named as a defendant in the foreclosure action, there was typically no need for it to expend time and money participating, as there was no money left over from the foreclosure sale to go towards unpaid common expenses.
Now, however, this is not always the case for condominium associations. Rising home values have resulted in an increasing number of condominium units being sold at foreclosure auction for an amount greater than what the bank is owed. This results in a “surplus,” which is to be used to pay other lien holders, including condominium associations, which have a lien for unpaid common expenses pursuant to Section 9(g)(1) of the Illinois Condominium Property Act and their respective Declaration.
Unfortunately, it’s not always as easy as just asking a court to turn over the surplus funds to the Association. Assuming the condominium association was named as a defendant in the lawsuit (as Section 9(g)(1) of the Illinois Condominium Property Act requires), by the time the association realizes a surplus exists it is likely the association has been held in default for failing to take action once served with the foreclosure suit. Some judges have found that a condominium association that has been held in default is not entitled to recover unpaid common expenses from the surplus funds. Even more frustrating, it is possible these surplus funds will be turned over to the former owner of the condominium unit, despite the fact that this owner failed to pay their proportionate share of the common expenses during their period of ownership!
Beyond preserving its right to collect any surplus funds, there is another reason for a condominium association to strongly consider participating in the foreclosure of a unit. Section 9(g)(4) of the Illinois Condominium Property Act provides that the purchaser of a condominium unit at a foreclosure sale (or, in the event the unit is purchased by the foreclosing bank, the subsequent purchaser) must pay any unpaid common expenses for the unit which became due during the 6 months “immediately preceding institution of an action to enforce the collection of assessments.” In short, while the foreclosure of a condominium unit extinguishes the association’s lien for unpaid common expenses, the association is still able to collect 6 months of unpaid common expenses provided it instituted an action to collect them. One option a condominium association has is to institute their collection action by filing a counter-claim against the owner in the foreclosure case itself. While instituting a collection action may seem onerous, the Illinois Condominium Property Act also affords a condominium association the right to collect the attorney’s fees and costs form this future owner, along with the 6 months of unpaid common expenses.
To summarize, increasing home values are causing a dramatic increase in frequency and amount of surplus funds being available after foreclosure sales. In the event a condominium association fails to appear and file a responsive pleading in the foreclosure, it could be precluded from collecting unpaid common expenses from the surplus finds. Further, and regardless of whether the foreclosure sale results in a surplus, a condominium association is able to collect 6 months of assessments, attorney’s fees, and costs from a future owner, provided that it has instituted an action to collect these unpaid common expenses. This means that, except in limited circumstances, a condominium association should strongly consider filing an appearance and responsive pleading when served with a foreclosure, as doing so will entitle it to recover unpaid common expenses in the event of a surplus, obtain 6 months of assessments, attorneys, fees, and costs from a future owner of the unit, or both.