Appellate Court Ruling On Claims Of Third Party Purchasers At Lender Foreclosures Likely Harmful To Homeowner Associations

In recent years, legal issues have been raised by third party purchasers at a lender foreclosure sale following the changes in Chapter 720 of Florida Statutes governing homeowners associations, and in particular the provision which makes a new owner liable for a prior owner delinquency in assessments. A large majority of governing documents of homeowners associations contain provisions that exempt any purchaser at a lender foreclosure sale from liability for any prior delinquency on the property. After the changes to Section 720.3085 F.S. in 2007, associations considered such third party purchasers to owe all delinquencies based upon the provisions of the Statute in place at the time these purchasers acquired title to the property and the lower courts have regularly agreed with that conclusion when a challenge was raised. Many such investor-purchasers objected to these claims, suggesting that they should be covered by the exemption in the documents. On May 27, 2015, the Fourth District Court of Appeals answered this question in favor of the position of the third-party purchasers in Pudlit 2 Joint Venture, LLP v. Westwood Gardens Homeowners Association, Inc., Case No. 4D14-1385.

Pudlit 2 Joint Venture, LLP (“Pudlit”) purchased properties within the Westwood Gardens Community from lender foreclosure sales. As many homeowner associations have recently done, the Westwood Association demanded all unpaid assessments which predated the Certificate of Title on the properties, which Pudlit paid “under protest and with full reservation of all rights and remedies,” and then filed a law suit against the Association for a declaratory judgment. Of particular interest in this case was certain particular provisions of their declaration of covenants, which indicated specifically that “the personal obligation for delinquent assessments shall not pass to [a] successor in title unless expressly assumed by [such successor]” and, that in the event of a foreclosure sale, it “shall extinguish the lien of such assessments as to payments thereof which become due prior to such sale or transfer. . .” Pudlit claimed that the effect of these provisions in the declaration wiped out the Westwood claim against them. Westwood claimed that the Statute in place at the time of the foreclosure sale governed their rights and obligations, not the declaration.

The Trial court ruled in favor of the Association, which was appealed here. The Appellate Court reversed in favor of Pudlit, finding that a third party purchaser at a lender foreclosure sale is a “third party beneficiary” to the provisions of the governing documents of the Westwood Association that provided the exemption, notwithstanding the existing Statute on the date Pudlit took title. The Court decided that the Statute crossed the “constitutional” line and impaired the “existing” contract rights of Pudlit, making the Statute unenforceable. The Court further indicated its opinion that the Statute was not retroactive in its intent and, in order for any homeowner association that was in existence prior to the Statute being enacted in 2007 to recover similar claims against a third party purchaser, it must have language in its governing documents that incorporates the changes to the Statute and/or expressly incorporates the provisions of Section 720.3085 F.S. It was the conclusion of the Court that the Declaration of Covenants for the Westwood Gardens Community “expressly creates rights for successors in title,” such as a third party purchaser at a lender foreclosure sale.

The provisions of the governing documents in this case are substantially similar to a large percentage of existing declarations of covenants in Florida. It is recommended to have the association attorney review the current provisions of the governing documents for all homeowners associations and evaluate the exposure of the association to this type of defense and/or claim. To maximize the ability of the association to recover unpaid assessments from third party purchaser at a lender foreclosure sale, amendments to the governing documents should be undertaken by the association as quickly as possible. The amendments that are suggested would minimally include a provision that automatically incorporates changes to Florida Statutes as they are adopted by the Legislature. For greater protection, another amendment can be included which expressly incorporates the provisions of Section 720.3085 F.S., as it may be amended from time to time.