Five years ago, it was rare to see community associations take title to properties using their lien and collection rights. In years past, it was also rare to see community associations leasing newly acquired units in order to recoup past-due fees and assessments from delinquent owners. In light of the increase in association foreclosure actions however, it has now become commonplace to see associations become unit owners, as bank foreclosures are constantly delayed and properties that could yield significant rental income are sitting idle in foreclosure limbo. Community associations that foreclose their claims of liens and take ownership of residences in their communities should be mindful of these helpful guidelines when considering whether to offer these residences for lease.
Prior to entering into lease agreements with tenants, it is important for community associations to review the provisions of their governing documents in order to determine whether there are any restrictions governing rentals. Once a community association acquires title to a unit or home, the association assumes the responsibilities and obligations in the governing documents that apply to property owners. Therefore, associations that become property owners are not exempt from complying with the leasing rules and restrictions set forth in the governing documents. Community associations should be careful to follow the leasing restrictions promulgated for property owners in order to avoid challenges from owners alleging selective enforcement. If, for example, the community association has a tenant approval process that includes a background check, application, screening fee and common-area security deposit, the community association should follow and document each and every step in the screening process prior to approving and entering into a lease agreement with a prospective tenant.
Community associations should also work with experienced legal counsel who is able to draft a lease agreement that incorporates sufficient protections for the association in the lease transaction. For instance, if an association intends to lease property that is subject to a pending lender foreclosure or a superior mortgage lien, the lease agreement for the property should disclose the superior lien interest. The lease agreement should also include releases of liability in order to protect the community association from legal action by the tenant in the event the lender foreclosures its superior lien and the tenant is required to vacate the residence. Although the “Federal Protecting Tenants at Foreclosure Act” provides that foreclosing lenders must give tenants at least 90 days prior notice if the lender intends to terminate the tenancy once it takes possession of the property, an association could be exposed to liability if the potential foreclosure is not disclosed to the tenant and proper safeguards are not in place in the lease agreement to protect the association’s interests.
The lease agreement should also include provisions addressing tax certificates that may be issued for outstanding property taxes. Since governmental tax liens are superior to community association liens, these tax liens are not extinguished by association foreclosure actions. Although a community association is not liable for delinquent taxes that accrue prior to the association acquiring title to the property, the unpaid property taxes could lead to tax certificates being issued and sold through tax sales or auctions. If the tax certificate is not redeemed within two (2) years after it is issued (i.e., satisfactions of all delinquent taxes, including interest and costs), the purchaser of the tax certificate can apply for a tax deed to the property. Once a tax deed is issued, the grantee of the tax deed is entitled to the immediate possession of the property, and the tenant will most likely be required to vacate the residence. Therefore, it is essential that the terms of the lease agreement also incorporate adequate disclosures to the tenant and provisions to protect the community association in the event of a tax sale.
It is also important for community associations to maintain adequate property and casualty insurance for the residences that the association intends to lease. Community association boards should consult the association’s insurance agent in order to ensure that the association has a landlord insurance policy or some other level of insurance coverage to protect it against damages to the improvements within the residence, personal injuries that may occur within the residence, and damages and claims arising due to the acts or omissions of the tenant. Community associations leasing properties should also require that their tenants maintain renter’s insurance policies, and that the association is named as an additional insured and certificate holder on the tenant’s policy. Furthermore, evidence of the tenant’s insurance should be kept as part of the community association’s records.
Community associations should be very aggressive in their approach to using their lien and foreclosure remedies to take title to properties and rent them in order to recover past-due fees and assessments. By using these guidelines and working with experienced counsel to develop and negotiate the lease agreements, associations can effectively lease these residences in order to help to recover from the foreclosure crisis.