Purchaser of Property at Tax Sale is not Liable to Condo Associations & HOAs for Unpaid Assessments
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Florida’s Fourth District Court of Appeal issued an opinion in March of 2014 concerning properties governed by an association that are sold at a tax sale. The court, in A to Z Properties, Inc. v. Fairway Palms II Condo. Ass’n, Inc., held that when property with unpaid association assessments is purchased at a tax sale, the purchaser is not liable to the association for those unpaid assessments. No. 4D13-1267 (Fla. 4th DCA 2014). The court’s reasoning is that an assessment lien is extinguished by the issuance of a tax deed. Id. This post will analyze that case, including the ramifications that decision has on Florida’s community associations and what associations can do to avoid finding themselves on the wrong end of this situation.
In 2010, the subject property was purchased at a tax sale by A & Z Properties, Inc. (“A & Z”) for $21,100. When the tax deed was issued to A & Z after the sale, the property had $16,291 in unpaid assessments from the prior unit owners. Two weeks after obtaining the tax deed, A & Z sold the property to another buyer. Four months later the association recorded a claim of lien on the unit for those past-due assessments. The association subsequently filed suit against both A & Z and the new owner, claiming both were “jointly and severally liable” for the unpaid assessments pursuant to Section 718.116(1)(a), Florida Statutes. Id.
Initially, the trial court ruled in favor of the association and held the two defendants jointly owed $16,291 to the association. A & Z appealed, arguing that any amounts owed to the association prior to the tax sale were extinguished by the issuance of the tax deed. On appeal, the appellate court ruled in favor of the defendants, effectively overruling the favorable decision obtained by the association in the trial court. Id.
The appellate court explained that the section of the Florida Statutes governing tax sales and tax deeds makes clear that the issuance of a tax deed extinguishes all other liens or encumbrances on the property. The court identified Section 197.573, Florida Statutes, which provides that “restrictions and covenants shall survive and be enforceable after the issuance of a tax deed . . .” except for “covenants creating any debt or lien against or upon the property.” Fla. Stat. § 197.573(1) & (2). Stated another way, the rules, regulations, covenants and restrictions contained within an association’s governing documents survive a tax deed and remain enforceable against the property, but any debts, or liens constituting a debt, do not survive and become unenforceable. See A & Z Properties, Inc., No. 4D13-1267.
The reasoning for this outcome is that in a tax sale there is no transfer of title, but rather the issuance of a new title through a tax deed. “It is well-settled that acquisition of title by tax deed does not represent a transfer of title but instead constitutes the commencement of a new, original and paramount title.” Id. If there were a transfer of existing title, which occurs in the ordinary sale of real estate or in foreclosure actions, then section 718.116(1)(a), Florida Statutes, would control and the subsequent owner becomes jointly and severally liable with the prior owner for the unpaid assessments. However, as the appellate court further explained, this case involved the issuance of a tax deed, which is does not come attached with any prior liens or encumbrances. See A & Z Properties, Inc., No. 4D13-1267. “Section 718.116(1)(a) does not save liens for unpaid assessments from extinguishment under Chapter 197 when unit owners acquire title by tax deed.” Id.
What can an association do to avoid this from happening to them in the future? The solution is simple: be proactive and address delinquent unit owners and the past-due assessments before they get out of hand. In most Florida counties there is significant time between the issuance of tax certificates for those properties with unpaid property taxes and the eventual issuance of the tax deed from the tax sale. For example, in Duval County, Florida a tax certificate must be held for two years before its holder can apply for the issuance of a tax deed. Concerning the property in the case of A to Z Properties, Inc., how long must have the association ignored the unpaid assessments for the balance to grow to $16,291? Surely the association could have taken action prior to the sale of the tax certificates and the issuance of the tax deed.
The association could have sent its notice of intent to lien and eventually initiated its own foreclosure action at the first sign that past-due assessments were piling up. With the right legal counsel, that foreclosure action could have been completed in approximately 6 to 8 months, enabling the association to rent the unit and collect the rental income. Moreover, after gaining title to the unit through foreclosure, the association could have paid the outstanding taxes owed prior to the issuance of the tax deed, which may have resulted in the association owning the property outright depending upon the status of the original mortgage. While this case stands for the proposition that the issuance of a tax deed extinguishes all prior unpaid assessments, it is also an example of one of the many ways association budgets can be permanently damaged by not proactively taking action against delinquent assessments. To avoid this situation associations must have clear collection policies in place, legal counsel who knows how to utilize the Florida Condominium Act to protect association budgets and timely address delinquent assessments before they get out of control and uncollectable.