In today’s lien foreclosure market, most community associations benefit from competitive bidding at their lien foreclosure sale. Since the great recession a cottage industry sprouted of investors competitively bidding at these sales.  Investors then renovate the properties and rent them until the mortgagee completes its own foreclosure action. This is generally a win/win situation as community associations recovered their delinquent assessments, investors made a return on their investments, and a lender’s collateral was rehabilitated and preserved by the new owner and/or tenant instead of sitting vacant and deteriorating.

Proposed legislation is circulating (no formal bill has been filed in the legislature as of yet) that may put an end to this win/win situation. The proposed law would amend Florida Statute §697.07, which currently enables banks to collect rents during the pendency of a mortgage foreclosure lawsuit from tenants who lease from the mortgagor. The current statute is not applicable against non-mortgagor title holders – such as investors taking title at a junior lien holder’s foreclosure sale.

The proposed law would enable banks to collect rents from any tenant, even if the landlord/title holder is not the mortgagor. This means a third-party investor that purchased the property from an association foreclosure sale may be forced to turn over rental income during a mortgage foreclosure. The result will significantly diminish the incentive for third-party investors to bid at lien foreclosure sales, and in turn, the effectiveness of lien foreclosures as a remedy for delinquent assessments.

While the proposed legislative carves out an exception for community associations, that is of little solace. Most community associations prefer not to acquire title and take on the headaches and liabilities of being a landlord. Of greater concern, this exception is conditioned upon the community association “… not contest[ing] or otherwise imped[ing] the foreclosure of the mortgage by the mortgagee.” The proposed legislation fails to define “contest or otherwise impede.” Does this mean that the community association has to waive any and all valid legal defenses that it may have in the action?

If this legislation is passed, community associations should expect to feel the impact at the lien foreclosure sale. Investors will have little incentive to bid if their projected rental income can be intercepted. As a result, community associations will most likely end up with the burden of renting properties, with all the expenses, obligations and liabilities that come with becoming a landlord. Industry professionals should prepare to push back should a bill be filed proposing this legislation.