After a foreclosure sale, who pays special assessment?
Q. A unit in our condominium association was sold at foreclosure sale. Our association has an ongoing special assessment, and the board is not sure whether future payments of the special assessment for the unit were extinguished or are payable by the buyer of the foreclosed unit.
A. It depends on several factors. The most important factor is the precise method and language the Board used when they adopted and implemented the special assessment. Remember, payment of regular and special assessments is secured by two legal obligations: One, the unit owner(s) personal agreement to pay the association regular and special assessments; and two, the Association’s lien against the unit which secures the owner’s promise to pay the regular and special assessments. Both of these obligations automatically start when a unit owner purchases or receives title to a condominium unit. A lender’s foreclosure sale of a condominium unit typically extinguishes most of the association’s lien (but not the owner’s personal obligation) for regular and special assessments that are due as of the foreclosure sale date. However, if a special assessment is going to be collected in installments, it is absolutely critical that the Board’s resolution adopting the special assessment and describing the payment terms are extremely clear and well drafted. A poorly drafted special assessment resolution can result in the possible extinguishment of special assessment installments due after the foreclosure sale (even if there is a new owner). A well drafted, proper resolution will preserve the association’s lien for and ability to collect future installments of a special assessment after the date of a foreclosure. Obviously, the drafting and adoption of special assessment resolutions is not a “do it yourself” project and a condominium board should consult with their association’s legal counsel before considering a special assessment.
Q. Our condominium association board wants to borrow money from a bank to pay for a large-scale repair and replacement project. The association, however, does not own any real estate for which they can provide a mortgage to secure a bank loan. What sort of collateral will the bank request or require?
A. Condominium associations have the legal authority to use their current cash and future cash receipts as collateral for a bank loan. Under the Illinois Condominium Property Act, the board can pledge current deposits and/or the association’s right to future income from assessments or other sources in order to secure a bank loan, unless the governing documents state otherwise. The bank’s right to receive the collateral (future regular or special assessments) is only triggered if the association defaults on the loan. Depending on the precise language in an association’s governing documents, approval by 2/3 of the owners may be required if the board proposes to pledge all or substantially all of the assets of the association as collateral for a loan.
Q. I live in a 50-unit condominium association and our property manager has signature authority on our association’s bank accounts. Is this normal?
A. It is customary for a property manager to have signature authority on an association’s operating account. This is often necessary for management to pay the association’s expenses. However, the manager should not have sole signature authority on an operating account. That is, a board member or board members should also have signature authority. In addition, a board should consider requiring that checks over a designated dollar amount require dual signatures, one of which should be a board member. The association’s contract with the manager or management company should explicitly state this requirement. Seldom should a manager have signature authority on an association’s reserve account. Moreover, the association’s bank should be immediately notified whenever there is a change in an authorized signer on any association account.
• Matthew Moodhe is an attorney with Kovitz Shifrin Nesbit in the Chicago suburbs. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.