Those Pesky Past Due Assessments: When Does A Buyer Pay?
Recently I represented a buyer who was under contract to purchase a bank owned property ("REO" in real estate lingo). The buyer was quite pleased with what he believed was a great deal on a nice suburban Chicago condominium. All was proceeding swiftly toward an easy close when the subject property condominium association disclosed that the buyer would be on the hook for $10,000 in past due assessment charges. As you might imagine, the buyer was shocked. Particularly in light of the fact that the regular monthly assessment was only $50. The buyer's Realtor professed ignorance of the issue. The seller argued that the buyer was liable pursuant to Illinois law. Who was right? Well, as with many real estate legal issues, the answer depends on the particular facts.
Begin the analysis with the law. There is in fact an Illinois law that does under certain situations require a buyer to pay the prior owner's past due assessments and fees. Section 9(g) of the Illinois Condominium Property Act provides:
(4) The purchaser of a condominium unit at a judicial foreclosure sale, other than a mortgagee, who takes possession of a condominium unit pursuant to a court order or a purchaser who acquires title from a mortgagee shall have the duty to pay the proportionate share, if any, of the common expenses for the unit which would have become due in the absence of any assessment acceleration during the 6 months immediately preceding institution of an action to enforce the collection of assessments, and which remain unpaid by the owner during whose possession the assessments accrued. If the outstanding assessments are paid at any time during any action to enforce the collection of assessments, the purchaser shall have no obligation to pay any assessments which accrued before he or she acquired title.
A careful reading of the statute is required to determine if it in fact applies to a particular purchaser. The buyer must be buying from the bank that was the mortgagee (e.g. the foreclosing bank). If the seller is in fact a subsequent purchaser or an investor that purchased at the foreclosure sale, then the law does not apply. In my situation, our seller was indeed the mortgagee that had foreclosed and was now the owner selling the property. The next inquiry is the most critical. The law limits an association’s right to collect to those amounts that accrued “...during the 6 months immediately preceding institution of an action to enforce collection of assessments...” What does this mean? Well, the law requires that the association must have tried to collect what was due from the owner. In fact, the law goes further and requires that the association must have instituted an “action” which has been read to mean that the association must have filed a lawsuit (a joint action forcible entry and detainer or a civil collection) or a counterclaim against the owner in the foreclosure. If this was not done, the inquiry ends there and the association has no right to collect. If an action was indeed filed, that triggers the second part which requires the association to look back six months from the date the action was started. Assessments and fees which fall outside of this window are excluded and cannot be collected.
In my particular case, a close analysis of the assessment ledger revealed only $300 fell within that six period and that the bulk of the money sought by the association was in fact not due. Attorneys fees represented the bulk of the amount claimed due but they were incurred after the commncement of the "action" and thus not due.
Several lessons can be taken from this example. First, never take for fact what an association says without doing your own homework to verify the information provided. Ask for the back-up: the assessnent ledger and documentation of the "action." Most associations are quick to claim money due for six monthly assessment payments when they never did anything to try to collect. Routinely they get paid because of the ignorance of the law. Stand your ground and do your research. Second, make sure buyers are aware of the law at the outset before going under contract. Ask whether there are indeed past due assessments claimed. These charges are required to be disclosed pursuant to paragraph 22.1 of the Illinois Condominium Property Act. Get this disclosure sooner rather than later. Know what the issue is before going under contract and take that into account when setting a price with your buyer. Go in with “eyes wide open.” Finally, even when all else seems lost, negotiate. The seller still wants to sell and the buyer is ready to close on a deal. Use that leverage to negotiate a better deal. In my example, my buyer insisted on paying nothing (even though he was in fact liable for six monthly assessment payments of $50). When he threatened to walk away, the seller caved and agreed to pay the amounts due to the association.
I hope this example is helpful in your own dealings with this issue.
Rusty Payton is an Illinois Realtor and a licensed Illinois real estate attorney with over twenty four years experience in real estate. He may be reached at 773-800-1051.