Unpaid Condominium Assessments - Who’s on the Hook?

Under what circumstances and to what extent are purchasers of a condominium unit at a foreclosure sale or from a mortgagee liable to an association for unpaid assessments? The Condominium Property Act is a model of ambiguity.

At first glance, real estate lawyers probably think the Illinois Religious Freedom Protection and Civil Unions Act (750 ILCS 75/1 et seq) - the new law recognizing civil unions in Illinois - has little in common with unpaid condominium assessments. But it does have one thing in common: uncertainty.

For example, what will courts decide when parties to a civil union seek rights afforded to "spouses" - in particular, the right to hold title to residential real estate used as their principal residence as tenants by the entirety (for more, see the LawPulse item on this topic in the March IBJ)? And how will courts sort out the apparent inconsistencies in the Condominium Property Act (765 ILCS 605/1 et seq) concerning liens for nonpayment of assessments and mortgage foreclosure?

That latter issue was discussed recently by Richard Bales, regional counsel to Chicago Title Insurance Company and a prolific writer and speaker on real estate law. His treatment of the topic is summarized below with his permission.

What does it mean to institute an action?

Under what circumstances and to what extent are purchasers of a condominium unit at a foreclosure sale or from a mortgagee liable to an association for unpaid assessments? The Condominium Property Act is ambiguous on this point.

Sections 9 (g)(4) and (5) of the Act refer to unpaid obligations to the association (for a defined six-month period) variously as "outstanding assessments," "common expenses," and "assessments and legal fees." Indeed, in section 9(g)(4) the terms "assessments" and "common expenses" appear to be used interchangeably.

In reality, associations have defined "common expenses" to include assessments, fines, late fees, court costs, and attorney fees. To be eligible to demand such "common expenses" according to the statute, the association must show that it has "institut[ed]…an action to enforce the collection of assessments."

Buyers' counsel have argued that nothing short of a legal proceeding - e.g., a collection suit or a suit in Forcible Entry and Detainer - constitutes the "institution of an action" that entitles the association to collect. Associations contend that a demand letter to the defaulting prior owner is sufficient.

The term "institution of an action" is not defined in the statute, but in the real world associations have all the leverage. Regardless of whether an "action" by any definition has been instituted, associations typically refuse to issue the statements about the status of the account that are required for closings unless they provide for payment in full to the association of all expenses as defined above.

What are outstanding assessments?

Need more ambiguity? Section 9(g)(4) refers to assessments "that remain unpaid by the owner during whose possession the assessments accrued." Suppose the owner abandoned the unit before or during the "six months immediately preceding institution of an action to enforce collection of assessments." Does the statutory language mean that a third-party purchaser is not responsible for payment of the assessments?

It gets better. Section 9(g)(3) provides that the purchaser in question pays the unit owner's proportionate share of assessments "from and after the first day of the month after the…foreclosure sale….Such payment confirms the extinguishment of any lien…by virtue of failure…to make payment of common expenses…" Sections 9 (g)(1) and (2) provide that unpaid common expenses "shall constitute a lien on the interest of the unit owner…." Section 9(g)(3) states that the foreclosing lender's payment of its proportionate share of assessments "confirms the extinguishment of any lien."

So, if a lender pays all assessments between the month after the foreclosure sale through the date of sale to the third-party purchaser for value, must that purchaser pay anything to the association? Section 9(g)(4) provides that if "the outstanding assessments are paid at any time during an action to enforce the collection of assessments, the purchaser shall have no obligation to pay assessments which accrued before he or she acquired title" (emphasis added).

But recall that the association wants the third party to pay six months' worth of common expenses. The purchaser could persuasively argue that, assuming the lender has paid its proportionate share, no assessment is "outstanding" because the lender's payment confirms the extinguishment of "any lien."

What should you do if you represent a third-party purchaser? The best course is to try to get the seller - either before the contract is signed or during the attorney review period, if any - to agree to a cap on the amount your client will be liable to pay to the association for unpaid assessments.

Lisle attorney Joseph R. Fortunato is a past chair of the ISBA Real Estate Section Council and a director of the Illinois Real Estate Lawyers Association.