As the country continues to battle the Coronavirus outbreak, last week’s jobs report was disastrous. Based on the latest data, in a matter of a few weeks, the country went from record low unemployment to an estimated 12.5 million Americans unemployed. Moreover, because the number is measured by filed unemployment applications, it does not account for the many unemployed who did not yet file their applications. Anticipating a significant number of residential mortgage and lease defaults, on April 2, 2020, Governor Ron DeSantis signed Emergency Order 20-94. The Order states that the “emergency has impacted the ability of many Floridians with single-family mortgages to make their mortgage payments” and “has impacted the ability of many Floridians with residential tenancies to make their rent payments.” Accordingly, pursuant to the constitutional and statutory emergency powers that the Governor has, he suspended and tolled any law providing for a mortgage foreclosure and suspended and tolled any law providing for an eviction when it only is for non-payment of rent. The suspension period is through May 17, 2020, unless extended further.
No doubt, the Governor’s temporary suspension of residential mortgage foreclosures and evictions was in response to anticipated defaults. This raises the question of how community associations should respond to assessment defaults during this emergency time period. On the one hand, unlike the Great Recession where many Americans speculated in real estate or overextended themselves with questionable mortgage loans that banks were too eager to make, the current financial crisis was triggered by a viral pandemic that originated across the world. On the other hand, the Community Association Institute (“CAI”) notes “assessments are the lifeblood of community associations and are utilized to deliver essential services to residents and to pay for insurance expenses.” Because community associations are non-profit and work from zero-based budgets, the collection of community association assessments is an important responsibility of the governing board. If the board fails to timely collect assessments, it can impair an association’s ability to pays its bills, provide essential services, obtain financing for continued operations, and the ability of a potential purchaser to obtain a mortgage.
Therefore, we believe Associations should continue to pursue the collection of assessments when due, but consider holding off on filing foreclosure actions until more data becomes available. Suspending assessment collection, however, is not a good option because this will cause unnecessary economic harm in the short term, such as an interruption or the significant reduction in associations being able to provide its residents with essential services. Moreover, board members of associations have a fiduciary duty to collect assessments under Chapters 718, 719 and 720, Florida Statutes.
An example, Section 718.112(2)(g) states in relevant part:
Assessments shall be made against units not less frequently than quarterly in an amount which is not less than that required to provide funds in advance for payment of all of the anticipated current operating expenses and for all of the unpaid operating expenses previously incurred.
Therefore, we believe the better course of action during this emergency is to continue to collect assessments when due and develop a strategy for defaults, such as payment plan options that include the waiver of late charges and interest in exchange for timely arrearage payments. Boards should also reexamine the frequency of non-essential services and work with vendors to agree on temporary reductions in services and corresponding reductions in monthly recurring fees.
In addition, as we anticipate defaults as early as this month or within the next 30 to 60 days, we strongly encourage community associations, particularly those that do not have significant contingency cash reserves, to immediately apply for a line of credit with their financial institutions before default rates make it too difficult to qualify for such loans. Moreover, community associations, as not-for-profit corporations, often directly employ their property managers and staff, and may qualify for a loan under the Federal Paycheck Protection Program (PPP). Boards should contact their banking and accounting professionals to seek assistance with filing applications for the PPP program if qualified and authorized to do so. Also, if associations have cash reserves for specific projects, depending on whether those reserves are classified as statutory or non-statutory reserves, will determine whether your board can vote to use those reserves to meet temporary cash shortages or whether a membership vote is required. If a membership vote is required, an emergency meeting can be called to vote by limited proxy to authorize the expenditure of reserves earmarked for other projects to offset operating cash short falls in the near term.
Since the Governor has placed a moratorium on mortgage foreclosures and the court systems have suspended foreclosure sales, unless the federal government provides additional financial relief to the unemployed or facilitates aggressive mortgage loan modification programs, we expect there is going to be a substantial number of new mortgage foreclosure filings and bankruptcy filings. Therefore, it is important for community associations to timely file liens to secure default assessments and related charges so that associations are in line for payment. Furthermore, once community associations are at the lien stage of their collection cycle, boards can better evaluate payment plan options for these accounts. By then, hopefully we all will have a better timeline for when everyone will be getting people back to work, the additional financial assistance available, and how long it will be for the economy to rebound. Associations can at that time place a temporary hold on filing foreclosure actions depending on the data available.
In conclusion, questions of first impression will continue to arise. This emergency remains fluid, and the executive orders, policies, and recommendations continue to evolve as new data becomes available. One thing is certain, however, this war on COVID-19 is far from over, and the collateral damage has yet to be assessed. Therefore, when in doubt on how to proceed, contact your association’s legal counsel and other professionals to assist your board of directors to address your community’s specific issues. More than ever, thoughtful collection solutions will be needed to minimize long term financial damage to our communities.
by Steven R. Braten, Shareholder & Paula S. Marra, Senior Associate, Rosenbaum PLLC