Foreclosing on a timeshare interest is a frustrating prospect for both the developer and the association. In addition to losing income generated by owner visits, the developer doesn’t receive interest income from the loan and principal recoupment, while the association doesn’t receive the funds needed to maintain, repair, and enhance the facilities.
When the property is finally sold at the execution sale, the question becomes whether the association can recoup some or all of the missed dues or assessment payments that were not included in the foreclosure. If the developer or the association buys the interest, then there may be no need, or desire, to seek recoupment. That might be different if a third party buys the interest. The question is whether it can be done.
The answer depends on who buys the property and in which jurisdiction the property is located. Here, we look at the four major timeshare states – Florida, Hawai’i, California, and South Carolina – to provide insight on the answer. That being said, each situation is unique, so please reach out to MDK for more information on your particular set of facts.
Finally, a little pre-planning goes a long way. At the end, we explore options for including the amounts of past-due assessments in the bidding instructions for the foreclosure sale to ensure that the property either is not purchased by a third party or purchased for a sufficient amount to cover the assessments that come due between the date of the lien being foreclosed and the sale date.
In Florida, the statutes specifically state that the purchaser “is jointly and severally liable with her or his predecessor in interest” for the unpaid assessments and has a right to recover from the predecessor the amounts paid by that purchaser.
Because of this specific language, purchasers often proactively pay the past-due assessments and then seek reimbursement from the amount left over from the execution sale. However, if the purchaser does not proactively pay the past-due assessments, the association can demand payment and hold the account in default until payment is made.
Hawai’i’s statutes are more complex. Whether the association has a right to pursue past-due assessments, and to what extent, depends on the foreclosure type. If the action’s purpose is to foreclose a lien claim, Hawai’i Statute § 514E-29 specifically states that the purchaser is not liable for the amounts that came due before ownership. However, the statute also says that the unpaid amount could be assessed to “all of the time share owners, including the acquirer.”
There is little in the way of direction on this portion of the statute. The conservative approach, though, is to recoup the amount by adding the unpaid amount to the total of the subsequent year’s regular assessment and dividing that among all owners.
If the process is a mortgage foreclosure, the purchaser is liable for the unpaid regular assessments for the six months immediately preceding recording the affidavit of sale. That occurs shortly after the execution sale. Depending on when that happens, however, attempts to collect this amount may be difficult because defaults and sales occur at various times in the year and may not overlap an assessment issuance. Of course, the foreclosing entity could try to time its foreclosure process to ensure that the regular assessment does fall within the six-month time period, but many factors go into the foreclosure process and the timing may not be possible.
California’s statute is perhaps the most direct about this. California Civil Code § 1466 states “no one, merely by reason of having acquired an estate subject to a covenant running with the land, is liable for a breach of the covenant before he acquired the estate[.]” The short answer, then, is that the association cannot hold the purchaser responsible for the past-due assessments. The California Court of Appeals confirmed that in 1982 in the Mountain Home Properties case. It appears the courts have not revisited this issue, and the legislature has not made an amendment to the statute.
South Carolina’s code of laws addresses the purchaser’s liability directly in a foreclosure on a mortgage situation and handles it similarly to Hawai’i. The code states that the purchaser is not responsible for the assessments that came due before taking title. However, just like Hawai’i, the association may add the unpaid amount to the total of the subsequent year’s regular assessment due, which is divided amongst all the owners, and recoup the amount in that manner.
It handles the purchaser’s liability in a foreclosure on a lien claim situation differently, following the Florida path. S.C. Code § 27-31-220 specifically states that the purchaser is “jointly and severally liable,” with the prior owner, for unpaid assessments and has a right to recover from the predecessor the amounts paid by the purchaser.
The Supreme Court of South Carolina affirmed this approach in 1994. In the Council of Co-Owners of Forest Beach Villas HPR case, the purchaser argued that the property was purchased at a foreclosure execution sale and that S.C. Code § 27-31-210(b) had prevented the association from collecting the past-due assessments. The Supreme Court disagreed and held that S.C. Code § 27-31-210(b) is specific to foreclosures on mortgages and does not apply to foreclosures on claims of lien, which is governed by S.C. Code § 27-31-220.
As a result, the purchaser was liable to the association for the unpaid assessments. Therefore, associations can use S.C. Code § 27-31-220 to hold purchasers responsible for unpaid assessments that were not included in the foreclosure on the lien claim.
When drafting a lien for unpaid assessments, care should be taken to add additional sums language. Here, the lien specifically indicates that it covers the amounts stated within the lien “plus any additional sums as hereafter may become due with respect to such ownership interest” (or words of the like). This language then covers the additional amounts and the foreclosing entity should take the additional amounts into consideration when assessing its bidding instructions. MDK recommends including such language in future liens if it is not already being put into liens.
If foreclosing on a mortgage, then a lien for unpaid assessments should be recorded as soon as possible (of course following steps required to provide due notice and record the lien correctly), but by absolutely before the sale in the mortgage foreclosure. All jurisdictions allow for the proceeds from the sale to be paid to junior lien holders after the foreclosing entity has been paid in full. Since most liens for unpaid assessments that are recorded after the mortgage is recorded are junior liens (as opposed to senior liens), the junior lien holder, or its designee, could bid at the foreclosure sale to ensure that the property sells for a sufficient amount to cover both the mortgage and the lien.
This publication is for informational purposes only and does not constitute an opinion of Manley Deas Kochalski LLC.
Do not rely on this publication without seeking legal counsel.