Condominium, cooperatives and homeowner’s associations, hereinafter "Associations" for this article, have been suffering greatly due to the failure of the unit owners to pay their fees and assessments. These fees and assessments are due monthly, quarterly or yearly according to the Association’s documents; they are not optional payments, but rather a legal, contractual obligation of the unit owner. The inability of the Associations to be able to collect these monies owed from the unit owner, many of whom are also not paying their mortgage payments, have caused the unit owners who are indeed paying to sometimes have dramatic increases in the assessments and fees owed to their Association. As a result, some Associations have to make tough choices like cutting pool hours, no longer including cable, no longer including water, no longer manning the access gates, and cutting staff, clubhouse hours and activities, among many other things. In the past, the only recourse an Association had when dealing with a delinquent unit owner was to file a foreclosure action against the unit owner, which would then often trigger a foreclosure action by the bank against the unit owner, and in the end, the Association would frequently get nothing but a bill from their attorney. Things were quite different in the past, when very few unit owners would simply cease paying the dues, fees and assessments. It happened, but not nearly to the extent of what is going on today. Further, when it did happen, the unit owner usually just sold the property and the amounts owed were usually recouped by the Association at the closing.
To add insult to injury, many of the unit owners today are renting their units out, and although not paying their mortgage, taxes, insurance, assessments or dues, they have been regularly collecting rent from their tenants. Many property managers are completely aware of this and currently are managing properties in this position, while some managers are not aware of the financial situation of the owner, who really has no incentive to disclose this to the property manager. As can be imagined, this has not sat well with the Associations, and on July 1, 2010, Florida law has been amended to now give Associations the incredible power to demand that the tenant of the delinquent unit owner pay the Association DIRECTLY, bypassing the owner and the property manager, if there is one in place.
The Rent Demand Letter
In order to have the right to collect the rent from the tenant, the Association must make a written demand upon the tenant in the case of a condo association and a co-op. No written demand is necessary by a homeowner’s association, but this is probably due to a legislative oversight. Without making a written demand, the homeowner’s association would most likely never get paid, so let’s assume that a written demand is necessary or at least will be given for homeowner’s associations as well. This written demand is for the tenant to pay all "future monetary obligations" related to the Association directly to the Association. Does the demand have to be by certified mail? Does it have to be through the use of a Three Day Notice? The law states that the Association may issue notices as per Florida Statutes 83.56, which means that they must follow the same procedure of either posting, hand delivery or mailing of the Three Day Notice. Suppose the Association does not even know the name of the tenant, or that tenants have switched out since the initial approval process. This is just the beginning of many unanswered questions. If the Association makes the demand, the tenant must comply. DO NOT try to override this by collecting the rent and remitting to the owner, or you could have some liability.
What are "Future Monetary Obligations"?
You may or may not have caught that upon your first read. If this applies only to "future monetary obligations," what about the past monetary obligations which almost certainly are owed by the unit owner? At this moment in time, we do not know the answer to this burning question, but will assume that the legislative intent was to cover all unpaid monetary obligations, past, present and accruing. What will happen once the past amounts are collected from the tenant? Will the Association continue to make demands upon the tenant? How will we know when the Association is "done?" According to the law, the Association will "release" the tenant as some point, but the law provides no such mechanism or form, so most likely it will be in the form of a letter to either the owner, tenant or both. You, as manager, will probably be the last to know, which will increase the confusion of who paid what to whom and when.
What is the tenant to do?
According to the law, the tenant now must pay the rent or whatever amount of money the Association demands, not to exceed the rent amount due to the owner, each month, directly to the Association. In reality, the typical tenant will receive a letter and will not know what to do; many will decide not to pay anyone, as is often the case in the event the tenant is served with a lis pendens or a foreclosure lawsuit. Tenants who sense uncertainty or get conflicting demands upon their rent often sit back, pay nothing and try to use the confusion as a successful defense later in an eviction action, or at least live rent free and ride it out. After all, for six months they have been paying your company and now they get notice from an Association or their management company with whom they never had prior contact or knowledge, demanding the rent. Upon demand by the Association, the tenant MUST comply and pay the Association directly, or presumably through the association’s management company, if one is being used. If the tenant receives the demand letter and has already paid the rent to the unit owner or the property manager that month, the tenant must provide proof of payment to the Association within 14 days after receiving the demand letter from the Association. This is crucial for the tenant to do. Otherwise, credit will not be received for that payment, and according to the law, the Association can exercise their ultimate power against the tenant, which is an eviction action.
How the rent is applied
The unit owner must give the tenant credit for the money the tenant pays to the Association; thus, the owner cannot evict the tenant for nonpayment if he now receives partial or no rent, as long as the rent is being paid to the Association. It will be up to the owner or property manager to investigate and try to figure this out. The law provides no reporting requirement or communication requirement from the Association to the owner or property manager. A tenant who acts in good faith and pays the Association is immune from any claim by the unit owner. Will the Association demand the full amount of rent or a partial amount? We assume that they will demand the full amount of rent to pay the outstanding amount the unit owner owes until such sums are paid in full. Hopefully once paid, they will properly notify the tenant so the rent is then paid to the owner.
Eviction by the Association
If the Association files an eviction action against the tenant, the cost of this will be further assessed to the unit owner, who will go deeper into debt, as now his tenant will be evicted from the premises. You can be pretty well assured that the Association will not approve the next tenant who may be presented to them. Suppose the Association accepts a partial rent payment from the tenant, which they almost certainly will. How will they then proceed? The tenant receives the demand from the Association, is told to pay the full $800 to them, but tenders a lesser amount of $500. We can almost guarantee that the tenants will begin to pay partial amounts to the Associations, as they often do anyway, and many Associations will continue to accept whatever they can, resulting in a tenant who is partially paying each month and an owner who does not know what to do. This will become a complete mess, as the Association is now becoming a "residential property manager" or "rent collector" by default, with absolutely no responsibility to maintain the unit, make repairs to appliances, and which has no obligations to the tenant as if they were the actual landlord. The new law clearly states that the Association does not have to comply with Florida Statute 83.51, which section provides for the landlord’s duties under the Landlord/Tenant Act. A tenant may be legitimately withholding rent because of the failure of the owner to comply with the lease or Florida law. The A/C could be broken, there could be a mold issue, or perhaps an infestation of insects is present, and the Association has no obligation to do a thing, while the tenant has the obligation to continue to directly pay rent to the Association. This could affect an eviction action by the Association if the tenant has legitimate defenses, complicating the eviction, and resulting in higher attorneys fees and costs to the Association, which will be passed onto all the other unit owners as the delinquent unit owner most likely will not have the money to pay this either. Another interesting issue arises if the tenant fails to pay the Association and the unit owner wants to evict the tenant so he can sell it, but the Association is dragging their feet and decides against filing an eviction because they are low on money. Since the Association is the one who is owed the money, and the owner must provide a credit to the tenant in the amount that the tenant pays, does this mean that the landlord will have a right to file an eviction if the tenant is not paying the Association, or will this exclusively be the right of the Association? Who will coordinate this mess?
Where does the new law leave the Property Manager?
Basically the property manager will be bounced right out of the management situation unless they want to work for free. Not a happy thought. The property manager who has a valid property management agreement with the owner of the property, under which a percentage of the rent paid each month by the tenant is retained in the form of a commission, will have no control over the rent money paid, as the rent money will presumably be paid in part or in full directly to the Association. Under normal circumstances, the manager deducts the commission and remits the balance to the owner, but now the rent completely bypasses the property manager. The property manager now has a choice to either continue managing the property with absolutely no funds coming in and no commission being paid, or decide to drop the owner and terminate the management agreement.
Possible solutions and opportunities
As our firm primarily works for property managers, we are always looking for ways to assist those managers in their duties, enable them to retain accounts and conduct their business profitably. Many managers will choose to discontinue management in situations when the Association makes the demand, and if the manager has the luxury to do so, we recommend that the management agreement is terminated according to its terms and that the property manager concentrate his or her efforts at finding owners who are solvent enough to own rental property. In most instances, if the owner owes money to the Association, he will also be in foreclosure or close to being into foreclosure. Ideally, the Association should contract with YOU, the current property manager of the managed units, for YOU to collect the rent and remit this rent to the Association. Of course, unless the property management agreement already addresses this issue, which we doubt it does, a separate agreement will need to be signed by the property manager, the owner and a representative of the Association. We cannot forget that the property manager’s loyalty lies with the property owner, and it could be construed as improper if the property manager collects the rent from the tenant and remits it to the Association without the express permission of the owner of the property.
Our office has developed a form which we are testing to use which can be signed by the owner, the Association and the property manager. It will accomplish the goal of having the property manager collect the rent, deduct customary commissions and then pay the Association. Since we are in such an early stage of all this, in order to access this form, we would ask that you call our office first and speak with me directly. There is no charge. Simply put, all parties through this agreement authorize the property manager to collect the rent, and depending upon the terms of the agreement, deduct the usual management fees, THEN remit the balance to the Association. This is by far the smartest way for the Association to accomplish their goals of collecting the money; the tenant does not have to be involved in any way, and the property manager is able to continue managing the property, maintaining the property and receiving payment for the all the property management services that they are rendering. It is the proverbial WIN-WIN, but the Association will have no idea that this is even an option unless YOU let them know.
Taking a Proactive Approach
We receive phone calls almost every day by property managers whose tenants already received the rent demand letter from the Association. Rather than wait for the Association to take action and push you right out of the picture, we urge you to go straight to the Association or the Association’s management company that are connected to the units you manage to see if they will allow you to use our agreement, or a variation with which everyone is comfortable, thus allowing you to stay in the loop. The person best situated to collect rent is you, the current property manager, not an Association, attorney for an Association or even the Association’s management company.
Many property managers are caught by surprise by all this, as they assumed that their owners were paying the fees and assessments of the Association. It is time to check each and every account right now and confirm that the owner has been current in his or her payments, and if there is a delinquency, work with the owner immediately by telling the owner about the new law and doing what it takes to get any delinquent amount paid to the Association before it is too late.
Next month we will examine this issue in further depth, as demanding rent from the tenant directly is only the beginning of the powers enumerated in the new law. We urge you to call us at 1-800-253-8428 or email us and tell us your experiences in dealing with the new law, as plans are in place for legislative fixes we may be able to get accomplished in 2011.