HOA Rights and Obligations After the Foreclosure Sale; Rent Skimming and Repairs During The Redemption Period

January 18, 2013 by David C. Swedelson

By Sandra L. Gottlieb, Esq., Tracy Neal, Esq. and Priya Aggarwal, Esq., HOA and Condo Attorneys

Screenshot_1_19_13_3_01_PM-2.pngAttorneys from the law firm SwedelsonGottlieb and Association Lien Services (ALS) attended Community Associations Institute Orange County Chapter’s (CAI-OC) Educational Luncheon on January 15, 2013 dealing with a California community associations’ rights and obligations following an HOA's lien foreclosure sale. We did not like everything that we heard. This post is intended to set out our thoughts and opinions which differ from the speakers' opinions with regard to improvements to the property during the statutory redemption period and the yet to be determined application of rent skimming to community associations and management companies.

The speakers at the January 15th program suggested that a California community association association that takes title to a property following foreclosure should not make improvements, including repairs necessary to rent the unit or home. We do not agree. California Code of Civil Procedure Section 729.060 contemplates that such improvements may be made to the property and that the redemption price shall include, in addition to and among other things, the “reasonable amounts for fire insurance, maintenance, upkeep, and repair of improvements on the property.” In fact, this very issue was litigated and the subject of an unpublished Court of Appeal opinion. In that case, the trial court found, and on appeal the appellate court determined, that money spent on improvements could be included in the redemption amount. In addition, the court found that there was no error in finding that the amount due in order to redeem the property previously foreclosed properly included over $17,900.00 in expenses the third party paid for maintenance and repair work on the unit after the foreclosure sale but prior to the expiration of the redemption period, an electric bill and interest on the foreclosure sale purchase price.

With regard to rent skimming laws, one of the (above referenced) speakers unequivocally stated that it applies to community associations. While the speaker did not entirely discourage associations from renting units acquired through assessment lien foreclosure sales, the speaker did advocate sending a letter to any senior lienholder notifying it that the association is collecting rents on the lienholder’s behalf and will pay the rents to the senior lienholder upon request. Seriously?! We believe that it is better to "let sleeping dogs lie" as there is no legal obligation to inform senior lien holders or collect rent on their behaves.

One of the speakers also referenced a management company’s potential exposure for multiple acts of rent skimming. “Multiple acts of rent skimming" is defined in California Civil Code section 890(b) as “knowingly and willfully rent skimming with respect to each of five or more parcels of residential real property acquired within any two-year period.” In order to be subject to both civil and criminal penalties, a management company would have to manage, within a two-year period, an association that has acquired at least five properties, and those five properties must all be rented out upon the unilateral decision of the management company with the intent to defraud the lender by not paying the mortgage. The statute poses an extremely difficult standard to meet in that, aside from the myriad of circumstances required to exist, the prosecutor must prove that the management company was the actor engaged in the fraud and possessed the requisite intent. Although we never say “never,” the likelihood of this occurring is so remote that, in our opinion, this should not have been addressed at the luncheon, unless briefly raised, then summarily dismissed.

For more information regarding an association’s responsibility for association-owned units and lots acquired through non-judicial foreclosure and information on renting the acquired properties, please follow this link to our prior blog post on this topic.

Sandra Gottlieb may be contacted at slg@sghoalaw.com.