May 2, 2016
by Michael Anselmo
Anselmo Lindberg Oliver LLC
USFN Member (Illinois)
In an effort to balance the scales in an environment that is increasingly shifting towards condominium associations in Illinois, a series of bills were recently introduced in the Illinois House of Representatives. While many of these affect the rights of the owners of condominium units, one bill in particular (HB4490) has the potential to affect the post-foreclosure market. If passed, it would represent a significant benefit for lenders and servicers in regards to fees and assessments claimed due by condominium associations.
HB4489 — states that a unit owner has the right to fairness in litigation, allows unit owners to bring actions against the association without naming other homeowners, voids any provision limiting a unit owner’s right to commence litigation against the association, provides that a unit owner’s compliance with a demand does not affect his ability to challenge the demand, requires reasonable attorney fees to be awarded to the unit owner or association under certain circumstances, states that (in litigation) the board must represent the best interest of all owners, and provides that, in litigation, the association may not be represented by counsel who also represents the board of managers.
HB4491 — provides for certain defenses for a unit owner in a forcible action and puts limits on the association seeking attorney fees.
HB2606 — requires that any person who makes payments for common expenses shall be furnished a copy of any legally binding agreement between the unit owner’s association and each management company retained by the association.
The problem at hand is that the current Illinois Condominium Property Act (ICPA) contains a confusing “reach back” provision that allows associations to charge REO buyers for certain prior unpaid assessments. Currently, section 9.2 of the ICPA states that “[a]ny attorney’s fees incurred by the Association arising out of a default by any unit owner … shall be added to, and deemed part of, his respective share of the common expense.” 765 ILCS 605/9.2(b). Under section 9(g)(4) of the ICPA, the association has the ability to collect from an REO buyer “the proportionate share, if any, of the common expenses for the unit which would have become due in the absence of any assessment acceleration during the 6 months immediately preceding institution of an action to enforce the collection of the assessments.” In simpler terms, a purchaser at an REO transaction must pay the association up to six months of unpaid assessments owed by the previous owner.
Attorneys in Illinois are sharply divided over whether, and to what extent, an REO buyer is responsible for pre-foreclosure association attorney fees. This has caused a deluge of disputes over pre-foreclosure attorney fees prior to — and at — Illinois REO closings. House Bill 4490 appears to be aimed at this problem.
HB4490 — would amend section 9.2 to read, “[i]f a court awards attorney’s fees incurred by the Association arising out of a default by any unit owner … the Association may add these fees to the unit owner’s respective share of the common expense. No attorney’s fees may be added to the unit owner’s part of the common expense unless a court first awards attorney’s fees.” (Proposed changes are underlined for clarity.)
One major issue that mortgagees currently have to deal with when attempting to sell a foreclosed property in an REO transaction is association attempts to collect unpaid assessments under section 9(g)(4), which often include large amounts of attorney fees in addition to prior assessments. While the payment of these back-assessments is ultimately the responsibility of the subsequent purchaser, it frequently ends up being the seller’s problem as disputes stall the transaction. Buyers who are represented by counsel will often refuse to pay the back-assessments, contending either that it is not their client’s responsibility or that the fees are too high. This leaves the REO seller with a Hobson’s choice between paying the illegitimate fee demands or foregoing the sale.
If passed, HB4490 would clarify that attorney fees may only be included in common expenses — including those allowed for by section 9(g)(4) — if a court previously awarded those fees. Unless associations can present a court order awarding fees, they would have no claim for them at an REO closing.
HB4490 would not solve all issues that section 9(g)(4) creates. It would, however, clear a particularly intractable roadblock that has derailed many REO transactions and forced payment of unjustified association demands in others. [As this article was going to press, HB4490 had been re-referred to the Rules Committee. Further developments will be covered in future USFN publications.]
Copyright © 2016 USFN. All rights reserved.
Spring 2016 USFN Report