Which Type of Foreclosure, Judicial or Advertisement, is Best for Your Community Association?
Community associations are often faced with the challenge of collecting unpaid assessments from delinquent owners. Initial collection efforts typically involve sending demand letters, suspending recreational facility privileges (if permitted by the documents), and suspending voting privileges (if permitted by the documents). When these efforts are unsuccessful, community associations are left with no choice but to record a lien against the property and, eventually, proceed to foreclosure.
In most cases, there are two different types of foreclosure that a community association may pursue. The first option is filing a lawsuit in the Circuit Court where the property is located and asking the Court to award a judgment of foreclosure. This is called the judicial foreclosure process. The alternative option is to schedule a sheriff sale where the property will be auctioned for sale to the public after notice of the foreclosure has been published with the local newspaper and posted on the door of the property. This is called the foreclosure by advertisement process. This article will examine both types of foreclosure as well as the advantages and disadvantages of both.
The Michigan Condominium Act, MCL 559.101 et seq., provides that a condominium association may foreclose its lien for unpaid assessments, together with interest, collection and late fees, advances made by the association for taxes or other liens to protect its lien, attorney fees, and fines in accordance with the condominium documents. Condominium associations are also granted the right to foreclose a lien by advertisement or judicially pursuant to MCL 559.208(1) which provides in part: “The lien may be foreclosed by an action or by advertisement by the association of co-owners in the name of the condominium project on behalf of the other co-owners.” The foreclosure process for condominium associations is the same as the process for mortgage foreclosures in the State of Michigan. MCL 559.208(2).
Unlike condominium associations, there is no statute or act in Michigan specifically addressing the rights of homeowners associations (sometimes referred to as subdivision associations). The right of HOAs to record a lien, and eventually foreclose that lien, must be granted by contract, which is the Declaration of Restrictions that is recorded against the subdivision. Although most Declarations allow these associations to record liens and foreclose, there are some unique cases in which an association’s governing documents do not provide the association with: (1) the right to record a lien; (2) the right to foreclose by advertisement; and/or (3) the right to recover attorney fees and collection costs. Homeowners associations must carefully review their governing documents to ensure that they are complying with these provisions when it comes to collecting assessments. Assuming the governing documents permit foreclosure, most documents likewise state that the foreclosure process is the same as the process for mortgage foreclosures.
Judicial foreclosure is the process by which an association files a lawsuit in Circuit Court against the delinquent owner and asks the Court to order the sale of the property to satisfy the debt. Importantly, the association can also ask the Court for a monetary judgment against the owner in addition to the judgment of foreclosure. The procedure is governed according to the mortgage foreclosure statute, which is MCL 600.3101 et seq.
After the association has served the complaint on the delinquent owner, the Michigan Court Rules give the owner 21 days to file a response to the lawsuit, unless the owner was served using alternative service (such as certified mail), in which case the owner is given 28 days to respond. The Michigan Court Rules also allow the defendant, which is the delinquent owner, to file a counterclaim against the association. Counterclaims could relate to any alleged violations of the owner’s rights under the governing documents.
After the response to the lawsuit is filed, the parties are allowed to engage in discovery. Discovery may include responding to requests for production of documents, answering interrogatories and/or taking depositions. In most cases, the association will not need any discovery in a collection/foreclosure action as the relevant facts are undisputed. However, if an owner disputes straightforward allegations, the association may need discovery before asking the Court for a judgment. If the association is successful, these increased costs ultimately get billed back against the delinquent owner and added into the judgment.
Once discovery is complete (or if no discovery takes place), the association will file a motion for summary disposition stating there are no disputed facts related to the owner’s delinquency and that the owner has no defense for not paying the assessments. If the Court grants the motion, a judgement would be entered in favor of the association against the owner. If the Court determines that there are factual issues in dispute, the Court may order a trial to take place. This rarely happens in collection and foreclosure cases.
If the owner does not respond to the association’s lawsuit, the association is permitted to seek a default judgment. If granted, the default judgment would give the association the relief it requested in the lawsuit, which is typically the monetary judgment and judgment of foreclosure.
Whether the judgment is obtained via default, summary disposition, or after trial, the association must wait 21 days before taking action to enforce or collect the judgment. See MCR 2.614. In addition, the association cannot seek to have the property sold until at least 6 months have passed after the filing of the lawsuit. MCL 600.3115.
The foreclosure sale is conducted by the county sheriff and ordinarily takes place in the county courthouse’s lobby. All members of the public, including the association, are entitled to bid on the property at the sheriff’s sale. In the majority of circumstances, the association will enter a full credit bid (i.e., a bid in the amount of the judgment plus any additional expenses) as the opening bid for the property. If the property is sold for a price greater than the opening bid amount, the owner is entitled to receive the surplus.
If the association is the successful purchaser, a Sheriff’s Deed is recorded with the County Register of Deeds. The redemption period, which is the time period given to borrowers in foreclosure during which they can buy back or “redeem” their property after foreclosure, begins to run from the date the Sheriff’s Deed is recorded. The redemption period is 6 months from the date of the sale, unless the property is deemed abandoned, in which case the redemption period expires 1 month from the date of sale.
Foreclosure by Advertisement
Foreclosure by advertisement is the process by which an association forecloses its lien by publishing a notice in the local newspaper for a certain period of time prior to sale (i.e., advertising the sale), instead of obtaining a court order prior to the foreclosure sale. The statute governing foreclosure by advertisement is MCL 600.3201 et seq.
A notice of foreclosure must be published at least once per week for 4 consecutive weeks with a newspaper published in the county where the property is located. The association is also required to post a copy of the notice in a conspicuous place on the property, which is usually the front door. MCL 600.3208. Many condominium association governing documents include an additional requirement that the association must notify the co-owner that the association will be pursuing foreclosure by advertisement and advise the co-owner that they are permitted to request a judicial hearing by bringing suit against the association. Gorosh v Woodhill Condominium Ass’n, unpublished per curiam opinion of the Court of Appeals, issued October 16, 2012 (Docket No. 306822).
If the owner fails to pay the amount stated in the notice, then a sale is scheduled and the county sheriff conducts the sale in the same manner as a judicial foreclosure. Similar to a judicial foreclosure, the owner who has defaulted on their assessments has the right to redeem the property after foreclosure. As with a judicial foreclosure, the redemption period in a foreclosure by advertisement is 6 months unless the property is deemed abandoned, in which case the redemption period is 1 month.
Advantages and Disadvantages
From a practical standpoint, a major advantage of judicial foreclosures is that the association can seek a monetary judgment in addition to a judgment of foreclosure. Thus, if the owner is uncollectable, the association can seek to foreclose on the property and take possession. The property could be sold to a third party or leased out to allow the association to recover its costs.
Alternatively, if the owner is collectible and/or there is no equity in the property, the association can seek to recover on the monetary judgment and garnish wages and/or bank accounts of the delinquent owner. Another advantage of judicial foreclosures is that the association may seek to have a receiver appointed, especially if there is a tenant in the property to collect rent during the litigation. MCL 559.208(7). For these reasons, judicial foreclosures provide an association with more flexibility in pursuing delinquent owners.
However, judicial foreclosures are disadvantageous because they take a much longer period of time before the association can take possession of a property. When taking into account the time to file the lawsuit, serve the lawsuit, wait for the response, file a motion, obtain a judgment, and waiting the required 6 month period of time, there is a minimum of 7-8 months before the association can foreclose on the property. This time period is in addition to the 6 month redemption period after the foreclosure sale takes place. Judicial foreclosures are also more complex and more expensive than foreclosure by advertisement. For example, when an owner has passed away, the association will have to begin probate proceedings if not presently open, to have a personal representative appointed upon whom to serve the complaint.
There are several benefits to foreclosing by advertisement. Foreclosure by advertisement is much faster and less expensive than judicial foreclosures. In addition, foreclosure by advertisement only requires publishing and posting of the notice of foreclosure. Accordingly, an owner cannot evade service to avoid a foreclosure by advertisement because service is not required. Finally, foreclosure by advertisement does not give the owner the right to raise a defense or challenge the foreclosure or the balance owed. In order to do so, the owner must file a lawsuit in court which puts the financial burden on the owner instead of the association. Foreclosure by advertisement forces an owner to payoff the balance in full or risk losing their home in a short period of time and can be an extremely valuable tool for associations to compel payment.
Foreclosure by advertisement also has its disadvantages. Once the foreclosure by advertisement takes place, the debt owed to the association is extinguished. Accordingly, the association would not be able to pursue collection through garnishments and the association would lost all interest in the property if a senior lienholder foreclosed before the association recovered any funds. In addition, certain title companies may not issue a title insurance policy unless the property is sold judicially. A title company may be concerned that there could be a challenge to the sale based on improper notice (or some other defect), or will not issue a title policy over a junior mortgage. Some junior lienholders can cause problems by challenging the purchaser’s title and forcing the purchaser and/or the association to file a quiet title action to establish title. In addition,
Whether the sheriff sale is conducted judicially or by advertisement, if the association purchases the property at the foreclosure sale and the property is subject to a senior lien, such as a first mortgage or a state or federal tax lien, then the association would own the property and be entitled to lease the property only until the senior lienholder foreclosed its lien, at which time the association’s interest would be terminated.
Which Foreclosure Type is Best for Your Association?
There is no universal answer to which foreclosure is the best option for your association. Each case depends on its own unique facts and circumstances and must be analyzed individually. For example, condominium association liens are granted priority over second mortgages pursuant to MCL 559.208. Accordingly, even in a situation where there is no equity in the property, a condominium association may be wise to pursue foreclosure by advertisement in an effort to have the second mortgagee pay off the association’s lien in order to avoid having its interest extinguished. Given the nuances inherent in deciding whether a judicial foreclosure or a foreclosure by advertisement is right for your association, it is crucial to seek and obtain competent legal advice prior to taking action.
Brandan A. Hallaq is an attorney with Hirzel Law, PLC where he dedicates the majority of his practice to representing condominium associations and homeowners associations. He litigates cases involving defective construction, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, enforcement of restrictive covenants, real estate foreclosure actions, and bankruptcy matters representing creditors. He also has experience preparing documents for business and real estate transactions including purchase agreements, franchise agreements, loan/financing documents and commercial and residential leases and mortgages. In each year from 2018 through 2020, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. Mr. Hallaq obtained his Juris Doctor degree, cum laude, from Wayne State University Law School where he served as an editor on the Wayne Law Review. He can be reached at (248) 478-1800 or at [email protected].