Allan Goldberg

120 S. Riverside Plaza

Suite 1200
Chicago, Illinois 60606
(312) 876-7133
agoldberg@arnstein.com

Mr. Goldberg is the co-chair of the Real Estate group

at Arnstein & Lehr LLP, where he is a partner. He con-
centrates his practice in the area of real estate, in-
cluding real estate development, real estate litiga-
tion, condominium and community association law
and practice, lender representation, directors and
officers liability defense litigation, and affordable
housing matters on behalf of for profit and nonprofit
developers and condominium converters. He regu-
larly handles a wide range of issues on behalf of con-
dominium and other community associations, and
chairs Arnstein & Lehr’s Community Association prac-
tice group, which involves the representation of hun-
dreds of Illinois and Florida community associations.

Copyright 2011, Allan Goldberg

All Rights Reserved

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Allan Goldberg • Aligning the Stars in Mortgage Foreclosures

C ondominium association boards are aware of the so-called “six (6) month lien” protection available to
Illinois condominium associations. This six (6) month period captures delinquent assessments following
a unit owner’s foreclosure case. Few “experts” in the field, however, understand that the lien is not automatic,
that the association must undertake certain affirmative steps to place itself in a position where it might recover
assessments and, most of all, that the stars must align just right for the association to recover a portion of its
unpaid assessments. This article reviews the relatively new law regarding foreclosure relief for condominium
associations. We will walk through the analysis of how the association may be protected in asserting its lien
position for at least a partial recovery of an owners’ assessment delinquency.

The Problem

In these challenging financial times, condominium associations are increasingly faced with the effects of mortgage
foreclosures. Typically, the owner in a foreclosure suit is likely delinquent with the payment of their condominium
assessments as well as their home mortgage loan. As a greater number of unit owners are facing the loss of their
units to bank foreclosure, more and more associations feel the drain on their revenue stream. Basically, all first
mortgage loans are superior to the condominium association’s lien. Thus, the condominium association is in
greater than ever financial jeopardy.

When a condominium is sold to a new owner at a foreclosure sale, the first mortgage holder, typically a bank,
must be paid in full before the condominium association can receive any proceeds from the sale to apply against
unpaid, and accrued, assessments. If the net proceeds of sale do not exceed the amount owed to the bank, the
association receives nothing from the sale of the unit. To add insult to injury, prior law also prohibited the association
from pursuing the new owner for any assessments owed by the prior owner. This is further compounded by the
continuing accrual of unpaid assessments during the foreclosure case, usually lasting at least eight (8) to nine (9)
months before the unit is auctioned off at the public foreclosure sale. Thus, the condominium association suffers
severe financial hardship in these ever increasing number of situations.

A Possible Solution

Effective January 1, 2007, Illinois condominium associations obtained the ability to recover losses sustained when
unit owners default on their mortgages. Section 9(g)(4) of the Illinois Condominium Property Act provides that
the purchaser of a unit at foreclosure sale must pay the association up to six (6) months of unpaid assessments
owed by the prior owner if several conditions are met. First, the condominium association must file a lawsuit to
collect unpaid assessments to be entitled to this special relief. Next, the purchaser of the unit must be someone
other than a mortgage holder. If a bank or other mortgage holder purchases the unit at sale, the special obligation
to pay assessments shifts to the person who buys the unit. Most frequently, the foreclosing bank ends up with
the unit as no one else bids at the auction. Third, where there is a successful buyer at the auction, the new owner
is liable to pay past assessments only to the extent that the assessments have not been otherwise paid. Finally,
a person who buys from a mortgage holder is liable for payment of up to six (6) months of pre-foreclosure

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Allan Goldberg • Aligning the Stars in Mortgage Foreclosures

assessments provided the condominium association’s “paid assessment letter” and Section 22.1 disclosures specifically
disclosed that liability.

So, while the law can help minimize losses when units are sold in mortgage foreclosure sales, the law is not self-executing.
Boards must be proactive in protecting the association’s recovery potential. The next section explains how clients may
persue of the recovery of assessments in these situations. As discussed below, each situation is fact specific, and each
must be analyzed from a cost-benefit analysis.

Recommended Options

When a lawsuit has been filed to foreclose a mortgage on a condominium unit, the lawsuit asks the court to have the unit
sold at a foreclosure auction sale to generate money with which to satisfy the unit’s owner’s mortgage debt. As previously
noted, the foreclosure process typically takes eight (8) to nine (9) months, or longer, to complete. It is likely that the unit
owner will not pay assessments during that time. In order to protect the Association’s interests in the foreclosure process,
and to maximize the potential for recovery of unpaid assessments, a number of steps need to be taken:

1. First, an appearance should be filed on behalf of the association by counsel in the foreclosure proceedings. By
doing so, all future court filings will be sent to the law firm appearing. This step will enable the attorney to track the
progress of the foreclosure case, and will give the attorney advance notice of when the unit is scheduled to be sold at
public auction.

2. The next steps depend on the likelihood of the unit selling at auction for more than the unit’s mortgage debt.
In foreclosures, Illinois law provides generally that the proceeds generated from the auction sale of a condominium unit
must first be applied to pay off mortgage debt before the association can receive any proceeds of sale. Moreover, even if
a unit sells at auction for more than its mortgage debt, the association will not receive any money from the auction sale
unless it has protected its claim position by filing an answer to the foreclosure lawsuit, supported by an affidavit as to the
amounts owed.

3. Thus, when looking at the allegations of the foreclosure complaint, the attorney should examine the unit’s
mortgage debt as stated in the complaint to evaluate the likelihood that, if sold, a surplus will be available to a third
party.

4. If the association believes that the unit might sell at auction for more than the amount of debt alleged in the
complaint, it is usually worthwhile for the association to have an answer prepared and filed on its behalf. Thus, the
association needs to make a decision whether or not to file an answer supported by affidavit. We assist our association
clients in this regard to make the best, informed, decision for the association considering a number of factors, including
running through a cost-benefit analysis to determine the value of spending additional legal fees and costs to position the
association for a six (6) month potential recovery.

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Allan Goldberg • Aligning the Stars in Mortgage Foreclosures

In the event the association believes that the unit could sell at a foreclosure auction for more than the mortgage
delinquency, the attorney should prepare an affidavit for the board or manager to complete for filing with the court.
The affidavit requires a current account ledger reflecting the balance due. (If a special assessment is currently payable in
monthly installments, future installments cannot be included, even where the association’s governing documents contain
the right to accelerate future monthly installments in the event of a payment default.)

Without such an affidavit, the association will not share in any foreclosure sale surplus proceeds.

5. Where there is a second mortgage on the unit, additional steps should be taken by the association’s attorney. A
special provision of the foreclosure law provides that if the foreclosure sale of a condominium unit with two mortgages
generates net proceeds of sale greater than the amount owed to the holder of the first mortgage, the association can
receive some of the proceeds of sale otherwise payable to the holder of the second mortgage by giving a special notice
to the holder of the second mortgage. That notice entitles the association to receive auction sale proceeds, otherwise
payable to the holder of the second mortgage, equal to all assessments and related charges first accruing within ninety
(90) days after the special notice is sent. In order to take advantage of this special right, the attorney must prepare and
issue the required special written notice to the holder of the second mortgage on the unit.

As noted, even if the foreclosure sale does not generate any proceeds of sale for the association, Illinois law now makes
it possible for the Association to recover up to six (6) months of assessments owed by the current unit owner from the
person who buys the unit at the mortgage foreclosure auction.

So What Does it All Mean?

At the risk of repetition, but in the interest of clarity, to recover up to six (6) months of unpaid assessments on the sale of a
foreclosed unit to a new owner, the following conditions must be satisfied: (1) the Association must file a lawsuit against
the current unit owner to collect unpaid assessments before the unit is sold at a foreclosure sale, (2) every “paid assessment
letter” issued for the unit must state the amount for which the new owner will be responsible, and (3) disclosures to
prospective buyers made pursuant to Section 22.1 of the Illinois Condominium Property Act for the unit must also specify
the amount for which the new owner will be responsible.

It is the association’s responsibility to make sure that paid assessment letters, and Section 22.1 disclosures for the affected
unit, provide all required information. If collection action is not already in process, the association should issue a 30 Day
Notice and Demand, and then file a forcible entry and detainer lawsuit against the unit’s current owner to establish the
association’s right to collect up to six (6) months of unpaid assessments from the unit’s future owner.

The mortgage foreclosure process is complicated and difficult. The Illinois Condominium Association does have the
opportunity, if the stars are aligned just right, to recover at least some, if not all of past due assessments.