Condo groups seek relief for unpaid fees

Posted April 05, 2009, at 9:06 p.m.

PORTLAND, Maine — With more condominium owners defaulting on their mortgages, condo associations in Maine are seeking relief.

When condos are foreclosed upon and their owners leave, the other condo owners are left to pick up the tab for monthly fees that are used to pay insurance and maintain and repair common property.

Condo associations around Maine are now asking for a change in state law governing condominium rules to allow them to recover some of that lost money from lenders after the owners bail. They say they are being pinched because of the rising number of foreclosures.

But banks and other lenders oppose the idea, not wanting to be on the hook for unpaid condo fees.

The two sides will offer their views during a public hearing at the State House on Wednesday before the Legislature’s Judiciary Committee.

Maine has an estimated 1,500 to 2,000 condominium units, according to the state’s branch of the Community Associations Institute, which represents condo associations.

While some condo developments have more than 200 units, many associations are small with just a handful of units.

Small associations are especially hard hit when owners stop paying fees, Joseph Carlton, a lawyer who is co-chairman of the institute’s Maine Legislative Action Committee, told the Portland Press Herald. Typical fees run $100 to $200 a month, so when even one or two units are in default, associations have trouble paying insurance premiums, keeping the building in good repair and paying for snowplowing and other services.

One possible remedy is for associations to go to court and file a lien to secure the overdue payments. But in a foreclosure, the lender holding the first mortgage on the property is entitled to the proceeds from the sale, minus unpaid taxes, to retire the debt.

In today’s market, with many homes selling for less than what their owners paid, the sale may not generate enough money to pay the entire bank loan. That leaves nothing for the condominium association.

“That means the association is left holding the bag,” Carlton said.

To address the issue, Larry Clough, a Portland lawyer who helped write the state’s original condo laws in 1983, has drafted language modeled after recent legislation in Rhode Island. It aims to give associations a six-month priority over existing first mortgages for regular fees that would have been due during that period.

That means when an association files suit to enforce its lien against nonpayment, the mortgage holder would have to pay money owed six months back from that date, the maximum allowed by federal lending agencies.

Supporters also expect to ask lenders to pay lawyer fees incurred in enforcing the lien, as a way to encourage negotiations. And in practice, they could file a new lien if another six-month period passes without payment, Clough said.

The proposal isn’t sitting well with banks and other lenders, who are expected to oppose the bill during the public hearing.

“We’re the ones at risk for a large amount of money,” said Chris Pinkham, president of the Maine Association of Community Banks.

Pinkham said banks share the concerns of condo owners and don’t want to see property values erode if maintenance is deferred. But associations also need to be prudent, he said, and establish reserve accounts that can handle expenses when fees aren’t paid.

Bankers expected their institutions to be the first in line to be paid for primary mortgages when they lent money, he said. Changing the law now would change the rules under which they had agreed to make the loans.

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