Once the mortgage foreclosure sale occurs, the homeowner has a statutory redemption period, an amount of time in which they can pay the amount bid at the sale, plus allowable extras. The period is usually six months, but it can be as long as twelve months or as short as five weeks if the property is abandoned. There are two main topics that arise following a foreclosure: redemption rights of the association and payment of assessments post foreclosure. I’ll address each of these topics.
What redemption rights does the association have?
Associations that are governed by the Minnesota Common Interest Ownership Act (MCIOA) (see the March/April 2012 issue on the CAI-MN website for coverage answers), have a statutory lien on the units in its association. This lien is junior to the first mortgage, but senior to any second mortgage. Most associations that are not governed by MCIOA have a similar lien, granted by the recorded declaration. When a mortgage company forecloses on a unit, the association, being a junior lien holder, has the first right to redeem the property from the foreclosure sale if the owner does not redeem. Mortgage companies often bid less for a property than they are owed, creating a redemption opportunity for the association.
Why would an association want to redeem?
Generally to recover what was owed to them by the owner that was foreclosed upon and possibly to make additional money for the association. A homeowner who failed to pay their mortgage is often delinquent with the association assessments as well. The association could pursue a personal judgment against the individual, but the ability to foreclose is extinguished by the mortgage foreclosure sale. By redeeming from the mortgage foreclosure sale, the association can then sell the property to recover the delinquent assessments, and sometimes additional money.
Some associations do not want to redeem a unit due to a variety of issues, including finding the funding to pay the redemption price and the loss of assessments during the time it holds the unit. In this case, the association can sell its lien rights to a third party. A third party can pay the association for its lien, and then redeem the unit. The added benefit of selling the lien is that there is always a party responsible for payment of assessments. The third party would become responsible for dues should the property not sell quickly. Had the association redeemed, there would be no assessments being paid until the unit was sold.
When does the mortgage company have to pay and how much?
When an association property is sold at a foreclosure sale, the sheriff issues a Sheriff’s Certificate of Sale, this is often referred to as simply the “sheriff’s certificate”. This document provides the high bidder at the sale with the right to the property, should the owner fail to redeem the unit. In MCIOA associations, the holder of the sheriff’s certificate takes the property subject to a lien in favor of the association for assessments that came due and owing in the six months preceding the end of the redemption period. Unlike with a typical owner, there is no personal obligation for the holder of the sheriff’s certificate to pay the assessments. The association would be unable to sue to obtain a judgment for the amount of the assessments. However, that does not mean that the association is unable to collect the assessments. Because there is a statutory lien, the association is able to foreclose the lien and take over ownership of the unit.
While the lien is for six months of assessments, the payment of those assessments is not required until the end of the redemption period. For example, if a sale occurred on January 15, the assessments would accrue until June 15. At that time, the holder of the sheriff’s certificate would have to pay the assessments, or risk the association foreclosing the lien.
The most common scenario is that the holder of the sheriff’s certificate owes assessments beginning with the date of the foreclosure sale. However, should the redemption period be shortened to five weeks, the certificate holder will take the property subject to a lien for assessments that came due and owing prior to the foreclosure sale.