Under the Delaware Uniform Common Interest Ownership Act (“DUCIOA”), certain community associations are authorized to foreclose liens just like foreclosing a mortgage on real estate. In Delaware, all mortgage foreclosures are by judicial process and typically take more than ten months to complete when initiated by a secured mortgage lender. When a homeowner defaults on a mortgage, a lender or association may begin the foreclosure process with the filing of a complaint in court in the county where the property is located. Once judgment has been granted in the association's favor, the association must first try to recoup the delinquent fees from the homeowner's personal assets (i.e., garnishing wages and attaching personal property). Once those methods have been exhausted and part or all of the judgment remains unpaid, the association, like a mortgage lender, may proceed to foreclosure.
However, community associations may have one important advantage over mortgage lenders: recently, the State of Delaware extended its Mortgage Mediation Program to allow homeowners, at their option, to elect into a mandatory foreclosure mediation process. This takes time and delays the foreclosure timeline.
But it appears that no effort was made to extend the Mortgage Mediation Program to community associations seeking foreclosure for assessments, as assessments do not constitute a mortgage of real estate. Therefore, after getting the judgment and exhausting its ability to get repayment from the owner's personal assets, an association may go directly to sheriff sale. Of course, the proceeds of such a sale will not all go to the association: mortgage lenders, the State and Federal government, and other creditors may all have priority over the association. If the homeowner owes more than the unit is worth, then the primary, but not insignificant, advantage of moving to a foreclosure is the ability to get rid of a problem homeowner, and hopefully bring in a new dues-paying owner.
And of course the association will have to incur legal fees and costs to move through the entire process to get to the sheriff's sale.
Whether an association should move forward with a foreclosure is a judgment call, and each case will turn on its own facts and circumstances. Some factors to consider in making the decision include:
- Equity. Can the equity in the property be accurately determined? If a homeowner lacks equity as a result of a perfected mortgage, often the most a community can recover from a sheriff sale in Delaware is six months of assessments under DUCIOA section 81-316(b).
- Future Assessments. Is the association’s primary goal the collection of past or future assessments? A sale may not result in a recovery of past assessments but may result in transfer of title to a new owner or the lender, making the collection of future assessments timelier.
- Cost. The fees to the prothonotary and sheriff to conduct the sale can be substantial, even before consideration of attorney fees.
- Lien Priority. Where does the association stand in the line of priority and is the association obligated to expend funds at a sheriff sale to satisfy other encumbrances?
- Likely Purchaser at Sale. Who will purchase the property at the sale, if any? Is the association able and willing to take legal title to the property, and be responsible for taxes, utilities and other costs of ownership if no purchaser materializes at the sale? Does the association intend to become a landlord?
The decision to seek foreclosure of a lien should follow only after a careful analysis of the costs and benefits. Legal counsel can provide a detailed analysis to the Board to assist them in making an informed business decision.
If the association believes the benefits of a foreclosure outweigh the costs, it usually takes two to three months for the sheriff to properly advertise and give notice of the sale. The sheriff will post the sale notice on the property and in other public places at least two weeks before the sale date. The notice should include the date, time, and location of the sale, as well as a brief property description and the location of the property. The notice is also delivered to the borrower and other lien holders and published in local newspapers. Typically, the sheriff's sale takes place at the local courthouse or other governmental building. Confirmation of the sale should occur within several months after the actual sale date, and it is the purchaser’s responsibility to provide a deed to the sheriff to execute evidencing transfer of ownership.