The Georgia Property Owners’ Association Act (“POA”) was adopted in 1994 to expand the powers of homeowners associations. The POA does not, however, apply automatically. Instead, the developer of a community or the members of a community’s homeowners association must “opt-in” to be governed by the POA. The “opt-in” process generally takes place either by the developer when the developer initially creates the declaration of covenants for the community, or by the members of the homeowners association through an amendment to the declaration.
However, developers of most communities do not submit their communities’ covenants to the POA because there is a provision in the POA that assessments cannot be waived. This means a developer would need to pay assessments on each lot it owns, regardless of whether or not the lot has been developed and sold. There is now an exception in the POA that allows developers to waive assessments, as long as they also waive their voting rights. Most developers still do not submit their covenants to the POA because they do not want to lose control of the homeowners association. Accordingly, it is usually after the developer finishes development of a community that the members of the association are able to submit the declaration of covenants to the POA by “opting-in” through an amendment to the declaration. The specific amendment process within a community’s declaration of covenants must be followed for the “opt-in” to occur. For example, if the declaration of covenants states that the declaration may be amended by the consent of two-thirds of the association members, the consent of such two-thirds will be needed in order to submit the declaration of covenants to the POA.
Some of the benefits of the POA include the following:
Automatic Statutory Liens
After submitting to the POA, the association will no longer be required to file liens at the county courthouse for unpaid assessments or other charges. Instead, the POA creates an automatic statutory lien against a delinquent owner’s lot. In other words, the association will no longer have to file individual liens against lots in order to secure unpaid assessments; rather, the POA provides that the declaration of covenants itself serves as notice that there is a lien for any unpaid assessment or other charges. As a result, closing attorneys, title examiners, purchasers or owners will generally contact the association for a statement of any amounts owed to the association prior to concluding a sale or refinance of the lot. If the association is not paid out of the proceeds of the sale or refinance, the lien continues against the lot and will generally have priority. The statutory lien also results in a secured claim of the association against an owner if the owner files for bankruptcy.
Joint and Several Liability to Pay Assessments
The POA includes another provision that generally strengthens an association’s assessment collection powers. That is, the POA provides that unless the declaration of covenants states otherwise, the grantee (or buyer) of a house is jointly and severally liable with the grantor (or seller) for all unpaid assessments. That means that if the automatic statutory lien is not paid at the closing, the association can proceed against the new owner who will be personally liable for all amounts owed prior to the closing. (Note that the new owner can then seek reimbursement from the previous owner, but the association would not be involved in that dispute.)
Late Fees and Interest
Submission to the POA allows the association to charge a late fee of the greater of $10.00 or ten percent (10%) of the amount due, and interest at a rate of ten percent (10%) per annum on unpaid assessments and charges. These provisions must also be stated within the declaration of covenants, so as part of the amendment process, we generally will include these provisions to strengthen the community’s collection powers.
Attorney’s Fees and Costs of Collection
The POA authorizes the recovery of the association’s costs of collection of the delinquent assessments, including reasonable attorney’s fees actually incurred. If your community’s declaration of covenants does not already use the term “attorney’s fees actually incurred,” we generally will include that provisions as part of the amendment process.
The POA provides that to the extent provided in the declaration of covenants, a board may specifically assess expenses to an owner if the conduct of the owner or the owner’s tenants or guests caused the expense. For example, if an owner or owner’s child damages common property that the association then pays to repair, or an owner causes the association to incur attorney’s fees in covenant enforcement against the owner, then those amounts may be specifically assessed against the owner.
The POA also clarifies that all owners and tenants (i.e., people who rent a house in the community from the owner) must comply with all the provisions of the declaration of covenants and the association’s rules and regulations.
Fines and Suspension
The POA gives the association a statutory power to assess fines against violators and to suspend the common area use rights of violators, provided the ability to fine and suspend are stated in the declaration of covenants. We will therefore generally include such provisions as part of the amendment process. Fines constitute a lien against the violator’s lot, and the ability to fine significantly strengthens the association’s powers to enforce the covenants and the rules and regulations.
Prior to 1993, Georgia law at Code Section 44‑5‑60 generally provided that covenants expire after twenty years. That statute was amended in 1993 to permit covenants to automatically renew, but the Georgia courts have held that covenants in communities that were recorded prior to 1993 do not receive the benefit of the new 1993 law. One of the extremely important benefits of the POA is that it has a provision that states Code Section 44‑5‑60 shall not apply to any covenants contained in any instrument submitted to the POA. That means that if a community’s covenants were recorded prior to 1993, submission to the POA now would eliminate the possibility that the covenants will expire after twenty years. Also, as part of the amendment process when we submit a community’s covenants to the POA, we will generally include an amendment that the covenants will be for a perpetual duration.
Note that the issue of pre-1993 covenants expiring after twenty years is still an issue that is being decided by the courts. There have been many interesting decisions in the last few years addressing this issue. One of the more interesting cases is a Georgia Court of Appeals case from 2002 that states that although pre-1993 restrictive covenants expire after twenty years, affirmative covenants, such as the obligation to pay assessments, do not expire under Code Section 44-5-60. The issue of which covenants are restrictive and which covenants are affirmative is still an open issue for the courts to decide. Our opinion is that to best protect the community, opting into the POA to eliminate the provisions of Code Section 44-5-60 is the best option to avoid this ongoing issue in the courts of covenant duration.
In addition to addressing covenant duration, Code Section 44-5-60 states that no change (i.e., amendment) in the covenants which imposes a greater restriction on the use or development of the land will be enforced unless agreed to in writing by the owner of the affected property at the time such change is made. For example, if your community passes an amendment to restrict the number of houses that may be leased at any one time, Code Section 44-5-60 could be asserted that the leasing restriction will not be enforceable against any homeowner who voted against the amendment because such owner did not agree to the amendment in writing.
The best option is to eliminate the owner’s Code Section 44-5-60 assertion altogether. To that end, as stated above, one of the important benefits of the POA is that it states that Code Section 44 5 60 shall not apply to any covenants contained in any instrument submitted to the POA. Accordingly, if your community’s covenants were created by the developer pursuant to the POA, or if your covenants have been amended to submit them to the POA, the limitations within the above Code Section 44-5-60 do not apply. That means the approved amendment to limit leases in the above example would be enforceable against the entire community, including those homeowners who voted against the amendment.
Community associations cannot fulfill their obligations related to maintenance, repair, and operations without owners paying their assessments. Many associations have had enough of delinquent owners who continue not to pay and are increasingly looking to foreclosure as a way to rid themselves of these deadbeat owners.
There are two types of foreclosure in Georgia. Judicial and non-judicial. A typical non-judicial foreclosure is a mortgage which provides that if an owner does not pay the monthly payments, the mortgage company may foreclose without having to sue the homeowner. By contrast, community association foreclosures are judicial foreclosures that do require the association to sue the owner.
Once an association has sued an owner and obtained a judgment, the biggest hurdle to foreclosure had historically been the legal requirement that the association pay off any pre-existing mortgage or lien against the owner’s property prior to foreclosure. Since most owners have a mortgage, and since most associations do not have the extra cash on hand to pay off the owner’s mortgage, community association foreclosures have been rare.
That all changed for many community associations on July 1, 2004 with an amendment to POA. The amendment to the POA specifically authorizes judicial foreclosures of community association liens subject to prior mortgages or liens. This means that associations governed by POA are no longer required to pay off the owner’s existing mortgage or lien prior to foreclosure. This does not mean, of course, that the owner’s existing mortgage or lien simply disappears. Instead, any mortgage or lien will remain in place against the property after the association forecloses and will need to be paid off to avoid a subsequent foreclosure by the holder of that mortgage or lien. The following two examples illustrate how this works.
In the first example, assume an owner, Carl, owns a townhouse valued at $100,000, owes $50,000 on his mortgage, and owes the association $10,000 in past due assessments. The association sues Carl and obtains an order for judicial foreclosure under the POA. The association then auctions off the townhouse for $10,000 on the courthouse steps through the sheriff’s department. An investor, Sally, buys the townhouse for $10,000, and the association is paid the $10,000. The association is paid off in full, and the foreclosure terminates Carl’s ownership of the townhouse. The association is very happy with this result.
But what about the existing $50,000 mortgage? Sally is now the legal owner, and Carl’s $50,000 mortgage is still against the property. Since Carl is no longer the owner, there is little likelihood he is going to continue to make his monthly mortgage payments. Sally knows this will result in Carl’s mortgage company foreclosing out from under her, so to prevent that from happening, she pays off the $50,000 mortgage directly. She thus bought a townhouse valued at $100,000 for a combined purchase price of $60,000 with $10,000 to the association and $50,000 to the Carl’s mortgage company. Everyone, except Carl, is a winner in this perfect situation.
As we all know, however, perfect situations do not come along every day. Instead, this second example is what is more likely to occur. Assume again that Carl owns a townhouse valued at $100,000 and again owes the association $10,000 in past due assessments. But this time he owes $95,000 on his mortgage. Assume again that the association obtains an order for judicial foreclosure and that the townhouse is auctioned off on the courthouse steps. Sally once again attends the auction but this time does not bid on the townhouse because she knows she will have to pay the association $10,000 to obtain ownership of the townhouse and will then have to pay Carl’s mortgage company $95,000 to prevent it from foreclosing out from under her. She does not want to spend a combined purchase amount of $105,000 on a $100,000 townhouse. Likewise, no other investor is going to purchase the townhouse. In this situation, the association will purchase the townhouse for the judgment amount of $10,000. The association does not actually pay $10,000 in cash; it instead, in essence, exchanges its $10,000 judgment for the townhouse. The association thus becomes the owner, and Carl’s ownership is terminated.
But what about the existing $95,000 mortgage? Since the association does not have the money or desire to pay off the existing $95,000 mortgage, Carl’s mortgage company will foreclose on the $95,000 mortgage out from under the association. The association will thus lose its short-lived ownership of the townhouse and will not be paid any money, but, the good news is that it will be rid of Carl as an owner, which was its goal from the beginning. And there is also a very good chance the mortgage company, after its foreclosure, will sell the townhouse to a new owner who will pay assessments.
In addition to the two examples above, there are several other possible turns the foreclosure action can take. We have seen situations where the owner pays in full to avoid the foreclosure, and we have seen owners file for bankruptcy. We have also successfully had property auctioned off and have had a title insurance company pay over $20,000 to prevent a foreclosure.
The primary purpose of foreclosure is to terminate the delinquent owner’s ownership of the property to keep past due assessments from continuing to accrue, and there is no guarantee an association will receive any funds as a result of foreclosure. As long as the association’s board understands this upfront and does not have false expectations, the foreclosure process can be extremely beneficial to stop the bleeding.
Fortunately, the amendment process to obtain the consent of the association members to opt into the POA can often be done by going door to door, depending upon the specific amendment provisions within a community’s governing documents. While owners rarely oppose submitting to the POA, associations often face the problem of overcoming owner apathy. Developing a strategy to adopt the POA can therefore be the key to obtaining the necessary approval of the owners needed to amend the community’s declaration of covenants. Please contact us at your convenience if you would like to learn more about amending your community’s declaration of covenants to submit to the POA and developing an amendment strategy.