Obligations Under Condo Declaration Run with the Land

Posted by NCBRC - April 19, 2016

Obligations under a Condominium Association Declaration agreement run with the land and a condominium association may rent properties surrendered in bankruptcy and apply rent monies to pre-petition assessments without violating the discharge injunction. In re Montalvo, No. 10-8338 (Bankr. M.D. Fla. Feb. 25, 2016).

In his chapter 13 bankruptcy Mr. Montalvo surrendered his interest in two condominiums for which he owed assessments to Villa Medici Condominium Association under its Declaration. In accordance with Florida law, the Declaration provided that the assessments were secured by a lien on the property. Mr. Montalvo’s plan provided that he would remain responsible for post-petition assessments and that those debts were not subject to the automatic stay. Mr. Montalvo made his payments under the plan to his other creditors but did not make any payments to the Association for assessments and fees. He received his discharge.

At the Association’s request a Florida state court appointed a Receiver to rent out the debtor’s condominiums and the Association applied the collected rents to Mr. Montalvo’s pre-petition assessments. Mr. Montalvo filed for sanctions arguing that by applying the rent money to discharged pre-petition debts, and by attempting to collect discharged post-petition assessments, the Association violated the discharge injunction and the automatic stay.

The case turned on whether the debtor’s obligation to pay the assessments were covenants that ran with the land, in which case they would be liens that would survive bankruptcy, or were contractual obligations subject to discharge.

Three approaches have been followed by courts addressing the effect of bankruptcy on homeowners association fees. One line holds that post-petition assessments are nondischargeable because they are covenants that run with the land. Another treats the assessments as arising out of pre-petition contract, and the third splits the difference and holds that debtors who surrender and vacate the property are not liable but those who remain on the property are.

The court turned to state law to determine which approach to apply. Under Florida law a covenant running with the land concerns the “property conveyed and the occupation and enjoyment thereof, whereas the latter covenant is collateral or is not immediately concerned with the property granted.” Generally a covenant that involves the land or some right or easement annexed to the land that tends to enhance its value, is deemed a covenant running with the land.

Finding that under the terms of the Declaration and under Florida condominium law, the obligation to pay the assessment was a covenant running with the land, the court concluded that both of Mr. Montalvo’s claims against the Association failed.

With respect to the Association’s application of rent monies to pre-petition debt for which the debtor had no personal liability after his discharge, the court found no violation of the discharge injunction or the automatic stay. The money did not come from the debtor himself and the Association continued to hold a lien on the property post-discharge.

As to the post-petition assessments, the court found they were not discharged in Mr. Montalvo’s bankruptcy, both because he failed to comply with the plan provision to pay them, and because they represented post-petition in personam liabilities for which the debtor did not obtain a discharge. The fact of the debtor’s surrender of the property was irrelevant. So long as Mr. Montalvo was the record owner of the properties, he was responsible for the assessments.

Montalvo Bankr MD Fla opinion

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