In this era of high delinquency rates and association foreclosures, associations acquiring units encumbered by a senior mortgage should be weary of potential rent skimming issues. As unfair and counter-intuitive as it seems, when an association acquires a unit that has a senior mortgage, using any rent received during the first year after acquiring the unit, for any purpose other than paying amounts due on the mortgage, is “rent skimming,” even though the association otherwise has no obligation to pay the mortgage. Civ. Code § 890(a)(1).
Rent skimming is declared to be unlawful. Civ. Code § 891(f). However, the circumstances under which it is actionable are limited. Civ. Code §§ 891 & 892. The circumstances applicable to associations in most cases involve a lawsuit brought by a lender, a lawsuit brought by a tenant, and criminal prosecution.
A mortgage lender may sue a person who has committed “multiple acts of rent skimming,” whether or not the person has become contractually bound to pay the mortgage. Civ. Code § 891(c). The phrase “multiple acts of rent skimming” is statutorily defined to mean “knowingly and willfully rent skimming with respect to each of five or more parcels of residential real property acquired within any two-year period.” Civ. Code § 890(b).
A tenant may sue a person who has engaged in rent skimming if the mortgage lender forecloses, and the tenant is required to move. Civ. Code § 891(d). Multiple acts of rent skimming are not required for a tenant to sue, and a tenant may sue even if the association received rent from only the unit the tenant occupies.
Criminal prosecution for rent skimming requires “multiple acts of rent skimming,” like liability to a mortgage lender. Civ. Code § 892(a). One court has held that an owner can be prosecuted if rent is received and used intentionally with knowledge that the mortgage is not being paid, even with an innocent motive, no evil intent, and ignorance that it is illegal. People v. Bell (1996) 45 Cal.App.4th 1030, 1042-1043.
The potentially liable or prosecuted persons, in addition to the association itself, include the officers, the directors, and anyone who authorizes rent skimming or who, being in a position of control, fails to prevent another from rent skimming. Civ. Code § 890(c).
There are multiple benefits to foreclosing on units even though rents received in the first year are supposed to be applied to amounts due on the mortgages. Those benefits include demonstrating that the Association takes collections seriously, removing “deadbeat” owners who otherwise would continue to plague the association while the mortgage lenders take a long time to foreclose themselves, being able to keep the rents collected after the first year if the senior mortgage lender does not foreclose in that time (as has seemed to be the case in the last few years), and enabling the association to evict “deadbeat” tenants.
After acquiring a unit that is already occupied by a tenant or before renting out a vacant unit, associations should consult legal counsel to strategize on addressing the rent skimming issues.
Call |
|