The Perils of Borrowing

The Perils of Borrowing

By Michael J. Gelfand, Esq. / Published December 2016



This month brings us three issues of importance to all Florida associations: borrowing money, restrictive endorsements on checks, and fire sprinkler retrofitting.


Everyone Is Doing It

Borrowing seems like the American way. You read that the economy depends upon individuals and businesses borrowing to expand capacity and the market. Government programs encourage borrowing, including the Federal National Mortgage Association, “Fannie Mae,” and the federal income tax interest deduction. So why does the pop melody of the Roaring Twenties, “Everyone Is doing It,” not work, or work easily, for many Florida not-for-profit condominium and homeowners associations?

The answer is that Florida community associations are organized, have purposes, and must fulfill obligations that are different from individuals and businesses, including how the associations budget and expend monies.

Thus, association borrowers face many perils. Unfortunately, too frequently those perils are not recognized until after directors have signed loan papers and obligated their communities to hundreds of thousands, if not millions, of dollars of debt for years. Will you be embarrassed when you hear the question, “You didn’t ask anyone, like the lawyer, before signing papers for a million dollars?” A response that “the bank said it was standard and that everyone does it” does not fly.

While Florida’s Not-for-Profit Corporations Act generally allows borrowing, §617.0302(7) Fla. Stat. (2016), the law is subject to more specific and targeted statutes, a community’s “governing documents,” and, of course, common sense and reasonableness.

Many community association documents outright prohibit borrowing. Some documents limit duration, dollar amount, and purpose. Limitations also restrict who may approve borrowing, for example requiring a super-majority membership vote such as two-thirds or three-quarters. Restrictions may be in a Declaration of Condominium or Covenants, the Articles of Incorporation, or By-Laws. Statutory requirements that a budget include anticipated expenses must be considered. Thus, it is imperative for an association to carefully review all of its governing documents and applicable laws.

The “fine print” that you might have ignored for your personal loans becomes important when a volunteer signs loan papers for a community association. You might be surprised to learn that these are frequent terms:

  • Directors signing personally guarantee that the loan papers are correct and that the association has the ability to borrow and do everything the papers mention. Some lenders acknowledge, discretely, that this is akin to directors guaranteeing loan repayment!
  • Each signing director can bind the association to new loans and agreements without a meeting or a vote.
  • All deposits can be used by the lender to pay off all loans without notice. There is no exception for reserves, which all directors should know are restricted and normally cannot be applied to a loan unless expressly authorized by the owners in advance.
  • The lender may require owners to pay assessments to the lender, effectively cutting the association’s life blood.
  • The association waives its rights to a jury trial and a trial by an independent judge.
  • Disputes must be resolved in a location of the lender’s choosing, such as Rapid City, South Dakota, or a location that is inconvenient, in which no local counsel is available to represent the association, and in which the lender is the biggest business in town.
  • For a line of credit, the association must draw all of the funds immediately, starting interest accruals immediately.
  • The association must provide an attorney’s opinion that every step in the process was correct and all the papers are enforceable. This means, for example, concerning the vote to approve a loan, the attorney must not only draft the notice of meeting, but also personally supervise the notice’s posting, attend the meeting, and prepare the minutes.

This is only a short list of issues.

Many directors do not realize that by signing the lender’s commitment letter, the director has done what the letter says: committed the association. Note that a lender’s commitment letter is not standard across all lenders. These are areas of negotiation.

Perhaps the moral to the story is the same you learned as a child, and you taught your children. Just because “everyone does it” does not mean that your stewardship of your community’s association should result with the same mistakes that “everyone else” has done.

There are many reasons why an association would legitimately consider borrowing. Thus, particularly because directors are volunteers who “want to do the right thing,” it is imperative that before you go to a lender, confer with counsel to ensure that your governing documents allow borrowing, and to determine whether the purpose for the loan is consistent with the documents. Sometimes you may need to amend your documents before sitting down with a lender.

As always, the time to read and confer with counsel is before you sign! Despite what you may have heard from the poolside legal sharks from up north, Florida does not provide a cooling-off period for association loan agreements.

Read, consult, and think before committing your association to long-term agreements for hundreds of thousands or millions of dollars.

Restrictive Endorsement on Check Does Not Amount to Accord and Satisfaction Barring Collection

During the course of collecting assessments, an association may receive a check which contains the words “payment in full.” What happens if the check does not cover everything that is owed? If the association deposits the check as it is required to do so pursuant to Florida law, is this an accord and satisfaction? In other words, is there a settlement meaning the association is barred from collecting the remaining amount that is owed?

A recent Florida appellate court concluded that a restrictive endorsement placed on a payment was not an accord and satisfaction and does not bar collection of all funds due. In Madison at Soho II Condominium Association Inc. v. Devo Acquisition Enterprises LLC, No. 2D15-2067 (Fla. 2nd DCA, August 24, 2016), a condominium association demanded approximately $28,000 from the new owner of a condominium unit.

The owner sent the association $2,412 as a proposed offer for accord and satisfaction of the past due assessments. Although the association informed the owner that the association rejected the offer, the association nonetheless deposited the check two days after the owner sent its offer. The association then filed a lien foreclosure action against the owner for failing to pay over five years of assessments. The trial court granted summary judgment for the owner on the grounds that “a full accord and satisfaction took place pursuant to Florida Statutes.”

After the trial court rendered its decision, the Florida Legislature amended Section 718.116(3), Fla. Stat., which now reads:

Any payment received by an association must be applied first to any interest accrued by the association, then to any administrative late fee, then to any costs and reasonable attorney fees incurred in collection, and then to the delinquent assessment. The foregoing is applicable notwithstanding. . .any purported accorded and satisfaction, or any restrictive enforcement, designation, or instruction placed on or accompanying a payment.

The owner argued that statute should not be retroactively applied to it.

The Florida appellate court rejected the owner’s argument and reversed the decision of the trial court. The court observed that the legislation was intended to clarify existing law.

Consequently, restrictive endorsement on a check will not automatically bind a condominium association. A condominium association may accept a check and apply it as set forth in the statute. This means that a partial payment normally is applied to interest first, then late charges, costs, and fees before paying down the assessment. There does not appear to be any reason why that statute’s clarification should not be similarly interpreted in the homeowners association context.

Fire Sprinklers: The Last Word, Hopefully

In the third, and hopefully last, act of the fire sprinkler saga, the Division of Florida Condominiums issued a statement which provides that “neither the Florida Condominium Act nor the Florida Cooperative Act mandate that associations install fire sprinklers.” As such, it now appears that there is no mandate under the Condominium Act which requires buildings to undergo retrofitting!

Recognizing that each condominium association needs to be individually evaluated, the firm generally recommends that low-rise condominiums consider the following:

  1. If you have already sent out the notice and proxy materials, you may want to finish up the process.
  2. If the meeting and proxy materials have been prepared but not sent out, you may want to finish up the process, unless it becomes too burdensome.
  3. If the paperwork has not yet been prepared, you may decide not to proceed.

     Of course, high-rise condominiums should consult with counsel unless they have installed code-compliant sprinklers. Please contact your association’s counsel with any questions, particularly since this issue has created much confusion.



Michael J. Gelfand, Esq.

Senior Partner of Gelfand & Arpe, P.A.

Michael J. Gelfand, the Senior Partner of Gelfand & Arpe, P.A., emphasizes a community association law practice, counseling associations and owners how to set legitimate goals and effectively achieve those goals. Gelfand is a Florida Bar Board-Certified Real Estate Lawyer, Certified Circuit and County Civil Court Mediator, Homeowners Association Mediator, an Arbitrator, and Parliamentarian. He is the Chair of the Real Property Division of the Florida Bar’s Real Property, Probate, & Trust Law Section, and a Fellow of the American College of Real Estate Lawyers. Contact him at or (561) 655-6224.