Our practice frequently involves protecting the rights of clients who employ seller-financing to promote the sale of both residential and commercial real property. One of our recent significant efforts in this area, an amicus curiae brief before the Florida Supreme Court, can be seen online at:
To put this brief in context, imagine you have sold real estate and taken as payment a promissory note secured by a mortgage, a common practice. As time passes, although the buyer makes payments, the municipal authorities assert that the requirements of the municipal code have been violated. Code enforcement proceedings can arise from any number of issues, such as failing to mow the grass to construction without a permit to failing to maintain physical structures. Having sold the land, you have limited options for securing compliance with the municipal code, and may not even be notified of the situation until after the code enforcement proceeding has concluded. You could declare default and foreclose, but if the buyer is making payments you may not want to, and by the time a foreclosure can be completed penalties will likely have been already imposed. Such penalties could potentially total hundreds of thousands of dollars. Since you have recorded your mortgage, you might think yourself to be in a prior position as to any subsequent code enforcement claim. Then you learn that the municipal authority claims that its code enforcement lien will be superior in dignity to your previously recorded mortgage. If so, this would effectively impose the sanction for your buyer’s code violations directly against the interest of an innocent mortgage holder.
This scenario is no mere hypothetical. In recent years, a number of municipalities have adopted ordinances providing for code enforcement liens to have priority over previously recorded mortgage interests. This kind of ordinance is of obvious concern to banks, but equally at risk are those who have sold land and taken back a mortgage directly. Both banks and owner financers can suffer a reduction of their security in the amount of a code enforcement lien if the buyer does not maintain the property to the satisfaction of municipal authorities. Can a city do this?
We say no. Serious legal objections have been raised against municipal power to elevate a code enforcement lien to be superior in dignity to a previously recorded mortgage. In City of Palm Bay v. Wells Fargo Bank, 57 So.3d 226 (Fla. 5th DCA 2011), the Court held that such ordinances are invalid because they are contrary to state statutory law providing that first in time is generally first in right in determining priority of recorded interests. The Florida Supreme Court has granted review of that decision, and, along with the other parties, we will defend the decision before the Court. If our position prevails, seller financing will be safe from this type of governmental infringement.