HOA Liens: How “Super” is Super Priority?

Because of their “super” status, Homeowners Association liens are a particular form of confusion and frustration for Mortgage servicers and their attorneys. The content covers legal and process issues that affect a servicer’s ability to assert their position in a property and any other relevant subtopics.superman

Super-priority is more or less the circumvention of the traditional legal concept of “first in time, first in right,” meaning first to notice, file, or record is first in right, meaning that an association’s lien has higher priority over previously recorded liens. Currently, twenty-one states require the foreclosing lender to pay between six months and twelve months, or some variation of periodic assessments to the association at some point during the lender’s foreclosure process.[i] Depending on the state, the beneficiary of the super-priority liens are either condominiums or homeowners associations, or both. As of November 2017, four out of the top five states with the highest foreclosure rate have super-priority HOA statutes.[ii]

In Florida, associations must be named in the foreclosure process as a subordinate lienholder and interested party[iii] and the foreclosing lender cannot assign the bid to a third-party before the sale[iv] in order to qualify for the allowable statutory “safe harbor” provisions.[v] The 2008 Florida statutes were amended to allow an association’s lien to “relate back to the date on which the original declaration of the community was recorded”[vi] reserving a caveat for pre-2008 mortgages.[vii]

Nevada has recently disrupted the lending industry with a shocking decision in SFR Investments Pool 1 v. U.S. Bank.[viii] In this 2014 decision, the court clarified the differences between “true lien priority” and “payment priority” and held that associations hold a “true lien priority” which can unequivocally extinguish a first mortgage upon following the proper foreclosure procedures. [ix]

In Washington, a COA’s lien maintains a limited priority over a mortgage, subject to a relatively recent statute.[x] That limited priority mandates the lender to pay six months of assessments to the COA prior to the foreclosure sale date.[xi]

 

Other Jurisdictions

  • While not a designated “super” priority state, Arkansas recognized that a first mortgage does not entirely extinguish an association’s interest in delinquent assessments.[xii]
  • The District of Columbia[xiii] and Rhode Island[xiv] held that a first mortgage is subordinate to an association lien and the association could extinguish the first mortgagee’s interest.
  • On the more extreme end of the “super” priority spectrum, Massachusetts allows for multiple successive liens (every six months), all of which can be contemporaneously enforced.[xv]
  • Vermont extends its super priority status to assessments that have accrued during the first mortgagee’s foreclosure action plus the prior six months of assessments.[xvi]

In order to preserve the first mortgagee’s lien enforcement rights, some options include: (i) paying off the association’s lien, (ii) keeping the borrower’s account current with the association, (iii) redeeming the property in the association’s foreclosure, (iv) reviewing potential lien priority issues at the loan origination stage, (v) including language in mortgages requiring escrow of association assessments to ensure timely payment, (vi) timely participation in association lien enforcement actions, (vii) referring lien priority determination files to their foreclosing attorneys in each jurisdiction, (viii) requiring an assignment or proxy designation of borrower-owner association voting rights, (ix) requiring assessment invoices, billing statements, and periodic notices be sent to the lender to ensure timely payment or, at least, to allow the lender to monitor the status of an account, and (x) revising the terms of a mortgage to include non-payment of super-priority eligible associations’ assessments be considered a default under the terms of the mortgage.

Overall, lenders and associations must jointly navigate the same laws. While super priority may not be the fairest or the easiest resolution to the problems legislatures face in protecting all interests in real estate properties, it is certainly one solution. In order to properly and effectively navigate these complex laws, lenders should consult with their relevant jurisdiction’s attorney for a case-specific strategy on (i) how best to enforce the terms of the mortgage in case of a default and (ii) how best to preserve its lien in the case of an association foreclosure.

[i] Priority Lien for Collecting Delinquent Assessments. https://www.caionline.org/Advocacy/StateAdvocacy/PriorityIssues/PriorityLien/Pages/default.aspx (Alabama, Alaska, Colorado, Connecticut, Delaware, District of Columbia, Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Puerto Rico, Rhode Island, Vermont, Washington, West Virginia)

[ii] U.S. Real Estate Trends & Market Info: Foreclosure Trends. http://www.realtytrac.com/statsandtrends/foreclosuretrends (Alabama 1/2286, Alaska 1/4259, Colorado 1/4170, Connecticut 1/1391, Delaware 1/875, District of Columbia 1/1876, Florida 1/2361, Hawaii 1/3626, Illinois 1/1196, Maryland 1/981, Massachusetts 1/1862, Minnesota 1/3772, Missouri 1/2226, Nevada 1/1407, New Hampshire 1/3894, New Jersey 1/734, Oregon 1/3135, Pennsylvania 1/1723, Puerto Rico (unknown), Rhode Island 1/2324, Vermont 1/7176, Washington 1/5206, West Virginia 1/9372)

[iii] Fla. Stat. 720.3085(2)(c)(2)

[iv] Bay Holdings, Inc. v. 2000 Island Boulevard Condominium Association, 895 So.2d 1197 (Fla. 3d Dist. App. 2005) (holding that a title holder by virtue of a Certificate of Title whom was an assignee of a foreclosure final judgment did not qualify as a first mortgagee, successor, or assignee under Fla. Stat. 718.116(1) and therefore did not qualify for the safe harbor protections.)

[v] Under this statute, the foreclosing lender only has to pay the super-priority portion of the HOA’s lien to a certain degree – the lessor of (i) the past twelve months of regular assessments or (ii) one percent of the original mortgage debt. This statute is still triggered if a Deed in Lieu of Foreclosure is utilized as an alternative to a traditional judicial foreclosure.

[vi] Fla. Stat. 720.3085(1) (2008-2017)

[vii] Id.

[viii] SFR Investments Pool 1 v. U.S. Bank, 334 P.3d 408 (Nev. 2014); Prior to this decision, Nevada’s prior version of the controlling statute was found to have violated the Fourteenth Amendment’s Due Process Clause. See Bourne Valley Court Trust v. Wells Fargo Bank, 832 F.3d 1154 (9th Cir. 2016)

[ix] NRS 116.3116(2); This was later adopted by the Uniform Common Interest Ownership Act (UCIOA) (2014) §3-116 cmt. 2

[x] The Washington Condominium Act of 1989 governs the rights of condominium associations, including the lien priority over lender’s mortgages. While it is effective only for condominiums created after July 1, 1990. A COA lien is considered superior to a mortgage, unless the mortgage is recorded before the declarations of the condominium or before the assessments become delinquent.

[xi] Only periodic assessments for the annual COA’s budget for common expenses are specifically granted the limited super priority over mortgages, while capital improvement assessments and attorney fees and costs from collection efforts are examples of the limitations to the COA lien’s super priority status. See Summerhill Village Homeowners Association v. Roughley, 289 P.3d 645 (Wash. Ct. App. 2012)

[xii] First State Bank v. Metro.District Condos Property Owner’s Association, Inc., 432 S.W. 3d 1 (Ark. 2014)

[xiii] Chase Plaza Condo. Ass’n, Inc. v. JP Morgan Chase Bank, N.A. 98 A.3d 166 (D.C. 2014)

[xiv] Twenty Eleven, LLC v. Botelho, 127 A.3d 897 (R.I. 2015)

[xv] Drummer Boy Homes Association, Inc. v. Britton, 47 N.E. 3d 400 (Mass. 2016)

[xvi] Bank of America, N.A. v. Morganbesser, 2013 WL 9792479 (Vt. 2013)

Written By:  Jessica Skoglund Mazariego, Esq., Attorney
             Gilbert Garcia Group, P.A., a Florida Law Firm

 

 

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SECOND DISTRICT COURT OF APPEALS RULES ON HOA ISSUE

By Jennifer Lima-Smith, Esquire

Partner, Gilbert Garcia Group, P.A.

The Second District Court of Appeals issued a decision on September 2, 2016 in the case of Ballantrae Homeowners Association v. Federal National Mortgage Association (2D15-1025 and 2D15-1026). The case involves a consolidated appeal from final summary judgments entered by the trial court in favor of Federal National Mortgage Association otherwise known as “Fannie Mae.” The District Court of Appeal reversed the trial court’s decision granting summary judgment in favor of Fannie Mae.picture3

 

The background facts indicate there are two properties governed by the Associations Declaration of Covenants, Conditions and Restrictions. Each property was encumbered by a recorded first mortgage and also by the homeowner’s association lien for unpaid assessments. The borrowers on both properties defaulted on their mortgages. The servicers of the loans initiated foreclosure proceedings. Neither foreclosure case included the HOA as a party to the action as a defendant. Final judgments were entered in favor of Fannie Mae and were sold to Fannie Mae. Subsequently, an estoppel of the assessments due was sought by Fannie Mae. The amounts due to the association was challenged. Fannie Mae requested a declaratory and injunctive relief on the amounts due and stated their responsibility was limited to the assessments accrued after it acquired title to the properties. The trial court examined the Declarations and concluded Fannie Mae was only liable for the unpaid assessments after it acquired title and the HOA was ordered to provide an estoppel letter reflecting the reduction.

The appellate court distinguished other appellate case decisions and examined the language of the Declarations. The appellate court determined the Declaration’s subordination verbiage contained provisions to subordinating the assessment lien to the 1st mortgage but it did not contain wording specifically limiting or eliminating the subsequent owner’s liability for unpaid assessments. The reviewing court examined the law and found that it is well established under common law, the foreclosure of a senior mortgage extinguishes that of a junior mortgage listed in the final judgment. However, it is also well established that where a junior lienholder is not made a party to the foreclosure brought by the senior mortgage holder, “the lien of the junior mortgagee is unaffected by the judgment.” Abdoney v. York, 903 So.2d 981, 983 (Fla. 2d DCA 2005); See also, Willoughby Estates v. Bankunited, No. 2014AP000015, 2015 WL 5472506 at *2 (Fla. 15th Cir. Ct. June 23, 2015). At foreclosure therefore, the association’s lien rights were not adjudicated and the assessments liens remained intact. The appellate court concluded, the sale was held and the junior lienholders had no opportunity to bid or stir up others to benefit from a surplus.

The court stated the only remedies available to Fannie Mae are to move to compel redemption or filing a new action to re-foreclose. The association can defend itself in the same manner as if the foreclosure never happened. The court also stated that Fannie Mae’s actions for declaratory and injunctive relief are not recognized methods for removing the lien of an omitted junior lienor.

It is always a good idea to consult with your foreclosure and real estate counsel if there are any questions.