Condo or Community Association "Super Liens": A Matter of Priority (Jan. '01)
by Richard M. Leibert
The sometimes surprising existence of so-called super liens in some fifteen states and the District of Columbia serves to upset the mortgage servicing equation. Therefore, being aware of the existence and consequences of these liens should be helpful.
To appreciate the point, recall that inherent in the foreclosure process is the assurance that junior liens and encumbrances will be extinguished if given notice or served with process – as the case may be in the various states. Mortgage servicers recognize that with the exception of real estate taxes, virtually all interests that are later in time to the mortgage are also inferior to the mortgage. Special priority afforded to community association or condominium common charge liens, however, thwarts the usual formula by elevating these other interests to seniority over even pre-existing mortgages. How and where these liens arise, the effects of these liens, and how servicers may face the perils is the focus of what follows.
Also discussed are the competing needs, interests and unique characteristics of the community association and the mortgage banking industry, taking into account that the core of the problem involves both legal and social questions. Finally, some protective procedures and policies that may be implemented by the investment community to protect the value of the security are suggested. Hopefully, this article will stimulate further discussion of how to better balance the conflicting interests – with the understanding that, to a large extent, the economic value of each party is significantly affected by the ability to preserve the value of the asset under all economic conditions.
Broad Super-Lien Protections
The super lien statutes of seven states (Alabama, Alaska, Colorado, Connecticut, Minnesota, Nevada and West Virginia) share a common foundation based upon Section 3-116 of the Uniform Common Interest Ownership Act (CIOA). This modern version of the original "condominium only" statute expanded the format of statutory regulation to include all common interest communities. That is, cooperatives, planned unit developments and conventional condominiums.
The basic framework of the super lien status of community association liens in these seven CIOA states is the outright statutory grant of priority over first mortgage loans. The amount is limited to six months of common expense assessments as set forth in the periodic budget duly adopted by the association. The community association is not required to give any mortgagee notice of non-payment, and no further record notice or other "perfection" of the association’s lien is required. There are unique statutory differences in each of the seven CIOA states, which should be considered. Some of these are discussed below:
The super lien has priority over the claims of first and second mortgage holders.
The super lien applies irrespective of who commences the foreclosure action.
By statutory construction in two lower court cases, attorneys’ fees and court costs are recoverable as part of the priority claim irrespective of who commences the foreclosure process.
The super lien applies only to first mortgages recorded after June 1, 1994.
The super lien has priority only over the claims of first mortgage holders.
The super lien has priority only over the claims of first mortgage holders.
In order to perfect and preserve the lien, the association must give notice to the unit owner and record a notice of lien on the appropriate land records.
Narrowed Super-Lien Protections
Three states (Pennsylvania, Rhode Island, Washington), together with the District of Columbia, base their super lien statutes on the original provisions of the Uniform Condominium Act. The priority is available only to condominium associations. The liens of cooperatives, planned unit developments and other community associations do not receive the same protections. Key provisions for these three jurisdictions are set forth as follows:
The super lien has priority only over the claims of first mortgage holders. The priority is expressed as a "divestiture" of such portion of six months of unpaid common charges that are paid out of the proceeds of the foreclosure sale.
Attorneys’ fees and costs are included in the priority claim.
The Rhode Island statute is essentially identical to the standard CIOA statute except that it is limited to condominiums. The priority is limited to first mortgages only and includes attorneys’ fees and court costs.
A six-month super lien is granted over all mortgages on the unit that were recorded prior to the date of common-charge default. Unique to the Washington statute is a provision that permits a mortgagee to make a written request to the association for a notice of delinquent assessments. In that event, the six-month super lien will be "reduced by up to three months if and to the extent that the lien priority ... includes delinquencies which relate to a period after such holder becomes an eligible mortgagee or has given such notice and before the association gives the holder a written notice of the delinquency." If the association elects to record a notice of its lien on the land records, that notice does not qualify as a sufficient written notice of delinquency to an eligible mortgagee.
If the association seeks to foreclose its lien by non-judicial process, the super lien priority is not applicable.
The association is entitled to recover any costs and reasonable attorneys’ fees incurred in connection with the collection of delinquent assessments, whether or not such activities result in suit being commenced or prosecuted to judgment.
The "super lien" is applicable to first mortgage loans recorded after March 7, 1991.
Limited Super-Lien Protections
Four remaining super-lien states (Florida, Massachusetts, New Jersey and Oregon) have adopted what has been referred to as "stand alone" statutes. These allow limited priority for unpaid condominium and community association common-expense assessments and are described below:
The super lien priority is limited to first mortgagees or their assignees taking title by foreclosure or deed-in-lieu if the first mortgage was recorded on or after April 1, 1992. If the first mortgage was recorded prior to April 1, 1992, the super lien will still be operative if the condominium declaration made reference to future amendments to the Florida Condominium Act (Chapter 718).
The amount of the "super lien" is the lesser of: (a) unpaid common expenses and regular periodic assessments that accrued or became due during the six months immediately preceding the acquisition of title; or, (b) one percent of the original mortgage debt.
The one-percent limitation does not apply unless the first mortgagee joins the association as a defendant in the foreclosure action. But that joinder is not required if on the date the complaint is filed, the association was dissolved or did not maintain an office or agent for service of process at an office which was known to or reasonably discoverable by the mortgagee.
In the event the condominium association brings an action to foreclose its common charge lien, it may also recover reasonable attorneys’ fees.
About common-charge delinquencies subsequent to April 1, 1993. Provided that the first mortgagee has notified the association of its name and mailing address, the association is required to: (1) send a notice of default to the unit owner and to the first mortgagee by certified mail if a unit owner is in default for at least 60 days; and, (2) give the first mortgagee 30 days prior notice advising of its intention to commence an action to enforce its lien.
The super lien is limited to first mortgages and that portion of six months of common charges that are, in fact, unpaid. It does not include special assessments, late charges, fines, penalties or interest, but it does include reasonable attorneys’ fees.
The failure of the condominium association to send to the first mortgagee either type of notice of delinquency as set forth above, does not defeat the super-lien priority, but will preclude inclusion of attorneys’ fees or costs incurred in the action to enforce the lien.
The super lien is applicable as to any prior recorded mortgages and is limited to six months of "customary condominium assessments" for the period prior to the recording of the lien. No priority is afforded to late charges, interest or attorneys’ fees.
The lien is effective only after recording. However, it is ineffective if recorded after the association receives a summons and complaint in an action to foreclose a mortgage on the defaulting unit or a lis pendens giving notice of the pendency of an action is filed prior to the recording of the association lien.
The super lien is effective only once in each five-year period over the same mortgage.
For an association lien to achieve priority over a first mortgage, the association must give to the first mortgage holder written notification of the filing of the lien. Nonetheless, a good faith effort to identify that holder will be deemed to be substantial compliance with this requirement.
The statute is effective April 1, 1996, and is applicable only to mortgages recorded after that date.
The condominium association must record a notice of lien and may thereafter claim a super lien as against any prior mortgage in the amount of all unpaid condominium common charges (no six-month limit) if all of the following conditions are met:
Then there’s New York …
The Empire State has its own formulation. which to some extent is less onerous than in other states. First, there is no special priority for homeowners’ associations. The issue is whether the "plan" filed at the association’s creation reciting the existence of future charges is sufficient notice to subsequent mortgagees to create a priority. The issue seems unsettled, and title companies are themselves unsure. In any event, the dilemma arises only infrequently.
As to the much more common condominium common charge, a specific statute (RPL §339-z) makes even a later condo lien superior to all interests except a first mortgage of record. And to obtain that priority the condo lien must actually be filed. While a first mortgage – so long as actually recorded – remains senior to a subsequent condo lien, it is apparent that a second or more junior mortgage will be inferior to all condo liens that may be filed. And there is no limitation upon the continuing accrual of condo liens.
The only arena of confusion on this issue in New York applies to the situation of a first mortgage, followed by a second mortgage, with the two then consolidated to form a single first mortgage. While the better argument is that what had previously been a second mortgage (and junior to condo liens) is now a first mortgage (superior to condo liens), case law decisions go both ways. Oddly, one view is that what was a second mortgage always remains junior to later condo liens, even though consolidated to form a first mortgage. The opposite holding is the majority view. But the issue remains unresolved at an appellate court level, so servicers cannot be quite certain where they stand in this scenario.
The tension among investors, servicers, lenders and homeowners associations regarding the payment of common charges is described by the Community Associations Institute (CAI). This organization, with 53 chapters in 33 states and over 16,000 members, represents the political concerns of common interest communities throughout the country. The CAI has issued a Statement of Policy addressing the super lien, supporting a limited assessment lien priority over the lien of a first mortgage or deed of trust to the extent of six months. This is applicable only to regular monthly or periodic common-expense assessments made pursuant to an annual operating budget.
In explaining its position, the CAI has noted that community associations "have been bearing an ever-increasing burden of expenses and obligations historically paid for and performed by units of local government." At the same time, even though they are providing quasi-governmental functions, they do not enjoy the same full priority lien status granted to real estate taxes and other governmental charges. As a result, non-defaulting unit owners are forced to pay for this maintenance and upkeep.
Accordingly, the CAI states that in extremely weak areas of the economy, multiple unit owner defaults result in special assessments to cover the budget shortfalls. This further increases the economic burden on the non-defaulting owners, perhaps pushing some of them into default. The CAI argues that lenders holding mortgages on common interest units, both defaulting and non-defaulting, have a vested interest in ensuring that the community association has the economic ability to continue to maintain, preserve and protect the value of the property. Repairs, maintenance, security and insurance, provided by the community association and typically paid for through common assessments, are essential to preserving that value.
While the lending industry has a vested stake in the preservation of the property, it has a competing interest in preserving the value of the collateral and maintaining the amount of equity in the property.
Here are a few ideas for resolving the situation. These may facilitate a necessary balancing of the important interests of the lending industry and the community associations while at the same time serving as a basis for further discussion.
The CAI position is clear: The lending industry directly benefits from the common assessments used to pay for, at least in part, the preservation and protection of the collateral. And the costs of default are substantially borne by community associations and non-defaulting mortgagors in the affected communities. Recent enactment of the various super lien statutes indicates that the CAI position is gaining strength among the legislatures, and this trend will likely continue. That being the case, effective balancing of the interests may require the lending industry to give some further consideration to action that would be appropriate and likely to produce the desired results of effective professional management, budgeting, collection and notification of default of common assessments. Implementation of the solutions suggested above may assist the lending industry in protecting the value of its security represented by the equity in the property. It may also necessitate taking a more active role in monitoring the operations of the communities in which the industry has a large economic stake.
© Copyright 2001 USFN
(Originally printed in The USFN Report)
This information is not intended as legal advice. The comments are solely those of the authors and may or may not be the same as other attorneys. Specific questions should be referred to your counsel. Because of the complexities of the law and changes in legislation, this summary should not be relied upon. It should be used for facilitating dialogue with your counsel, after a careful review of the legislation and/or cases to which reference is made.
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