May 2, 2016
by Joseph A. Camillo, Jr.
Shechtman Halperin Savage, LLP
USFN Member (Rhode Island)
From the late 1980s to the present, “super-priority” lien laws have been enacted throughout the country, enhancing the power and ability of a homeowners association (HOA) to collect fees at the peril of mortgage holders. These statutes are the single biggest emerging threat to lenders due to confusion as to how priority legislation works. Given the high number of defaults, many first and second mortgage interests have been lost due to misconceptions about priority lien laws.
In December 2015 the Rhode Island Supreme Court confirmed the super-priority aspect of a condominium lien foreclosure sale under the Rhode Island Condominium Act, Title 34 Chapter 36.1-3.21, et seq. [Twenty Eleven, LLC v. Botelho, 127 A.3d 897, 2015 R.I. LEXIS 112 (R.I. 2015)]. The Court ruled that a first mortgage and all other junior liens are extinguished by an HOA sale where the mortgagee failed to either (i) pay the assessments, or (ii) exercise its right of redemption.
In order to fully appreciate the Botelho decision, it is helpful to look at the history of the super-priority lien. In the 1980s HOA/condominium liens were junior to a mortgage interest and meaningless. Associations were unable to collect the fees necessary to ensure the maintenance of the buildings and common areas. For this reason, lenders were unwilling to make these types of loans as condominiums were considered high risk collateral due to their deteriorating conditions. The high risk classification changed when super-priority lien statutes were enacted, improving associations’ ability to collect fees on a timely basis. With the help of the super-priority lien, most associations began to have healthier balance sheets and better maintained buildings. This made them more attractive as collateral and offered a gateway to first-time homeownership.
The super-priority lien is a double-edged sword, however, because the very legislation that makes the collateral more viable also grants an HOA the power to extinguish a lender’s mortgage interest. The statutory scheme specifies a “split-lien” concept: a priority HOA lien consists of a “super-priority” lien that is higher in priority than the first mortgage, as well as a “priority” lien for any additional unpaid assessments that is lower in priority to the first mortgage but higher in priority to a second mortgage and junior liens.
R.I.G.L. 34-36.1-3.16 (b) — creates a super-priority lien for six months of regular condominium assessments; up to $2,500 in attorneys’ fees, and up to $5,000 for foreclosure costs. When any portion of the unit owner’s share of the common expense has been delinquent for at least sixty days, the association shall send a notice stating the amount of the delinquency to the unit owner and to the first mortgagee by certified and first-class mail. If the delinquent amounts are not paid, the HOA has the right to proceed to foreclose its lien. The statute sets forth very specific notice requirements. Additionally, the first mortgagee has a 30-day right of redemption. In order to redeem the property, the first mortgagee must tender payment of all assessments due on the unit, together with all allowable attorneys’ fees and costs incurred within 30 days of the date of the post-foreclosure sale notice; otherwise the right of redemption terminates and the unit is conveyed free of the mortgage.
Turning to the facts in Botelho: the borrower purchased a condominium unit financed by a loan that was secured by a first mortgage on the property. He fell delinquent on his condominium assessment fees, and the association sold the property to Twenty Eleven, who received a deed conveying title to property upon payment of the purchase price. PNC Bank (holder of the first mortgage) did not redeem the association’s lien within the statutory time period. The borrower had also fallen behind on his mortgage payments. After the association’s foreclosure sale, PNC sought to exercise its nonpayment remedies and foreclose on its mortgage. As owner, Twenty Eleven filed suit to enjoin the foreclosure sale and to quiet title, seeking a declaration that PNC’s interest was extinguished by the condominium lien foreclosure. In a bench decision, the superior court determined that PNC’s mortgage survived the association’s sale and Twenty Eleven’s ownership interest was subject to the PNC mortgage; PNC’s motion to dismiss was granted. On appeal, the Rhode Island Supreme Court reversed and remanded the matter for further proceedings.
In its decision, the Supreme Court confirmed the “split-lien” concept as “unconventional” and that the drafters of the Uniform Condominium Act intended to “’… strike an equitable balance between the need to enforce collection of unpaid assessments and the obvious necessity for protecting the priority of the security interests of mortgage lenders.’ Commissioners’ Comment 2 to § 34-36.1-3.16 ….” The Supreme Court cited other cases interpreting the plain meaning of the statute, including “‘however unconventional, the super[-]priority piece of the [condominium assessment] lien carries true priority over a [first mortgage or] first deed of trust’ SFR Investments ….” [SFR Investments Pool 1, LLC v. U.S. Bank, 334 P.3d 408, 413 (Nev. 2014)].
The Supreme Court further addressed the balance of a minimal condominium assessment nullifying a much larger loan, identifying solutions and actions that first mortgagees can take such as: (1) “’… pay the 6 *** months’ assessments demanded by the association rather than having the association [foreclose] on the unit.’… This payment can then be added on to the principal balance of the mortgage”; (2) “… require payment of assessments into an escrow account …”; or (3) redeem under § 34-36.1-3.21(a)(4) by “… tendering payment to the association in full of all assessments due on the unit together with all attorneys’ fees and costs incurred by the association in connection with the collection and foreclosure process within 30 days of the date of the post-foreclosure sale notice sent by the association ….” The Court observed that the notice requirement to first mortgagees demonstrates the legislative intent that foreclosure on a super-priority lien extinguishes a first mortgage “… because it provides the first mortgagee with notice of the lien and an opportunity on the front end to satisfy the lien in order to avoid foreclosure (and, thus avoid losing its security interest) ….”
The Botelho case is confirmation that a first mortgage will be extinguished by a foreclosure sale of a super-priority HOA lien in Rhode Island. Accordingly, upon receipt of any document that appears to be legal in nature from a condominium/HOA, lenders and servicers should immediately contact counsel and forward all documents for review. It is at this critical stage that immediate action must be taken to protect the mortgage interest and mitigate costs.
The earlier the priority amounts are determined and paid, the less association legal fees and costs are included in the priority amount. For that reason, a written request to the association should be made for a statement or ledger identifying all amounts owed, to which the HOA response is due within ten days. Thereafter, all efforts should be made to identify the priority amount and have it paid. Should the first mortgagee fail to protect its lien and a sale occurs, arrangements should be made to redeem immediately. Even if a lender/servicer finds that the post-sale redemption period has expired extinguishing the mortgage, in a small number of instances other options may exist, such as contesting the sale process or negotiating with the high bidder.
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Spring 2016 USFN Report