Taking collateral in a common interest community should involve heightened due diligence because of the relative complexities associated with common interest communities and how liens attach to units. As a lender, you want to ensure you obtain the lien priority you desire. Accordingly, special attention should be paid to the Uniform Common Interest Ownership Act (UCIOA) and how it treats liens. Lenders should utilize title attorneys who are experienced with UCIOA, which West Virginia adopted in 1986. UCIOA applies to all common interest communities created in West Virginia after the effective date of the Act. Pre-existing communities are also subject to certain provisions of UCIOA, including the lien for assessments under W.Va. Code § 36B-3-116. Of note, UCIOA does not apply to a planned community in which all units are restricted exclusively to nonresidential use unless the Declaration, described below, provides that UCIOA does apply (W.Va. Code § 36B-1-207).
UCIOA is outlined in Chapter 36B of the West Virginia Code. Common interest communities are real estate for which a person, by virtue of their ownership of a unit, described below, is obligated to pay for real estate taxes, insurance premiums, maintenance or improvement of other real estate described in a Declaration (W.Va. Code § 36B-1-103(7)). A Declaration is an instrument that creates the common interest community and can be found of record in the county clerk’s office of the county in which the real estate is located (W.Va. Code § 36B-1-103(13)). Importantly, the Declaration may require that all or a specified number or percentage of the lenders who hold security interests encumbering the units approve specified actions of the unit owners or the association as a condition to the effectiveness of those actions (W.Va. Code § 36B-2-119). Lender approvals are often associated with larger condominiums developed for commercial and residential use, with the intent to lease units.
Under UCIOA, almost every common interest community in West Virginia is required to have a homeowners association. The membership of the association, at all times, consists exclusively of all unit owners (W.Va. Code § 36B-3-101). The association is responsible for paying expenses associated with the common elements, described below, through assessments levied against each unit. The assessments are based on the allocated interest attributed to each unit. Units are a physical portion of the common interest community designated for separate ownership or occupancy (W.Va. Code § 36B-1-103(33). Lots in a planned community, for instance, are units. The common elements are generally portions of the common interest community other than units. Each unit and its allocated interests are separately taxed and assessed (W.Va. Code § 36B-1-105(b)(2)).
So why should a lender be concerned with taking a unit as collateral for payment of a loan obligation? Because, in part, much like a mechanic’s lien, an assessment lien may take priority over a Deed of Trust lien. The association has a lien on a unit for any assessment levied against that unit or fines imposed against its unit owner from the time the assessment or fine becomes due. Of particular note, if an assessment is payable in installments, the full amount of the assessment is a lien from the time the first installment thereof becomes due (W.Va. Code § 36B-3-116(a)).
An assessment lien is prior to all other liens and encumbrances on a unit except (i) liens and encumbrances recorded before the recordation of the declaration and, in a cooperative, liens and encumbrances which the association creates, assumes or takes subject to, (ii) a first security interest on the unit recorded before the date on which the assessment sought to be enforced became delinquent or in a cooperative, the first security interest encumbering only the unit owner’s interest and perfected before the date on which the assessment sought to be enforced became delinquent, and (iii) liens for real estate taxes and other governmental assessments or charges against the unit or cooperative. Of particular note to lenders, the lien is also prior to all security interests described in clause (ii) above to the extent of the common expense assessments based on the periodic budget adopted by the association which would have become due in the absence of acceleration during the six months immediately preceding institution of an action to enforce the lien (W.Va. Code § 36B-3-116(b)). In other words, the association has a six-month super-priority lien which could trump the lien of a deed of trust.
To perfect and preserve the assessment lien, the association is required to provide notice to the unit owner. The lien is discharged as to subsequent purchasers for value without notice unless the association records a notice of the lien in the county clerk’s office. A lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the total amount of the assessments becomes due (W.Va. Code § 36B-3-116(d)). Upon payment of the assessment, the association must execute a written release which must be recorded in the clerk’s office in which the notice was filed (W.Va. § 36B-3-116(h)). If your title attorney finds one of these liens of record but does not find a release, it would be wise for them to visit the Circuit Court Clerk’s office to determine if litigation to enforce the lien has been instituted. W.Va. Code § 36B-4-109 allows for resale certificates provided by current unit owners, obtained from the HOA, to purchasers, including statements regarding assessments. If your borrower is purchasing a unit, they should obtain a resale certificate.
Lenders should also be aware that in lending to an association, the association is restricted in its ability to “assign its right to future income, including the right to receive common expense assessments” as collateral unless the declaration expressly allows for such assignment. W.Va. Code § 36B-3-102(a)(14). Lenders should work with counsel to review the declaration and come up with appropriate collateral structures.
Lenders should also be aware of liens against condominiums or a planned community that benefit third parties. Specifically, a recorded judgment for money against an association is a lien in favor of the judgment lien holder against all of the units in the common interest community, pursuant to their allocated interest, at the time the judgment was entered (W.Va. Code § 36B-1-117(a)(1). However, each unit owner is permitted to discharge their share of the judgment. Judgment liens against the association must be indexed in the name of the common interest community and the association and, when so indexed, is notice of the lien against the units (W.Va. Code § 36B-3-117(a)(4)). Accordingly, a lender’s title attorney should examine the title for liens against the association that may affect the lender’s lien position against a unit, the purchase of which has been financed by the lender.
Matthew Kingery is Of Counsel with Lewis Glasser, PLLC, in Charleston, West Virginia. Matt devotes his practice to commercial transactions, lender representation, commercial development, distressed assets and real property matters with an emphasis on title, acquisitions, sales and financing issues. Matt has been recognized for his work in the legal industry and community and has received numerous awards including being selected multiple times in Super Lawyers® in the practice area of real property law; named the 2010 West Virginia State Bar Young Lawyer of the Year; honored as a recipient of the 2009 Generation Next 40 Under 40 award by The State Journal; and named a Young Gun by the West Virginia Executive in 2017. He can be reached at firstname.lastname@example.org.