Pub. 6 2015 Issue 4

www.wvbankers.org 20 West Virginia Banker A homeowner’s association (HOA) typi- cally charges monthly assessment fees to its homeowners. These fees are im- plemented in order to pay for any required maintenance or repairs to an association’s common areas and community facilities. Additionally, HOAs can take assessment liens on a homeowner’s property if the homeowner stops paying her monthly fees. Usually, these liens are considered junior to mortgage liens which were recorded prior to the HOA assessments becoming past due. However, depending on the ju- risdiction, this may not always be the case. Enter the “super” lien. The “Super” Lien The Uniform Common Interest Owner- ship Act (the UCIOA) was first created in 1982, with subsequent amendments in 1994 and 2008. The UCIOA created the concept of the “super” lien in the homeowner’s association context. “Super” liens were intended to balance a lender’s security interest with a homeowner’s association’s need to collect unpaid fees. These liens allow a portion of HOA assessment liens to take priority over other liens. This lien priority even trumps that of the first-mortgage holder for a certain number of monthly assessments. In the UCIOA’s latest revision, homeowner’s as- sociations can collect not only the unpaid assessments, but also any attorney’s fees and costs incurred by the association in foreclosing the lien. Currently, more than 20U.S. states have adopted legislation that gives “super” lien status to HOA liens under various condi- tions. For instance, Florida allows HOA liens to take priority for either 12 months of unpaid assessments or 1 percent of the original mortgage debt. Likewise, Mary- land gives priority to HOA liens for four months’ worth of unpaid assessments. West Virginia’s Law West Virginia is one of eight states—along with Arkansas, Colorado, Connecticut, Delaware, Minnesota, Nevada, and Ver- mont—that has adopted a version of the UCIOA. Like the UCIOA, West Virginia’s legislation provides that an HOA lien takes priority over a secured lender’s prior recorded lien for six months’ worth of unpaid assessments. However, in order to perfect and preserve the lien, the HOA has to give notice to the homeowner, as well as record a notice of lien in the land records. Additionally, a lien for unpaid assessments is extinguished unless the HOA institutes an action to enforce the lien within three years after the amount of assessments become due. Why Should You Care? Originally, these “super” liens were creat- ed with the expectation that first-mortgage holders would foreclose on homes in a timely manner, with enough sale proceeds to pay both the homeowner’s association and the lender. When the first-mortgage holder forecloses in a “super” lien state, the HOA is repaid first up to the allow- able amount of the “super” lien. In West Virginia, this is six months of unpaid assessments. After the foreclosure sale’s completion, the purchaser at the sale be- comes responsible for paying current and future HOA assessments. Although functioning in theory, the recent realities of the marketplace do not adhere to what the UCIOA drafters had envisioned. In the advent of the Con- sumer Finance Protection Bureau’s 120 day residential mortgage rule which can significantly delay foreclosures, Lenders have been taking longer to foreclose than expected, with HOAs waiting on the side- lines to get paid. This causes community residents to bear the burden of increased assessment fees. Moreover, in many juris- dictions, homes have lost value in recent years, sometimes dipping far below the balance of the first mortgage. Consequen- tially, HOAs have become more aggressive with their efforts to collect assessments. Lenders across the country have been get- ting headaches from these HOA “super” liens because HOAs have been initiating their own foreclosure sales. At these sales, the property can be auctioned off for only slightly more than the amount of the lien. Thus, this has the effect of costing lenders because they are more likely to pay the demanded, unpaid assessments rather than having the association foreclose on the home. Additionally, Nevada and the District of Columbia have produced troubling case law for lenders regarding HOA “super” liens. These courts have determined that when a homeowner’s association fore- closes a “super” lien, it can extinguish the lender’s first-mortgage lien. In the District of Columbia, this holding was particularly concerning because the jurisdictional law does not require notice to the lender before foreclosure. In 2013, the Joint Editorial Board for the Uniform Laws Commis- sion—creators of the UCIOA—affirmed Nevada’s and the District of Columbia’s interpretations by stating that a lender’s first-mortgage lien could, in fact, be extin- guished. However, the Board’s comments emphasize that a lender would need to be given notice before an HOA lien foreclo- sure could extinguish the lender’s lien. What Should You Do? Fortunately, the Nevada and District of Columbia Courts’ rulings on the extin- guishment of prior mortgage liens are not controlling in West Virginia. To date, there is no legal precedent that an HOA foreclosure cuts off a prior perfected mort- gage lien in West Virginia. However, there is no certainty as to how a circuit court may rule on this issue, and HOAs will at least be entitled to collect six months of assessments if they follow proper proce- dures. As a result, lenders should protect themselves by implementing a system to periodically check with HOAs and/or public records to confirm that assessments are not delinquent and that HOA liens have not been asserted. In certain prob- lem situations, lenders may also want to consider taking more aggressive measures such as contacting HOAs on the front-end to request notification in the event HOA fees become delinquent and/or escrowing for HOA assessments. In sum, to avoid the risks and pitfalls that can result from the “super” lien status that HOAs may be able to achieve, lenders should become more proactive when it comes to making sure that HOA fees are timely paid on real estate collateral. n Homeowner’s Association Liens By David Thomas and Kelsey Jonas, Dinsmore & Shohl LLP