In late August, the D.C. Court of Appeals rendered a decision in
Chase Plaza Condominium Association, Inc. v.
J.P. Morgan Chase Bank, N.A., CA-5826-10 (August
28, 2014) determining that a homeowner's
association's (HOA's) statutory "super-priority"
lien, or superlien, for unpaid assessments took priority of
position over other liens, including a lender's mortgage lien.
Read that again: not just priority of payment, but priority
of position for these HOA assessment superliens.
In jurisdictions (like D.C.) that have adopted these
"superliens" -- there are some 20 jurisdictions, in
varying definitions -- the HOA assessment superlien has priority
over mortgages and deeds of trust, even if senior or preexisting,
"to the extent of common expense assessments ... which would
have become due in the absence of acceleration during the [six]
months immediately preceding institution of an action to enforce
the lien." D.C. Code 42-193.13(a)(2).
Last month, the Nevada Supreme Court followed suit and concluded in
SFR Investments Pool 1, LLC v. U.S. Bank,
N.A., No. 63078 (Sept. 18, 2014) that the Nevada HOA lien statute
is based on the Uniform Common Interest Ownership Act
of 1982 (along with at least seven other states: AK, CO, CT,
DE, MN, VT and WV; NC is not such a state). To that extent,
the Nevada Court concluded that a portion of an HOA assessment lien
was superior in position -- position
priority -- to a first deed of trust and rejected the
lender's argument that the statute only afforded a payment priority to the HOA
and its superlien.
What is the actual impact? Well, if the HOA forecloses its
superlien, not only does it collect its debt, but it eliminates or
"wipes away" the first mortgage or first deed of trust,
as well as any other junior liens on the property.
What is the practical impact? Lenders with first position are
forced, in most cases, to pay off the HOA's assessment
superlien in order to preserve the first position. If not,
and foreclosure is completed, the sale price can sometimes fall
"at an amount equal to or slightly above the HOA dues in
arrears", as reported by the Wall Street Journal.
The justification for these HOA superliens is quite simple: HOAs
are critical to the preservation of the value of the community, and
should wield significant authority to ensure that they receive the
funds necessary to maintain the community and, so, real estate
valuations.
The significance of that ruling for lenders, borrowers and HOAs
cannot be understated in states granting these HOA superliens.
For HOAs, these cases cement the power they have to obtain
payment for past due assessments. For lenders, on the other
hand, enforcement strategies must change and underwriting and loan
documentation practices must evolve.
The lender in the Nevada case has petitioned the State Supreme
Court for reconsideration; we can expect a move to the Supreme
Court of the United States if that bid is unsuccessful. The
stakes are just too high, it seems.
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