[FINANCE] DD 8/25/06 Prior Unpaid Assoc. Assessments May Prime Foreclosing Mortgagee Through "Back Door"

Daily Development for Friday, August 25, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

FORECLOSURE; CONDOMINIUM; LIENS: If a condominium's organic documents clearly so provide, the association can require that a subsequent purchaser of a foreclosed unit is obligated to pay the arrears even if there is no lien. 

Highland Lakes Country Club & Community Association v. Franzino, 186 N.J. 99, 892 A.2d 646 (2006); March 6, 2006.

Unit owners defaulted on their purchase money mortgage and failed to pay their community association dues and common assessment fees.  Their mortgagee filed a foreclosure action.  Separately, the community association obtained and docketed a judgment for the unpaid dues and fees.  The lower court ruled that the mortgagee had priority in payment over the association's docketed judgment.  In its order requiring sale of the property to pay the mortgagee, the lower court also ordered the community association to be "absolutely debarred and foreclosed of and from all equity of redemption" in the property.  The writ of execution authorizing the sheriff's sale did not include any language authorizing payment to the community association in the event of any surplus resulting from the sale of the property for more than the amount owed to the mortgagee.  There was no evidence of any surplus available to the community association after the sale of the property and the community association n

ever made application for any surplus.

A new owner bought the condominium unit from the foreclosing mortgagee.  The community association sought to compel that purchaser to pay its association dues and common assessments as well as the unpaid membership dues and common assessments attributable to the predecessors in title.  The association claimed that the recorded covenants in the community's deeds and bylaws provided adequate notice to the subsequent purchaser that it would be responsible for the arrears.  The subsequent purchaser contended that the covenant language was vague and therefore did not provide sufficient notice that it would be responsible for the arrears of the predecessors in title.  Further, the subsequent purchaser argued that the mortgage foreclosure, to which the community association was a party, cleared the title of any lien for arrears.  The lower court granted summary judgement in favor of the community association, ruling, among other things, that the foreclosure action did not extinguish the

community association's contractual right to collect the assessments of prior owners from the current owner.

        On appeal, the Appellate Division reversed.  First, it ruled that a unit owner's obligation to pay association dues and common assessment fees is based on the association's restrictive covenants as recorded in the deeds and bylaws.  In this case, the bylaws stated that unpaid assessments constituted a lien from the date of recording the lien.  Since the association never recorded a lien, the Appellate Division ruled, the association could not recover past assessments from the subsequent purchaser.  Second, the Appellate Division ruled that the execution of a deed containing covenants compelling compliance with bylaw requirements may create an agreement to pay common assessments and association dues, including arrears of the predecessors in title.  Here, however, the Appellate Division found the recorded covenants to be ambiguous and ruled that the ambiguity did not provide sufficient notice to the subsequent purchaser that property purchased in this community would be conv

eyed subject to a contractual requirement that the arrears of the predecessors in title were enforceable against the subsequent purchaser. 

        The New Jersey Supreme Court reversed the Appellate Division and reinstated the judgment of the lower court.  It held that, even though the association's lien was extinguished by the foreclosure judgment and sheriffs' sale, the underlying debt was unaffected.  Extinguishing a lien does not affect the validity of the underlying debt. 

        A subsequent purchaser takes title subject to the covenants contained in the recorded deeds and bylaws.  Provided the recorded covenants are not ambiguous, the recorded language creates a debt for past and present arrears.  The Court ruled that the recorded language in the homeowners' association's bylaws was clear and unambiguous, and that therefore  nothing relieved the subsequent purchaser of its obligation to inquire as to whether there were any arrears. 

        An association may collect a previous owner's arrears from a subsequent purchaser, based on contract theory, if the recorded covenant language is clear enough to provide notice to the subsequent purchaser of its obligation to pay such arrears, even if the association does not have a lien against the property.

                               
Comment 1: If the editor understands this opinion properly, it is big news.  The opinion does not appear to turn on special language of the New Jersey condominium law, but rather is a common law ruling valid provisions in the Declaration and Bylaws binding subsequent purchaser to pay delinquent charges assessed to their predecessors in interest. 

        As the Editor understands things, the question of whether claims for prior unpaid assessments have priority as against a foreclosing lender is one that has sparked hot debate for many years between the lending industry and the condominium association interests.  A compromise was reached in the Uniform Condominium Act permitting priority of association liens for a relatively short period of time, but subordinating any further balance to the rights of the lender.  This compromise influenced FNMA and FHLMC to continue to participate in purchasing mortgage loans on  condominium units, and thus significantly increased the value of all condominium units affected by the compromise.

        It appears to the editor that the court’s opinion, where language of the Declaration and Bylaws suits, undoes the protection for the lender, and thus likely will lead FNMA and FHLMC to refuse to certify loans on communities that have such language. 

Comment 2: Although one might argue that the lender need not be concerned, since court recognizes that the lien for unpaid assessments still has not priority over the lender’s lien, the fact of the matter is that if the party who buys from the lender is bound by the prior unpaid assessments, this will devalue the unit in the hands of the lender and consequently the assessments do achieve priority over the lender’s claim.  The editor doubts very much that purchase money lenders in New Jersey have anticipated that unpaid assessments will be able to “back door” their way into priority over the lender’s security protection. 

New Jersey condominium mavens - help the editor out here.  Is this the end of significant secondary market interest in New Jersey condos that have this language?

Readers are encouraged to respond to or criticize this posting.

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