Important Facts About HOA Liens & Foreclosures You Should Know
The right to record liens, and to foreclose on unpaid liens, is perhaps the most powerful tool homeowners’ associations have to enforce assessment obligations. State HOA laws allow associations to recover unpaid assessments without undue effort and expense while protecting homeowners from overly aggressive associations by requiring strict compliance with statutory procedures and ample notice to homeowners.
Any homeowner who has had a lien filed – or threatened – should review the HOA laws of the state where the property is located and the association’s declaration to get a clear picture of the rights and responsibilities that the homeowner and the association have concerning assessments and liens.
This article will attempt to give community members a basic understanding of their contractual obligation to pay HOA fees and the general lien and foreclosure processes and procedures taken by homeowners associations when attempting to collect delinquent fees.
Member’s Obligation to Pay Association Fees
When homeowners purchase a new home, they receive heaps of documents. So many that it takes hours or more to read through everything. Thus, most people do not. However, for those who do, they will find that the closing packet includes a statement about their new development’s homeowners’ association (assuming it has one).
The statement will probably include the name of the homeowners’ association, the amount of the annual fees, and when they are due. Moreover, if fortunate, they will also receive copies of the homeowners’ association declaration of covenants (or a similarly titled document), Bylaws, Article of Incorporation, Rules, Guidelines, and other relevant community documents.
As previously discussed, a declaration of covenants is a document recorded with the county land records that establish the powers and obligations of a homeowners association. It states the functions the association is intended to serve and empowers the association to collect fees from homeowners in order to serve those functions.
The declaration is based upon a law passed by the state legislature authorizing planned communities. Many states have adopted the Uniform Common-Interest Ownership Act, so HOA laws in those states are similar. However, many states have their own unique homeowners’ association statutes.
The primary functions of a homeowners’ associations are to enforce the development’s rules and bylaws and to maintain the development’s common areas. An association might arrange for landscaping, road maintenance, and snow removal and take care of any community facilities, like playgrounds, tennis courts, and pools.
To perform these tasks, and to pay any employee salaries or property management company fees, the association must be able to obtain revenue and establish a budget.
The necessary revenue comes in the form of homeowner maintenance assessments, also known as HOA fees, which are specifically authorized by state statute and the association’s declaration.
When a new homeowner accepts the deed to a property within the community, he or she agrees to all covenants attached to the property. The obligations to obey homeowners’ association rules and pay fees are included within those covenants.
The idea behind HOA fees is that if everybody chips in, the whole community benefits. Well-manicured common areas and uniform community standards keep property values up and make the development a more pleasant place to live.
By spreading the cost burden on everyone in the community, the association can have a sufficient budget without overly taxing any one individual. However, what if a homeowner simply does not pay his or her assessments? Or what prevents a non-paying homeowner from enjoying the benefits of the association without chipping into the budget?
Because of these potential problems, homeowners’ associations are authorized to collect association fees and enforce payment obligations when a homeowner defaults on the payments.
Although homeowners’ associations can file legal collections actions against delinquent homeowners personally, the most common enforcement procedure is to record a lien against the property of the owner who fails to pay.
Association’s Power To Record a Lien Against a Property
A lien is a claim for money owed that is asserted against property rather than against a person. Both state law and the declaration provide the association with a lien against a non-paying owner’s property for any unpaid fees, which means the association can assert its assessment claim against both the homeowner individually and against the property itself.
When a homeowners association records this claim on the property with the county land records, the public at large is considered to have constructive notice that the property is subject to a debt and that any transfer or refinance of the property will be made subject to the claim for money.
Therefore, if the owner sells the property after the lien has is recorded, the recorded lien survives the transfer. It remains on the property until the debt to the association receives payment to satisfy the lien.
The power to file this debt security document against properties gives homeowners’ associations substantially leverage to collect delinquent fees. If an association had to file a lawsuit against every non-paying property owner, the legal costs alone would substantially eat into its budget, taking funds away from the services the association is intended to provide.
By filing a lien, the association can take meaningful enforcement action without incurring the substantially larger legal fees involved in filing a lawsuit.
Purpose of Recording a Lien
Technically, the lien attaches to the property as soon as the assessments become delinquent. However, because there is no way for third-parties to know about it, the homeowners’ association records a notice of the lien with the land records of the county in which the property is situated so that it will show up in a title search.
Once the lien is recorded, and proper notice is given to the property owners, the association’s claim for money is part of the public record and must be honored by third-parties. A few states, like Arizona, have laws saying that a homeowners association lien is valid even if it has not been recorded [1].
Association’s Lien Notice Requirements
When HOA fees are due, the homeowners association, although not obligated to, may provide a statement to each property owner setting forth the assessment amount due. After receiving the statement, most homeowners pay the fees, and that’s the end of the story.
If the owner fails to pay, the association sends notice to the homeowner of its intent to record a lien. The content and timing of the pre-recording notice are set by statute in most states. For example, in Florida, the notice must be delivered at least 45 days before filing the lien and must tell the homeowner what is necessary to avoid the lien[2].
If the homeowner fails to pay after receiving notice of intent, the homeowners’ association can move forward with filing the claim for money. However, some states have additional procedural requirements that must be met before filing. If an association fails to comply with all required procedures strictly, the lien may be invalid.
Moreover, state laws vary as to the precise content of lien notices. However, generally, they identify the property’s owner and provide a brief description of the property, along with the amount of fees owed and any late fees, fines (if permitted by state law), and attorney’s fees due.
In Florida, late charges for HOA fees are limited to $25.00 or 5% of the past-due amount, and interest accrues at 18.00% unless a lesser amount is specified in the declaration[3]. California allows interest of up to 12.00% and prohibits the inclusion of fines or penalties in a lien, as does Arizona[4].
Contesting an Association Lien
Some states allow homeowners a statutory means of contesting a recorded lien notice. In Florida, for example, a homeowner served with a recorded claim for money can file a Notice of Contest of Lien with the county land records stating that the owner disputes the validity of the claim.
If the association’s claim for money is formally contested, the association must file suit to enforce the lien within 90 days, or the lien becomes void[5]. If a state does not have a statutory procedure for disputing a claim for money, a homeowner who believes a claim has been improperly recorded will need to file a lawsuit to clear the property’s title.
Lien Priority
For the most part, the lien “priority” – the position it holds to any other liens (or claims) on the property – is based upon the “first in time” principle. Under this principle, a lien recorded before another is superior but subordinate to any earlier-recorded claims.
However, the homeowners’ association laws of most states establish “super lien” status for claims filed by associations, giving the association’s claim for money higher priority than it would otherwise enjoy.
For example, in Florida, the date used to determine a lien priority is the date that the community’s declarations were recorded, regardless of when the notice itself was recorded. As a result, the homeowners association claim for money has priority over any other claims recorded after the declarations other than first mortgages, which are excluded from the super lien law.
Impact of an Association’s Lien
An HOA lien negatively affects the marketability of a property and can make it challenging to refinance. Before purchasing a property, a prospective seller will hire a title company or lawyer to conduct a title search, including an examination of county land records to ensure that the seller holds a valid title.
If a claim for money (or lien) is in place, the examiner’s report will indicate that there is a “cloud on the title,” which means that the seller does not own the property free and clear.
Because the association’s lien “run with the land,” any transfer of the property is made subject to the claim. The claim for money, therefore, reduces the actual value of the property. So a buyer will probably either insist that the seller pay off the claim before the transfer or request a corresponding reduction in the purchase price.
A bank is also very unlikely to approve a mortgage or refinance if a claim for money is already on the property because the bank wants its claim to have the highest priority in case it has to foreclose. Even though first mortgage claims are excluded from most super lien statutes, if the homeowners’ association claim is recorded first, it is superior to the mortgage under the first-in-time principle.
Thus, if the bank has to foreclose, the proceeds are applied first to the HOA claim for money, then to the mortgage debt. So, the bank recovers a smaller portion of the loan. Therefore, to avoid this scenario, banks writing mortgage loans or refinancing existing mortgages will almost always require that any claims for money be paid off at, or before, closing so that the new mortgage has the top lien position.
Association’s Power to Enforce a Lien Through Foreclosure
Perhaps the most significant consequence of an HOA lien and the consequence most surprising to many homeowners is that associations are empowered to enforce liens through foreclosure. Like a mortgage company, when a homeowners’ association forecloses, it is requesting that the property be sold to satisfy the unpaid delinquent fees.
There are two types of foreclosure: judicial and nonjudicial. With a judicial foreclosure, the foreclosing party files a lawsuit requesting that a judge enter an order directing that the property be sold to satisfy a lien.
In contract, in nonjudicial foreclosures, a trustee or commissioner (usually a local attorney practicing real estate law) is appointed to conduct the sale according to the legal foreclosure procedure.
Most states require that HOA foreclosures proceed judicially, though a few, such as California, permit nonjudicial foreclosures. Most associations will opt for nonjudicial foreclosure if it is allowed in their state because the process is quicker and cheaper.
Before it forecloses, a homeowners association usually must provide notice of its intent to foreclose to the homeowner. As with lien notices, state laws establish timing and content requirements for pre-foreclosure notices. In Florida, the notice must be provided by certified mail at least 45 days before filing the foreclosure action.
Associations Must Meet Certain Requirements Before Foreclosure
State laws can also set specific requirements that an assessment debt must meet before foreclosure can be pursued. For example, delinquent assessments must exceed $1,200.00, or be at least twelve months past due, before an Arizona association can foreclose.
California imposes similar requirements, though the delinquent assessment amount must exceed $1,800.00 or be more than a year past due[6]. Notably, if these requirements are not met, California law authorizes associations to pursue small claims judgments against delinquent homeowners.
If a small claims court judgment is entered, the homeowner will be subject to judgment executions, such as wage garnishments, and his or her credit score will drop due to the judgment. However, the property itself will not be sold (unless the association decides to foreclose later).
The statute of limitations applicable to association foreclosure suits is generally shorter than most other liens. Where a judgment lien usually remains valid for ten or twenty years unless it is renewed, an assessment lien expires if a suit is not filed to enforce the lien.
If no complaint is filed within the prescribed period, the association loses its right to enforce the claim. A title report will show that a claim for money outside of the limitations period is no longer valid, and so the claim for money does not have to be paid off in a subsequent closing.
Because of the relatively short statutes of limitations, homeowners’ associations have to be aggressive in enforcing money claims if they want to collect unpaid assessments.
Foreclosure Defenses
If a judicial foreclosure complaint is filed, the homeowner has the opportunity to assert any applicable defenses (debt dispute, lack of notice, lack of standing, improper service, etc.) and generally contest the sale.
However, if the assessments are actually owed, and the association has strictly followed the statutory procedure, the available defenses are limited. The courts in most states have held that the obligation to pay assessments exists independently of the association’s maintenance duties, which means – practically speaking – that a homeowner cannot assert as a defense that the association has failed to perform its duties[7].
Most homeowners’ association foreclosure lawsuits settle before a sale occurs. With most settlements, the homeowner, association, and any other defendants (other lienholders must be named in the suit) reach an agreement to resolve the unpaid assessments without selling the property.
Once the sale concludes, the proceeds are paid to lienholders based on their priority, and any excess equity paid to the former homeowner. If the proceeds are insufficient to satisfy all claims, the former homeowner may be personally liable for any deficiency balances owed, depending upon the nature of the underlying debts and the laws of the state.
Removal of Association’s Lien
To remove a lien on a property, homeowners must first satisfy the debt owed to the homeowners association. To pay off an HOA lien, the homeowner must make payment to the association in the amount of the delinquent assessments, plus interest and any applicable fees.
Usually, the homeowner is responsible for the costs of recording the lien and the attorney’s fees incurred by the association in having it prepared. Once the full amount has is paid, the association records a lien release in the county land records.
The release puts anyone conducting a future title search on notice that the lien is no longer outstanding. State law dictates how long the association has to file a release after payment is received. In California, for instance, the release must be recorded within 21 days.
Footnotes:
[4] Cal. Civ. Code §5650.(b)(3), A.R.S. §33-1807(A)
[5] Fla. Stat. §720.3085(1)(b)
[7] See Spanish Court Two Condo. Assn. v. Carlson, 12 N.E. 3d 1 (Ill. 2014); Blood v. Edgar’s, Inc., 632 N.E. 2d 419 (Mass. App. Ct., 1994)