CHICAGO TITLE INSURANCE COMPANY

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1 CHICAGO TITLE INSURANCE COMPANY TOPIC: Condominium and Planned Community Assessments- Lien Priority Issues By: Mark Griffith State Underwriting Counsel, Chicago Title Insurance Company Homeowner association assessments are currently the source of many discussions in the title insurance community. Primarily, in spite of the clear language in North Carolina General Statute (NCGS) 47C-3-116(f) of the North Carolina Condominium Act and its twin brother, NCGS 47F-3-116(f) of the North Carolina Planned Community Act, there is some debate as to whether subordinate homeowners association assessments can survive a foreclosure sale. NCGS 47C (a copy of which is attached hereto) provides that any assessment (generally thought of as a periodic assessment for maintenance of the common area) levied against a unit remaining unpaid for a period of 30 days or longer shall constitute a lien on that unit when a claim of lien is filed in the local clerk s office (NCGS 47C-3-116(a)). Subsection (b) of NCGS 47C then sets forth specific rules of priority: The lien under this section is prior to all liens and encumbrances on a lot except (i) liens and encumbrances (specifically including, but not limited to, a mortgage or deed of trust on the lot) recorded before the docketing of the claim of lien in the office of the clerk of superior court, and (ii) liens for real estate taxes and other governmental assessments and charges against the lot. This subsection does not affect the priority of mechanics or materialmen s liens. Subsection (f) of NCGS 47C goes even further than subsection (b) and protects a deed of trust recorded after a homeowners association claim of lien is filed by preserving in statute the doctrine of instantaneous seisin: Where the holder of a first mortgage or first deed of trust of record, or other purchaser of a unit, obtains title to the unit as a result of foreclosure of a first mortgage or first deed of trust, such purchaser, and its heirs, successors and assigns, shall not be liable for the assessments against such unit which became due prior to the acquisition of title to such unit by such purchaser. Such unpaid assessments shall be deemed to be common expenses collectible from all the unit owners including such purchaser and its heirs, successors and assigns. (According to the North Carolina Comment to NCGS 47C-3-116, the priority of purchase money mortgages was preserved in order to comply with requirements established by federal mortgage agencies.) (Last Revised ) - Page 1 of 5

2 A straightforward reading of NCGS 47C would seem to say that assessments owed by the foreclosed unit owner cannot be charged against the purchaser from foreclosure and its successors; rather, such assessments must be charged as a common expense among all of the then unit holders. Nonetheless, lawyers for homeowners associations in North Carolina and across the country are making arguments to title insurers that such assessments are owed by the new owner on the basis that the new owner agreed to abide by the organizational documents of the homeowners association which happen to require as a condition of ownership the payment of all current dues and assessments of the owner and also those in arrears. The argument being made is apparently that despite the language in the statute, the purchaser was on notice of the terms of ownership in the condominium (via the declaration and organizational documents of the homeowners association) and in moving forward with the purchase contractually bound itself to payment of all current assessments and those in arrears. Arguably, upon the new owners default, the homeowners association will be allowed to use NCGS 47C to file a claim of lien against the unit for the then current amount of assessments owed by the current unit owner and those owed by the prior unit owner. Such a case was presented to the Supreme Court of New Jersey in Highland Lakes Country Club & Community Association vs. Robert Franzino, 186 N.J. 99, 892 A.2d 646 (2006). In Highland, the homeowners in a private, single-family, residential community governed by a notfor-profit corporation (which all homeowners were required to join by a master deed and likely their conveyance deed) defaulted on their mortgage and failed to pay their community assessment fees. The mortgagee filed a foreclosure action and the homeowners association obtained a judgment for the unpaid fees. As part of the order foreclosing the mortgage, the trial court ordered the homeowners association to be absolutely debarred and foreclosed of and from all equity of redemption in the property (Id. at 107). The mortgagee obtained title and later sold the property to Franzino. Franzino was subsequently informed by the association that he would not be permitted any membership privileges in the association until he paid not only his assessments but those of his predecessor in title (Id. at 109). The argument made by the association and ultimately adopted by the New Jersey Supreme Court was that Franzino had sufficient notice through the recorded organizational documents of the association that he was purchasing the property subject to a contractual requirement to pay his dues and those in arrears (Id. at 119). The New Jersey Supreme Court ruled that the dues in arrears were enforceable against Franzino despite the association s judgment lien being extinguished by foreclosure and there being no other lien of record to notify Franzino about the arrearage (Id.). According to the New Jersey Supreme Court, the recorded covenants in the community s master deed and bylaws were notice enough to Franzino (Id.). In Highland, the New Jersey Supreme Court addressed the association and its rights to collect the arrearages solely as a matter of contract. In our case, of course, condominiums and planned communities in North Carolina are creatures not only of contract but also of statute. Thus, it is difficult to ascertain how an argument such as that made in Highland will fare when faced with the plain language of NCGS 7C-3-116(f) and NCGS 47F-3-116(f) (each hereinafter, subsection (f) ). The New Jersey Supreme Court s position in Highland would seem to completely swallow the legislative intent of subsection (f). Nonetheless, homeowners associations in North Carolina are making this argument or a version thereof in an attempt to collect outstanding assessments. (Last Revised ) - Page 2 of 5

3 Without any case law clarifying this situation, at this point, it is best when dealing with any condominium, planned community, or other entity subject to a homeowners association to determine any prior assessments before closing. Do not simply rely on public records. Require the seller to provide a written statement from the homeowners association regarding any prior assessments due and to the extent any are claimed by the association, resolve their payment at or prior to the closing. NCGS 47C-3-118(b) of the North Carolina Condominium Act and NCGS 47F-3-118(b) of the North Carolina Planned Community Act both provide a statutory method for obtaining such a statement. According to NCGS 47C-3-118(b): The association, upon written request, shall furnish a unit owner or the unit owner s authorized agents a statement setting forth the amount of unpaid assessments and other charges against a unit. The statement shall be furnished within 10 business days after receipt of the request and is binding on the association, the executive board, and every unit owner. Whether or not an argument like that in Highland succeeds, the purchaser out of foreclosure will incur expenses for any prior assessments through subsection (f) and, therefore, should try to resolve the matter with the seller prior to closing. Requiring a statement from the homeowners association is also prudent in purchase situations not involving a foreclosure. For instance, another position that has been argued before North Carolina title insurers is that NCGS 47C and NCGS 47F allow a homeowners association to file its claim of lien after the party incurring the assessment has sold the property because the assessment is levied against the unit or lot rather than the owner. The argument made, in effect, is that the assessment lien allowed under either NCGS 47C or NCGS 47F takes precedence over a prior-recorded deed. Notwithstanding that both positions at first glance seem contrary to the legislative intent of NCGS 47C-3-116, NCGS 47F-3-116, and North Carolina s status as a race state, they will continue to circulate until the issuance of dispositive case law. Until that time, however, these arguments create reasonable concern for title insurers issuing title policies for a condominium or planned community property without proper confirmation from the homeowners association of an absence of outstanding assessments. Despite what seems to be the plain language and intent of the statutes, with homeowners associations becoming ever more aggressive in their positions and tactics, proper due diligence of any outstanding assessments and a resolution prior to closing of any issues discovered regarding the same are becoming the norm and will likely remain so until these issues are clarified through case law or our legislature. (Last Revised ) - Page 3 of 5

4 Chapter 47C. North Carolina Condominium Act C Lien for assessments. (a) Any assessment levied against a unit remaining unpaid for a period of 30 days or longer shall constitute a lien on that unit when a claim of lien is filed of record in the office of the clerk of superior court of the county in which the unit is located in the manner provided herein. Unless the declaration otherwise provides, fees, charges, late charges and other charges imposed pursuant to G.S. 47C-3-102, 47C-3-107, 47C , and 47C are enforceable as assessments under this section. Except as provided in subsections (a1) and (a2) of this section, the association's lien may be foreclosed in like manner as a mortgage on real estate under power of sale under Article 2A of Chapter 45 of the General Statutes. (a1) An association may not foreclose an association assessment lien under Article 2A of Chapter 45 of the General Statutes if the debt securing the lien consists solely of fines imposed by the association, interest on unpaid fines, or attorneys' fees incurred by the association solely associated with fines imposed by the association. The association, however, may enforce the lien by judicial foreclosure as provided in Article 29A of Chapter 1 of the General Statutes. (a2) An association shall not levy, charge, or attempt to collect a service, collection, consulting, or administration fee from any unit owner unless the fee is expressly allowed in the declaration. Any lien secured by debt consisting solely of these fees may only be enforced by judicial foreclosure as provided in Article 29A of Chapter 1 of the General Statutes. (b) The lien under this section is prior to all other liens and encumbrances on a unit except (i) liens and encumbrances (specifically including, but not limited to, a mortgage or deed of trust on the unit) recorded before the docketing of the lien in the office of the clerk of superior court, and (ii) liens for real estate taxes and other governmental assessments or charges against the unit. This subsection does not affect the priority of mechanics' or materialmen's liens. (c) A lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the docketing thereof in the office of the clerk of superior court. (d) This section does not prohibit actions to recover sums for which subsection (a) creates a lien or prohibit an association taking a deed in lieu of foreclosure. (e) A judgment, decree, or order in any action brought under this section shall include costs and reasonable attorneys' fees for the prevailing party. If the unit owner does not contest the collection of debt and enforcement of a lien after the expiration of the 15-day period following notice as required in subsection (e1) of this section, then reasonable attorneys' fees shall not exceed one thousand two hundred dollars ($1,200), not including costs or expenses incurred. The collection of debt and enforcement of a lien remain uncontested as long as the unit owner does not dispute, contest, or raise any objection, defense, offset, or counterclaim as to the amount or validity of the debt and lien asserted or the association's right to collect the debt and enforce the lien as provided in this section. The attorneys' fee limitation in this subsection shall not apply to judicial foreclosures or proceedings authorized under subsection (d) of this section or G.S. 47F (Last Revised ) - Page 4 of 5

5 (e1) A unit owner may not be required to pay attorneys' fees and court costs until the unit owner is notified in writing of the association's intent to seek payment of attorneys' fees and court costs. The notice must be sent by first-class mail to the property address and, if different, to the mailing address for the unit owner in the association's records. The notice shall set out the outstanding balance due as of the date of the notice and state that the unit owner has 15 days from the mailing of the notice by first-class mail to pay the outstanding balance without the attorneys' fees and court costs. If the unit owner pays the outstanding balance within this period, then the unit owner shall have no obligation to pay attorneys' fees and court costs. The notice shall also inform the unit owner of the opportunity to contact a representative of the association to discuss a payment schedule for the outstanding balance as provided in subsection (e2) of this section and shall provide the name and telephone number of the representative. (e2) The association, acting through its executive board and in the board's sole discretion, may agree to allow payment of an outstanding balance in installments. Neither the association nor the unit owner is obligated to offer or accept any proposed installment schedule. Reasonable administrative fees and costs for accepting and processing installments may be added to the outstanding balance and included in an installment payment schedule. Reasonable attorneys' fees may be added to the outstanding balance and included in an installment schedule only after the unit owner has been given notice as required in subsection (e1) of this section. (f) Where the holder of a first mortgage or first deed of trust of record, or other purchaser of a unit, obtains title to the unit as a result of foreclosure of a first mortgage or first deed of trust, such purchaser, and its heirs, successors and assigns, shall not be liable for the assessments against such unit which became due prior to acquisition of title to such unit by such purchaser. Such unpaid assessments shall be deemed to be common expenses collectible from all the unit owners including such purchaser, and its heirs, successors and assigns. (g) A claim of lien shall set forth the name and address of the association, the name of the record owner of the lot at the time the claim of lien is filed, a description of the lot, and the amount of the lien claimed. (1985 (Reg. Sess., 1986), c. 877, s. 1; , s. 16.) (Last Revised ) - Page 5 of 5