A recent decision by the District of Columbia Court of Appeals brings into renewed focus the tension between condominium and homeowner associations and lenders when it comes to payment of delinquent association assessment charges. In Chase Plaza Condominium Association, Inc. v. JPMorgan Chase Bank, N.A., decided on August 28, 2014, the Court of Appeals determined that an association's statutory "super-priority" lien for unpaid assessments took priority of position, not just of payment, over the lender's mortgage lien. This ruling has significant implications for both lenders and associations.
In states that have adopted some variation of the Common Interest Ownership Act (or otherwise granted associations some measure of assessment lien priority over mortgage holders), associations are granted a statutory assessment lien as security for the collection of periodic assessments. As quoted in the Chase opinion, the District of Columbia Condominium Act provides that an association's lien is "'prior to any other lien or encumbrance except [among other things]… [a] first mortgage… or [first] deed of trust… recorded before the date on which the assessment sought to be enforced became delinquent.'" However, this priority of mortgages and deeds of trust is limited under the Act to the extent of any “superliens.” In jurisdictions such as the District of Columbia that have adopted superliens, the association's assessment lien is senior to mortgages and deeds of trust "to the extent of the common expense assessments based on the periodic budget adopted by the unit owners' association which would have become due in the absence of acceleration during the 6 months immediately preceding institution of an action to enforce the lien."
At issue in the Chase case was the effect of the association foreclosing its assessment lien. Is the association's lien only a priority of payment, such that following foreclosure by the association the lender's mortgage lien remains (subject to the association's right to collect up to six months' assessments), or a true priority of lien, such that the association's foreclosure wipes out the lender's mortgage lien? Put differently, does the initiation of an assessment lien foreclosure action expose a lender to risk that its collateral will be lost or only that the association has a first right to payment of foreclosure proceeds?
Disagreeing with the trial court, the Court of Appeals held that foreclosure of the association's assessment lien extinguished the lender's mortgage lien. The court based its decision on common law principles of lien priority and the absence of a clear intent in the association's governing documents to subordinate the association's assessment lien as against mortgages and deeds of trust. Further, the court reached this conclusion even though the District of Columbia foreclosure laws do not require notice of the foreclosure to the lender. This means that lenders may be wiped out by an association's assessment lien foreclosure without any notice or opportunity to cure.
Chase is not the first case to interpret an association’s superlien. Courts in Washington and Nevada have previously confronted the same issue (with the decisions split on whether a mortgage lien survives an assessment lien foreclosure). Recognizing this emerging issue, the Uniform Laws Commission recently amended Section 3-116 of UCIOA to resolve this ambiguity in favor of the Chase holding. The comments to UCIOA provide that the revised lien priority language "makes clear that the association’s lien has true priority over the lien of an otherwise first mortgage lender to the extent of the [superlien amount]. Thus, if the association conducts a foreclosure sale of its association lien and the otherwise first mortgagee does not act to redeem its interest by satisfying the association’s limited priority lien, the mortgagee’s lien would be extinguished."
The effects of the Chase decision (and the revisions to UCIOA) are significant for both lenders and associations. For associations struggling from the effects of nonpayment of assessments, this decision may provide a powerful tool for collecting delinquent assessments. By contrast, for lenders the decision complicates loan enforcement strategies on current loans and may require modification to underwriting requirements and loan document escrow provisions in the future. In addition, this interpretation may result in new secondary mortgage agency requirements for condominium documents to require waivers, notices, and/or opportunities for lenders to cure.
