Understanding HOA Liens & Foreclosures

Overview

When you purchase a new home, you receive heaps of documents.  So many, in fact, that it takes hours or more to read through everything.  And so most people don’t.  But if you’re one of those who does, you’ll find that your closing packet includes a statement about your new development’s homeowners’ association (assuming it has one).  The statement will probably tell you the name of the homeowners' association, the amount of the annual fees, and when they are due.  If you’re fortunate, you will also receive a copy of the homeowners' association declaration of covenants (or a similarly titled document).

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 are intended to 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. 

But what if a homeowner simply does not to 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 house of the owner who fails to pay.

What is a Lien?

A lien is a claim for money owed that is asserted against a 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 dues lien is recorded 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 lien.  So, if the owner sells the property after a lien has been recorded, the lien survives the transfer and remains on the property until the debt to the association is paid.

The power to file liens gives homeowners’ associations substantially more 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.

Is the homeowners association required to give a Notice of Intent to Lien?

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[1].  

If the homeowner fails to pay after receiving notice of intent, the homeowners' association can move forward with filing the lien, though some states have additional procedural requirements which must be met before filing.  If an association fails to strictly comply with all required procedures, the lien may be invalid.  

What is the Process for Filing a Notice of Lien?

Technically, the lien attaches to the property as soon as the assessments become delinquent.  But, 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.  At the time of filing or shortly thereafter, the association provides copies of the lien notice to the property owner and any co-owners.  Once recorded, the lien 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 [2].

What information should a Notice of Lien have?

State laws vary as to the precise content of lien notices, but 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 for the interest of up to 12.00% and prohibits the inclusion of any fines or penalties within a lien, as does Arizona[4].

Can a homeowner contest an HOA Lien?

Some states allow homeowners a statutory means of contesting a recorded lien notice.  In Florida, a homeowner served with a recorded lien notice can file a Notice of Contest of Lien with the county land records stating that the owner disputes the validity of the lien.  If the lien 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 lien, a homeowner who believes a lien has been improperly recorded will need to file a lawsuit to clear the property’s title.

What is the priority of an HOA Lien?

For the most part, the lien “priority” – the position it holds in relation to any other liens on the property – is based upon the “first in time” principle.  Under this principle, a lien recorded before another lien is superior to the later-recorded lien but subordinate to any earlier-recorded liens. However, the homeowners’ association laws of most states establish “super lien” status for liens filed by associations, giving the lien higher priority than it would otherwise enjoy.  In Florida, the date used to determine a lien priority is the date that the community’s declarations were recorded, regardless of when the lien notice itself was recorded.  As a result, the homeowners association dues lien has priority over any liens recorded after the declarations other than first mortgages, which are excluded from the super lien law. 

What are the consequences of an HOA lien?

A homeowners association lien negatively affects the marketability of a property and can make it difficult to refinance.  Before purchasing a property, a prospective seller will hire a title company or lawyer to conduct a title search – an examination of county land records to ensure that the seller holds a valid title.  If a 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 lien.  The lien, therefore, reduces the true value of the property, and so a buyer will probably either insist that the seller pay off the lien prior to transfer or request a corresponding reduction in the purchase price.

A bank is also very unlikely to approve a mortgage or refinance if a lien is already on the property.  This is because the bank wants its lien to have the highest priority in case it has to foreclose.  Even though first mortgage liens are excluded from most super lien statutes, if the homeowners' association lien 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 homeowners association lien, then to the mortgage debt. So, the bank recovers a smaller portion of the loan.  To avoid this scenario, banks writing mortgage loans or refinancing existing mortgages will almost always require that any liens be paid off at, or prior to, closing, so that the new mortgage has the top lien position.

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. 

What is the HOA foreclosure process?

There are essentially 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 nonjudicial foreclosures, a trustee or commissioner (usually a local attorney practicing real estate law) is appointed to conduct the sale according to the statutorily prescribed nonjudicial foreclosure procedure.  Most states require that homeowners' association 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 prior to filing the foreclosure action.  

When can a homeowners association foreclose?

State laws can also set certain 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, but 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 lien.  A title report will show that a lien outside of the limitations period is no longer valid, and so the lien does not have to be paid off in a subsequent closing.  Because of the relatively short statutes of limitations, homeowners' associations have to be fairly aggressive in enforcing liens if they want to collect unpaid assessments.

What happens when a foreclosure lawsuit is filed?

If a complaint for judicial foreclosure is filed, the homeowner has the opportunity to assert any applicable defenses 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 suits settle before a sale actually 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.

If the court orders a sale and the sale is conducted, the proceeds are paid to lienholders according to their priority, with any excess equity paid to the former homeowner.  If the proceeds are insufficient to satisfy all liens, 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. 

What happens when a lien is paid?

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 been 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.

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 are designed to 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 in which 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 with respect to assessments and liens.