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Monday, January 24, 2011

When might foreclosure of an Texas assessment lien prove useful?

The statutory superiority of the liens under 82.113(b) of Texas Uniform Condominium Act (particularly with regard to first deed of trust liens), significantly takes away from the usefulness of foreclosing on the assessment lien. The thought of the Association acquiring the foreclosed-upon unit also presents significant downsides. Should the Association acquire the Unit in foreclosure, it will then be responsible for paying any tax liabilities, including any that were outstanding at the time of the foreclosure. Additionally, if the Association were to acquire the foreclosed-upon unit subject-to a superior mortgage lien, it will then be “on the hook” for the mortgage’s obligations, including the monthly mortgage payment, and any outstanding payments on the mortgage. If a unit owner is delinquent on their assessments to the Condominium Association, it is a very real possibility that they are also in default on their taxes associated with the unit, as well as on their mortgage.

With those significant detractors, a Condominium Association might be left wondering if there is ever a time where foreclosing upon an assessment lien is useful. However, there are still some situations where foreclosing on the assessment lien can still be worthwhile and valuable tool.

Most obvious is where no first vendor’s lien or first deed of trust lien exists to take superiority over the assessment lien; for example where the unit was acquired with cash, or where the mortgage was acquired, but the mortgagee bank failed to timely file their lien.
It is also worth noting that it is difficult to predict what a property will fetch at sale, and the Association might find a favorable price at auction, and then be able to turn around and market the property again at a price that will more than make up for the outstanding obligations it might have acquired with the unit in foreclosure.

Foreclosure of the assessment lien might also be beneficial not in the collection of unpaid assessments, but with an eye towards ensuring that future assessments are paid. Generally, when a unit has a first-mortgage lien on it, and that unit owner has not paid their assessments, the owner likely is also behind on their mortgage payments, and that mortgagee bank therefore would “take the lead” in seeking foreclosure with their own interests in mind. However, a situation might arise where the unit owner is just barely “scraping by”, and is able to pay their mortgage, but yet cannot (or is unwilling to) pay their assessments. In such a situation it might be beneficial for the Association to “cut their losses”, and usher in a new unit owner through foreclosure that is able to pay those assessments going forward. Should the Association decide to buy the property at sale, the Association would take the unit subject to the first mortgage lien (and its resultant payment obligations month-to-month until the unit is resold), and would not obtain satisfaction of the delinquent assessments, but would hopefully have a new owner in place willing and able to pay the assessments.

Another situation where foreclosure of the assessment lien might be favorable is where the mortgagee bank is unwilling to foreclose, despite the unit owner’s failure to pay on the mortgage, and that unit owner has habitually failed to pay their assessments. Though rare, such a situation might arise (and recently has arisen more often) where the value of the property has greatly diminished since the acquisition of the mortgage, and where interest rates have significantly fallen since the acquisition of the mortgage. In other words, where the homeowner is “underwater”, or “upside down” on their mortgage. If the unit owner is still able to make some payment on the mortgage and/or if they perceive the unit owner as eventually being able to pay the mortgage in the future, it might make more sense from the bank’s perspective to bet on the homeowner paying down the valuable and higher-interest mortgage long-term, then to take on a property now worth significantly less, with a resultant new mortgage that will be worth significantly less (especially given lower interest rates in the wake of the recession). In that instance, by foreclosing on the assessment lien, the Association would either have a new owner hopefully able and willing to pay assessments, or by seeking foreclosure, the mortgagee bank may even step in and pay the back-assessments to keep the unit out of foreclosure, and then seek collection of those amounts out of the mortgagor unit owner.

Overall, while the assessment lien arguably may be more “bark” than “bite”, there are still circumstances where it can still be a useful tool, and a Condominium Association should not rule out turning to foreclosure when the situation is right.

Priority of Texas Assessment Liens

Other than the time, cost and effort required in pursuing foreclosure of the assessment lien, the Texas Uniform Condominium Act, or, TUCA, further limits its usefulness, by statutorily recognizing certain types of liens that are superior to the Texas assessment lien, and therefore are not extinguished by an assessment lien foreclosure. Any Texas condominium unit taken at foreclosure will be taken subject-to any superior liens.

Section 82.113(b) outlines four types of liens that are superior to the assessment lien. As one might expect, liens for property taxes and other governmental assessments are superior to assessment liens related to the Condominium Association, as are liens recorded prior to the filing of the Declaration for the Condominium Association in the real property records.

Most notable of the statutorily superior liens though regards first deed of trust liens, commonly known as mortgages. Pursuant to Texas Property Code Section 82.113(b)(3), an assessment lien is inferior and subordinate to “a first vendor’s lien or first deed of trust lien recorded before the date upon which the assessment sought to be enforced becomes delinquent under the declaration, bylaws, or rules.” So while the process for perfecting a lien under TUCA is essentially effortless and trouble-free, and further relates back to the date of filing of the Declaration (thereby establishing a priority position with respect to subsequent liens), unfortunately, the assessment lien would be inferior to the extent that the underlying assessments became delinquent subsequent to the recordation of the first mortgage lien in the real property records. Given that most unit owners will acquire a unit only through the acquisition of a mortgage, unless a mortgagee fails to properly protect their interests through timely recordation of their lien, delinquent assessments will only arise after the mortgagee (typically a bank or credit union) has already secured their “place-in-line”, and established superiority over the assessment lien.

Interestingly, the “uniform act” upon which TUCA is modeled, created by the National Conference of Commissioners on Uniform State Laws, contained provisions allowing for up to six-months worth of assessments to have “super-priority” even over first deed of trust liens. However, what many regard as a strong banking lobby in Texas was able to prevent that provision of the model act from making it into TUCA.
Similar to the first deed of trust lien, under 82.113(b)(4), liens, such as “mechanics and materialman’s” liens arising from improvements made to the unit are also superior to the assessment lien to the extent that any assessments sought through foreclosure of the lien became delinquent subsequent to the recordation of that lien. However, this subordination to mechanic's and materialman's liens may be eliminated by declaration. So, should a unit owner hire a contractor to make improvements to the unit, and the contractor records the lien, that lien would have superiority over assessments that only became delinquent after the recordation of that contractor’s lien.

Additionally, under 82.113(b)(4) (again, unless the Declaration provides otherwise), an assignment of insurance proceeds on the unit is also superior to assessment liens to the extent that any assessments sought through foreclosure of the lien became delinquent subsequent to the recordation of the insurance assignment.

“Opting out” of the superiority of mechanics and materialman’s liens and insurance assignments through the Declaration is one step a Condominium Association can take to improve the utility of the assessment lien.

Prepared by Austin Lawyer Chloe M. Love

Texas Process of Foreclosing on an Assessment Lien

The statutory framework governing the foreclosure of condominiums resides within Chapter 82 of the Texas Property Code. Pursuant to Section 82.113(d) of TUCA, the process for effectuating the sale of the property through a foreclosure is delineated by Texas Property Code Section 51.002, which is the same statutory provision utilized for foreclosure and power of sale in connection with single family residences. That being said, Section 82.113(d) of TUCA also allows the Condominium Association to amend or alter the procedures set forth by Section 51.002 through its Declaration.

Section 51.002 requires that 20 days notice of foreclosure be given to a unit owner, with opportunity to cure the default giving rise to the foreclosure. Then, upon expiration of the 20-day notice, a “Notice of Sale” must be posted at the county courthouse at least 21 days prior to the sale, thereby alerting the public of when and where the sale is to occur. If there are other lien holders with an interest in the property (for example, a bank holding a mortgage), that lien holder may demand that the Association provide written notice prior to any foreclosure. At any time prior to the sale, the unit owner may halt the foreclosure by paying all amounts then due and owing (Section 82.113(j)). Foreclosure sales must take place on the first Tuesday of each month between 10 am and 4 pm. The Condominium Association may bid on the property at the sale.

If the unit was used as a residence, and the Condominium Association purchases the unit at the sale, the unit owner will still have a 90-day window to “redeem” the property by paying all amounts then due and owing, plus interest on that amount from the date of the sale to the date of the redemption, in addition to reasonable costs and attorneys’ fees incurred in foreclosing the lien (Section 82.113(g)).

After the sale, the former owner may not simply vacate the unit upon the request of the Association, In such instances, a Condominium Association should be prepared to bring a forcible detainer action in a Justice of the Peace Court to evict the unit owner if they or their tenant refuses to vacate.

Liens for Past Due Assessments Owed to Texas Condominium Associations

As one would expect, the statutory provisions giving rise to Texas liens regarding assessments owed to a Condominium Association reside within the Texas Uniform Condominium Act, commonly referred to as “TUCA” (or “too-kuh” if spoken aloud). TUCA may be found in Chapter 82 of the Texas Property Code.

Pursuant to Section 82.113 of the Texas Property Code, assessments owed by a unit owner of a Texas condominium are a “personal obligation of the unit owner and [are] secured by a continuing lien on the unit.” Unless the Declaration of the Condominium Association holds otherwise, the lien exists and is “perfected” upon recordation of the Declaration in the real property records in the relevant county and requires no further recording by the Condominium Association. Of course there must be delinquent assessments before one can have an actionable lien capable of being foreclosed upon, but for purposes of determining when a lien came into existence once a Condominium Association is confronted with a delinquent unit owner, the lien relates back to the date upon which the Declaration was filed in the real property records. Because the lien arises for any delinquent assessments subsequent to the filing of the Declaration of the condominium complex, the lien for any particular unit arises with no effort or cost to the Condominium Association, and the Association need not file the lien in the real property records for it to have a valid and subsisting lien. That being said, the act of filing the lien can be useful in alerting others of the existence of a lien, limiting the unit owner’s ability to sell the unit. Filing of the lien in the real property records can also be a useful tool in prompting payment of the assessment, as some unit owners may be loathe to see their name and reputation tarnished in real property records for “all the world to see.”

Section 82.113 of the Texas Property code also states that “[b]y acquiring a unit, a unit owner grants to the [condominium] association a power-of-sale in connection with the association’s lien.” Section 82.113 further confers on a condominium association the power to foreclose on the lien and effectuate the sale by judicial and non-judicial means. However, pursuant to Section 82.113(e), a condominium association may not foreclose when the amounts owed consist solely of fines.

Prepared by Austin Attorney Chloe Love