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.
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