Working with an HOA Lawyer Part I: The Hiring Process (Austin Lawyer Tip)

Finding the right lawyer for your Texas owners' association is not always the easiest task, particularly for volunteer Board Members that have little experience with property management.  This post is an attempt to provide a framework, from a lawyer's perspective, of what a board of directors or members should be looking for in an HOA lawyer.

The Lawyer and Areas of Practice

It is important to note, at the outset, that lawyers are not all the same.  The concept of the general practice lawyer that knows everything about every law passed is more of a TV myth than reality.  We've all seen LA Law episodes where the same lawyers handle criminal trials, civil trials, large transactions and divorces.  This is fiction.

Typically, lawyers find core competencies.  These are largely (and roughly) divided between transactional lawyers (who may form businesses, review contracts, advise on business transactions, review real estate title documents, etc.), or litigation lawyers (those that go to court, file lawsuits, advise on disputes or potential disputes).  Some lawyers do both, to be sure, but going to court or not going to court seems to be a dividing line most of the time.

Beyond the court/no court distinction, lawyers also usually gravitate towards "areas of practice".  These are the topic areas, within litigation or transactions, that the lawyer learns at a larger level of detail to attract its clients to their services.  These are things like personal injury, or divorce/family law, or, relevant to you, owners association management.

So in selecting a lawyer, don't just go to any lawyer that advertises.  Understand that there are lawyers that have read the codes and laws related to owners associations, have represented properties in the past, have found solutions to problems similar to yours in the past, and they will have much less error rates than lawyers unfamiliar with the HOA practice area.

So ask questions like, "what other properties do you represent?" or "how often have you dealt with property management issues?" or "are you familiar with the laws associated with property owners associations?"

The HOA Lawyer and Fees

It is not uncommon for this to be the biggest issue on the minds of the members of the Board.  "How much is this going to cost?"

The unfortunate thing about lawyers and fees are that to gain this kind of core competency requires years of schooling, training, practice, repetition and risk.  So working with lawyers is not always inexpensive, depending on the tasks involved.

So what is a reasonable fee?  This will vary greatly based on the level of expertise of the attorney, experience level, the complexity of the legal issue, the level of adversarial relationships involved (it's always expensive to deal with "the crazy neighbor") and responsiveness level that you anticipate.  So, in some ways, you're setting your own reasonableness level to some degree, and sometimes this is set for you by outside forces outside of your control.

Typically lawyers charge for "unknown and uncontrollable" legal issues on an hourly rate.  Although the temptation for an HOA is to contain costs through flat rates, the best firms rarely limit themselves before they analyze the issues involved.  Law firms are still businesses, with overhead, employees, malpractice insurance, general insurance, and office/storage space (and sometimes student loan debt) like other professional services. And their time is their "product inventory".  If they spend all their time working on an issue for you and they aren't compensated for that additional time, they never get that time back to sell to someone else.

So, unless it is a largely administrative task, typically a law firm will want to bill hourly for its efforts.  You will notice that partners are usually billed at higher rates, and associates are billed at lower rates.  When you are having a lawyer work on your file, and you believe it to be a simple or repetitive task, you should probably inquire as to whether an associate can handle your work rather than paying partner rates for these tasks.  Good law firms will typically have more than one lawyer familiar with your organization, governing documents and goals for this very reason. It is not a "slap in the face" for an associate to be working on your cases.  Very often this is a way to make the work more cost effective.

So what are acts done for flat fees?  These are usually things like standard collection letters, filing notices of non-payment of assessments, sending out letters of violations from a form.  But advice on amending your declaration, or handing litigation and disputes are usually not susceptible to flat fees due to the uncertainty of the time commitments before the fact.

Prepared by Austin Attorney Marc Lippincott

TUCA: Where do liens come from?

Amongst condo-dwellers and their property management (to a lesser extent, single family home-owners subject to an owners’ association), I frequently hear the phrase, “Let’s just file a lien.” This is often mentioned when an owner and member of the association has failed to make timely payment of their regular monthly assessments. However, “filing a lien” is not really an accurate statement of how the Association should perfect it’s interest in the property.

Under the Texas Uniform Condominium Act (“TUCA”), which applies to all condos in the State of Texas that were formed on or after January 1, 1994, the Association already has a lien against delinquent owners, without the need of any filing. TUCA Section 82.113 provides that an assessment levied by an association against a unit or unit owner is a personal obligation of the unit owner and is secured by a continuing lien on the unit and on rents and insurance proceeds received by the unit owner and relating to the owner’s unit. Emphasis added.
Furthermore, the association’s lien has priority over many other types of liens. Typically, the governing documents for your condominium will echo the statement from §82.113 of TUCA, further stating that a continuing lien in favor of the association exists whenever an owner is delinquent in payment of his/her assessments.

Usually, once I provide this explanation, condo board members follow up with a very good question, “If the lien already exists, why are we filing anything in the real property records?” The answer to that question is simply one of logistics. For sake of explanation, let’s say Bad Neighbor owes the Association $10,000 in past due assessments. Let’s further assume that Bad Neighbor has indicated that he has no intention of ever paying his assessments, because he disagrees with the management decisions that have been made by the Board. If Bad Neighbor then chooses to sell his unit to Innocent Purchaser, there would be nothing to indicate to the innocent purchaser that there are any current amounts owed to the Association. However, if the Association has chosen to file a “Notice of Lien” in the real property records, potential purchasers and title companies will be able to see that Bad Neighbor owes money to the Association. Typically, a title company will require that all liens be cleared before they will issue title insurance, which will likely result in the Association being paid. Therefore, filing a Notice of Lien may just be the lowest-cost method of collection past due assessments. (However, beware of first lien holder foreclosures, as has been discussed previously in this blog)

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.

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