Published on: November 28, 2016
The ability to collect unpaid condominium fees was dealt a severe blow by a recent decision of the NH Supreme Court in the case of New Hampshire Housing Authority vs. Pinewood Estates Condominium Association. The Court ruled that a foreclosure sale buyer was not responsible for the satisfaction of a Termination of Services lien related to pre-foreclosure sale debt owed by the foreclosed former owner.
NHHA acquired the unit after it foreclosed on the owner, Patricia Rugg. At the time of the foreclosure sale, Ms. Rugg was behind on condominium fee payments and as such, the Association had recorded a Termination of Services lien against the unit. Pinewood Estates’ Declaration stated that “any Owner acquiring a Unit shall be liable…for any prior and outstanding assessments levied against the Unit.” This is a relatively rare provision that would seemingly provide a great benefit to the Association as most Declarations state precisely the opposite, that foreclosing mortgagees do not inherit any debt owed by the prior owner.
When NHHA refused to pay for any pre-foreclosure sale assessments, Pinewood Estates took the position that all common privileges and services would remain terminated until such time as payment in full was made. NHHA sued but Pinewood Estates prevailed in Superior Court with the court finding that even though the junior lien itself was wiped out by the foreclosure sale, the underlying debt was not. NHHA then appealed to the NH Supreme Court.
The basis for the Supreme Court’s decision lays in the priority scheme for condo liens set forth in NH RSA 356-B:46 which states that a condo’s lien is behind the first mortgage in order of priority unless a specific notice procedure is followed to obtain a single six-month priority lien. The court stated that: “If an association could withhold services from the unit post-foreclosure in order to force the post-foreclosure owner to ensure that the debt of the previous owner is paid, an association would have an ongoing encumbrance on the unit that exceeds that authorized by the Act.”
Since Pinewood Estates did not follow the notice procedure to obtain a priority lien, the Court therefore found that the Termination of Services lien was wiped out by the foreclosure sale making the NHHA not responsible for the underlying pre-foreclosure debt.
The Court made a point of holding that the language contained in Pinewood Estates’ Declaration that an Owner acquiring a unit inherits the debt of the prior owner did not save the day for the Association as it contradicted the statutory scheme in 356-B:46. When there is a conflict between a declaration and the statute, the statute prevails which had the effect of rendering the ostensibly beneficial language in the Declaration without legal consequence.
Additionally, the Court noted that the NH Condominium Statute reflects a balancing of interests between condos and banks with regard to the priority of liens and ultimate responsibility for the payment of condo fees. Under NH RSA 356-B that balancing was for a lender to have a maximum liability for a six-month priority lien.
The Court made several statements related to avoiding “uncertainty” in lending. “Because mortgage lenders often sell mortgages they originate, giving the claims of condominium associations for unpaid assessments priority over first mortgages holders would negatively impact the secondary mortgage market.”
What will this decision mean for you and your condo? Unfortunately, this case means that condominium associations can no longer force foreclosing banks and third-party foreclosure sale buyers to pay any portion of a Termination of Services lien that is related to pre-foreclosure debt unless the lien has priority status. The means of achieving priority status over the lien is set forth in NH RSA 356-B:46(c).
Termination of Services liens had been one source of leverage in condominium collections in NH. The liens forced banks to deal with the consequences of lending to borrowers who could not afford their units and for their failure to foreclose within a reasonable amount of time. While the decision is a setback in the foreclosure context, Termination of Services liens will continue to be a valuable enforcement tool, just not in the post foreclosure context.
There are two key take-aways from this case. First, condo associations should be prepared to write-off debt when an owner is foreclosed upon and consider budgeting for potential shortfalls. While the foreclosed former owners maintains personal liability for all fees owed as of the foreclosure sale date, collection is extremely difficult given that owner’s poor personal financial situation.
Second, it is important that the priority lien process is implemented to prioritize the lien so that the foreclosure sale buyer will be liable for 6 months of regular monthly fees after the foreclosure sale. The process to obtain a priority lien is governed by the law and involves very specific dates for notification to the owner and first mortgagee. Associations are encouraged to work with their legal counsel to make sure the proper process is in place. Note that a priority lien can only be obtained over a mortgage given after January 1, 2011, the effective date of the priority lien law. Priority liens cannot include any special assessments, late fees, interest or fines.
If you have any questions about this case, or with NH collections, please feel free to contact Dean Lennon at email@example.com.
For a copy of the Decision please [click here].