by Karen Perry, Esq.

Rosenberg & Associates, LLC
USFN Member (DC, MD, VA)

By state statutes and local ordinances, Virginia established opportunities for affordable housing to serve its low- to moderate-income residents. The goal to provide affordable housing to all Commonwealth residents is achieved by allowing for certain increases in density to reduce land prices for that housing. Virginia Code § 15.2-2304, -2305 and -2305.1 set forth the authority for certain local governments to create programs for affordable dwelling units (“ADUs”) by their governing body’s zoning ordinances. Each locality’s ADU program can vary to a certain extent within the statutory framework.

For purposes of foreclosure, the title review team should be able to identify ADU designated property when they review the title abstract. This is important as ADU programs are afforded certain rights and require the locality to receive certain notices. ADU ordinances normally require notice of default, notice of foreclosure sale, right to cure default, and right of first refusal during certain control periods. Additionally, ADU ordinances can sometimes demand payment of a percentage of the sale price to the extent that it is higher than the control price set by the locality. However, if the foreclosure requirements are properly followed, then the ADU ordinance is generally lifted from the property following foreclosure.

When an ADU property is identified prior to foreclosure in Virginia, it is vital to read the local government’s ADU zoning ordinance requirements where the property is located. Each locality’s ADU program must be reviewed to meet its specific requirements. Those requirements should be stated in the recorded ADU Declaration, although some programs have multiple declaration, so it is important to have the one that controls the specific property being foreclosed. The Declaration will include information about the control period, the specific properties encumbered by the ADU ordinance, and specific requirements for foreclosure.

If the control period is still in effect, then foreclosure can only happen under the requirements in the applicable ADU ordinance. Most ADU requirements will first require a written notice of default, similar to a demand letter. The letter usually must include a reinstatement amount and a payoff amount as well as a specific time period in which the ADU program can cure the default or exercise its right to purchase the property. Following the written notice of default and right to cure, the locality may respond that it asserts or will assert a claim against proceeds from any foreclosure sale, or that it wishes to purchase the property.

As an example, an ADU declaration may state that the county is entitled to one half of the difference between the ADU original control price paid by the owner, adjusted to the date of sale, and the actual purchase price paid for the property. After receiving the notice of default, the county may respond to the trustee that it intends to claim its portion of the proceeds and will provide the control price. The trustee will then sell the property and any proceeds over the control price will be split between the county and the noteholder. This can have serious implications on bid amounts, so it is important to work with your trustee firm to understand how the county is handling the property. If the property is not sold to the county, then generally the ADU covenants will no longer apply and the property can be sold at REO to any purchaser. Not following ADU covenants can result in a void or voidable foreclosure sale, so it is important to be aware of the requirements and work with your trustee firm to meet them.

Copyright © 2020 USFN. All rights reserved.

Spring 2020 USFN Report