by Jeff Horn, Esq.
Rubin Lublin
USFN Member (AL, GA, MS, TN)

One of the common questions that we encounter in the loan default industry is whether a lender’s security interest has priority over a homeowners’ association (“HOA”)^[i] lien for assessments or a condominium owners’ association (“COA”) lien for assessments. This article describes the statutes in Tennessee, Alabama, and Mississippi that govern lien priority for COA assessments and HOA assessments versus mortgages and other security interests.  However, in each of these states, there are situations where there are no applicable statutes that address lien priority. In those cases, it is necessary to thoroughly review the HOA or COA documents in order to determine whether a mortgage lender’s foreclosure will extinguish the lien for assessments.

In Tennessee, there are no statutes governing the priority of HOA liens versus security instruments. Therefore, it is necessary to review the HOA documents in order to determine whether the lender or the HOA has priority. It is common for HOA declarations to contain provisions making HOA assessments subordinate to first mortgages or deeds of trust on the unit recorded prior to the date on which the assessment sought to be enforced became delinquent. However, because these documents can vary, they should be reviewed carefully.

COA liens are often governed by the Tennessee Condominium Act of 2008, as amended in 2016,^[ii] which is applicable to all condominiums created within the state after January 1, 2009. The provisions of the Tennessee Condominium Act of 2008 that address lien priority also apply to condominiums created before January 1, 2009, but they only apply with respect to events and circumstances occurring after January 1, 2009 and do not invalidate or supersede existing provisions of the master deed, master lease, declaration, bylaws, or plats of those condominiums existing on January 1, 2009. In addition, condominiums existing before January 1, 2009 may elect to be governed by the Tennessee Condominium Act of 2008.

The Act provides that a COA has a lien on a unit for any assessment levied against that unit or fines imposed against its unit owner from the time the assessment or fine becomes due. A first or other contemporaneous mortgage or deed of trust on the unit recorded before the date on which the COA lien is perfected in the Register of Deeds Office has priority over a COA lien under this section.^[iii] Nevertheless, upon a foreclosure action, the COA shall be entitled to priority in the proceeds from the foreclosure sale to satisfy the COA lien up to the extent of the commons expense assessments based on the periodic budget adopted by the COA that would have become due in the absence of acceleration during the six months immediately preceding the institution of a foreclosure action, but not exceeding one percent of the maximum principal indebtedness of a lien secured by the first mortgage or deed of trust. Upon foreclosure by the holder of a superior mortgage or deed of trust, the sale and foreclosure will be subject to the COA lien up to the payment priority amount. However, the payment priority provisions of the statute can be rendered inapplicable in cases where the unit owner or lender gives proper notice of the lender’s identity and contact information to the COA and the COA fails to give written notice to the lender within thirty days of the date that six months of assessments for common expenses due from the unit became delinquent. Any foreclosure by the COA of its lien for assessments shall be subject to any prior mortgage or deed of trust encumbering the property and shall not extinguish the lien of such mortgage or deed of trust. A lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within six years after the date of the lien for the assessment becomes effective.    

The Alabama Homeowners’ Association Act^[iv] governs residential developments in Alabama subject to a declaration providing for an HOA recorded in the office of the judge of probate in the county in which the development, or any part thereof, is located on or after January 1, 2016. It also applies to residential HOAs formed prior to that time, provided that the HOA, by a majority vote of its members, elects to be governed by the Alabama Homeowners’ Association Act. The statute does not apply to real estate cooperatives, time-share developments, or campgrounds. The Act establishes, except as may otherwise be provided in the governing documents of the HOA, a lien for unpaid assessments arising on and from the date the assessment is due. However, mortgages and deeds of trust securing indebtedness have priority over the lien in favor of HOAs declared by the statute. For HOAs that are not governed by the Alabama Homeowners’ Association Act, it is necessary to review the governing documents for the HOA in order to ensure that the HOA assessments are not superior to the lender’s mortgage or deed of trust.

Both the Condominium Ownership Act (the “Ownership Act”)^[v] and the Alabama Uniform Condominium Act of 1991 (the “Uniform Act”)^[vi] govern COAs in Alabama. The Ownership Act existed prior to the Uniform Act and is still applicable to condominiums created before January 1, 1991, except where it has been superseded by the Uniform Act. Owners of condominiums existing under the Ownership Act are also permitted to adopt advantageous provisions of the Uniform Act to the extent that can be accomplished consistent with the procedures for amending the condominium instruments as specified in those instruments and in the Ownership Act. The Uniform Act applies to condominiums created after January 1, 1991. In addition, some of the provisions of the Uniform Act, including the section governing COA liens, apply to condominiums created before January 1, 1991. However, they apply only with respect to events and circumstances occurring after January 1, 1991 and do not invalidate existing provisions of the condominium’s governing documents. Certain condominiums created after January 1, 1991 that contain no more than four units may be created pursuant to the Uniform Act or pursuant to the Ownership Act depending on which statute the declarant of the condominium elects. 

Not only is it important to determine what statutory regime governs the attachment and priority of COA liens in Alabama, but it is also important to recognize some of the differences between the statutes. For example, under the Ownership Act, a COA lien becomes effective when a claim of lien is recorded in the public records of the county in which the unit is located. On the other hand, under the Uniform Act, the COA has a lien on a unit for any assessment or other moneys due from the time the assessment or charge becomes due. Under the Uniform Act, the COA is not required to record a claim of lien in the public records. Another key difference is that the lien created under the Ownership Act is subordinate to the lien of any mortgage of record. Yet, under the Uniform Act, only first security interests on the unit recorded before the date on which the assessment sought to be enforced became delinquent have priority over COA liens. The priority for these first security interests is limited, as the COA lien under the Uniform Act is prior to these mortgages and deeds of trust to the extent of the common expense assessment based on the periodic budget adopted by the COA that would have become due in the absence of acceleration during the six months immediately preceding the COA’s institution of a civil action to enforce its lien or a foreclosure of a mortgage or deed of trust. The Uniform Act provides that the lien for unpaid assessments is extinguished unless proceedings to enforce the lien are instituted within three years after the full amount of the assessments became due.

In Mississippi, there are no statutes governing lien priority for HOAs. Accordingly, the HOA governing documents should be reviewed thoroughly in order to confirm that HOA assessments are subordinate to the lender’s security interest.  

Mississippi condominiums are governed by the Mississippi Condominium Law.^[vii] Under the Mississippi Condominium Law, a reasonable assessment upon any condominium made in accordance with a recorded declaration of restrictions permitted by the statute shall be a debt of the owner thereof at the time the assessment is made. The amount of any such assessment plus any other charges thereon shall become a lien upon the condominium assessed when the COA causes to be recorded in the office of the chancery clerk of the county in which such condominium is located a notice of assessment.  Such lien shall be prior to all other liens recorded after the recordation of said notice of assessment except that the declaration of restrictions for the condominium may provide for the subordination thereof to any other liens and encumbrances. The COA lien shall be of no further force or effect one year from the date of recordation of the notice of assessment unless its enforcement has been initiated prior to its expiration. The COA may extend the one-year period for a period of time not to exceed one additional year by recording a written extension thereof. 

In Tennessee, Alabama, and Mississippi, priority issues between loan security interests and HOA or COA liens are not always clear. In many cases, there are no applicable statutes providing guidance on lien priority questions, so it is necessary to review the association’s declaration or other governing documents. Even in cases where there are statutes, associations and lenders might disagree on how the statutes should be interpreted and applied. As a result, instead of adopting one point of view over another, the parties might end up negotiating in order to achieve an outcome that both parties find acceptable.

Copyright © 2020 USFN. All rights reserved.

Fall 2020 USFN Report