Las Vegas HOA Foreclosure Attorney

Priority of Liens

Historically the priority given to liens has been based on when the lien was recorded against the property. This has been commonly referred to as “first in time, first in right” and has meant that the institution that has the first recorded deed or note must be paid out of sales proceeds before any other entity can get paid. This has the effect of putting the holder of a First Deed of Trust in the driver’s seat with respect to whether or not entities holding a lesser ranked lien could ever get paid. If a lower ranked lien holder foreclosed on their lien, they would be required to pay the full amount of the higher ranked liens before they could recover on their own lien. As a result, holders of lower ranked liens must simply wait in hopes that the homeowner’s financial situation improves or that the property sells for enough money to pay off the First Deed of Trust with enough residual to satisfy any additional liens against the property.

HOA liens were previously inferior to First Deeds of Trust held by lenders. This is no longer the case. Because HOAs rely solely on revenue from individual homeowners to provide the community, as a whole, with the maintenance and other services relating to the common areas, the HOAs needed a mechanism to ensure that they receive resources to meet their obligations. This is similar to how a municipality, county or state relies on property taxes to pay for community services, such as libraries, police and fire departments, or road and highway maintenance, etc. In 1991, the Nevada Legislature adopted laws known as the Uniform Common Ownership Interest Act (UCOIA) that created a priority lien for HOAs for certain maintenance and nuisance-abatements and other assessments. HOA maintenance and abatements are similar to special assessments levied by a municipality for things in addition to normal maintenance. In addition, the UCOIA created what is referred to as a “Super Priority” HOA Lien that provides for up to 9 month of general dues and assessments. Both the maintenance and nuisance-abatement lien and the Super Priority lien are superior to a First Deed of Trust.

Under the statute th priority of liens is as follows:

1. Liens for Real Estate Taxes.
2. Liens recorded prior to the recording of the CC&Rs.
3. HOA Liens for Maintenance and Nuisance-Abatement.
4. 9 Month Super Priority HOA Lien for Dues and Assessments
5. First Deeds of Trust.
6. General HOA Dues and Assessments.
7. Second/Third Mortgages, Judgment Liens, etc.

 

HOA Foreclosures Sales

Because of the severity of the recent economic downturn and a variety of other casual factors many homeowners have become unable or unwilling to pay their mortgages and HOA dues and assessments.   Because of the severe drop in home values many lenders have been reluctant to foreclose on their First Deeds of Trust and have instead entered into a variety of alternative programs designed to keep the owners in their homes. While these programs may be well intended, they can result in serious arrearages of HOA dues and assessments. As a result, HOAs struggle to meet their community obligations and have often been left with no alternative but to exercise their legal right to foreclose on the statutory liens against the properties.

Due to the Super Priority Lien status given to HOAs for the collection of dues and assessments, lending institutions no longer have a priority lien status and can no longer prevent the HOA from foreclosing on the properties.

Required Notices:

When an HOA forecloses on a lien it must record a notice of default and election to sell in the same manner as would the holder of a First Deed of Trust. Within 10 days after the Notice of Default is recorded the HOA must also send a copy of the Notice to each person who has recorded a request for a copy of the notice and each person with an interest whose interest is subordinate (junior) to the HOA’s lien. The identification of persons with an interest in the property is usually accomplished by a Title Company or an Escrow Agent who conducts a title search on the property.

After the expiration of 90 days after the notice of default and prior to the sale the HOA must give notice of the time and place of the sale by mailing a copy of the notice of sale to the owner and to each person who recorded a request for copy and to each person with an interest junior to the HOA’s lien. The notice of sale must also be mailed to any person holding a security interest if they have notified the HOA in writing prior to the notice of sale.

There are specific requirements regarding service of the Notice of Sale upon the occupant of the property as well as the contents of the notice itself.

The Sale:

The sale of the property must be conducted in the county in which the property is located and may be conducted by the HOA, its agent or attorney, a title company or escrow agent licensed in Nevada. The person conducting the sale may sell the unit at public auction to the highest cash bidder. The association may also purchase the property and hold, lease, mortgage or convey it. The HOA may purchase by a credit bit up to the amount of the unpaid assessments and any permitted costs, fees and expenses incident to the enforcement of its lien.

The proceeds of the sale are applied to the reasonable expenses of the sale, the reasonable expenses of securing possession before sale, holding maintaining and repairing the property for sale, payment of taxes or other governmental charges, insurance premiums, attorney’s fees and costs, and satisfaction of the association’s lien. After the satisfaction of the association’s lien and other expenses related to the sale, the proceeds are applied to satisfy any subordinate claims of record in order of their priority. Any remaining proceeds are to be paid to the property owner.

Purchaser Recieves Title Free and Clear

After the sale, the person conducting the sale shall deliver to the purchaser a deed without warranty which conveys all title of the property. The sale of the property vests in the purchaser “without equity or rights of redemption.” This means that the legal title to the property is free and clear of any encumbrances, liens or deeds. It also means that all junior liens, including First Deeds of Trust are extinguished to the extent that the sale proceeds were inadequate to satisfy such liens.

As the purchaser of an HOA foreclosure property you should make sure that the title incorporates certain recitals, including:

1.  That the previous owner was in default and received notice of the delinquent assessment and the notice of default and intention to sell.
2. That the required period of 90 days had elapsed.
3. That the previous owner and his or her and assigns, and all other interested persons, received proper notice of sale.

 

A Deed containing these recitals is conclusive against the former owner, his or her heirs and assigns and all other persons claiming an interest in the property. The receipt for the purchase money contained in the Deed is sufficient to discharge the purchaser from any obligation to see to the proper application of the purchase money. This means that the purchaser has no obligation to see that the proceeds from the sale are applied. That is the responsibility of the person conducting the auction.

Banks Have Argued Against Super Priority Lien Status

As holders of the vast majority of First Deeds of Trust on the foreclosed properties banks and other lending institutions have challenged whether the HOA’s foreclosure under the Super Lien Priority statute extinguishes the First Deed of Trust. The banks argue that the purchasers of the foreclosed properties are required to take the property subject to the First Deed of Trust. There are dozens of cases pending before the Nevada Supreme Court on this issue. The banks argue that instead of the HOA having the right to extinguish a First Deed of Trust the UCOIA only establishes that the HOA is entitled to receive up to 9 months of assessments if, and when, the bank or higher ranking lien holder forecloses. The banks further argue that any other interpretation would result in banks being unwilling to lend homeowner’s purchase money.

The idea that a First Deed of Trust might be junior to another lien is not foreign to banks. In fact, First Deeds of Trust have always been subordinate to liens by governmental agencies. That is why banks and mortgage companies establish escrow accounts for the payment of property taxes and insurance premiums. This is to protect the banks and mortgage companies from having the property foreclosed on due to the owner’s failure to pay taxes and to prevent a loss due to some casualty. The same rationale is applied when determining whether or not an HOA’s Super Priority Lien should be superior to a First Deed of Trust.

Courts Rule That Junior Deed of Trust is Extinguished

In a recent Nevada Supreme Court case, the Court ruled that the HOA Super Priority Lien is superior to a bank’s First Deed of Trust. The Supreme Court ruled that so long as the HOA followed all of the statutory notice requirements, including notice to the bank, the HOA lien will be deemed superior to the First Deed of Trust and the new owner will receive title to the property free and clear.

In addition, in a case before the Court of Appeals for the District of Columbia, the Court of Appeals ruled that the HOA’s Super Priority Lien was superior to the bank’s First Deed of Trust. The Court’s rational was that the Super Priority lien must have priority over the First Deed and must, under traditional foreclosure law, be able to extinguish the First Deed of Trust. The court further reasoned that if junior liens were allowed to survive foreclosure sales there would be no incentive for buyers to bid at auction.   While the bank attempted to argue that the drafters of the UCOIA did not intend for the super priority lien to extinguish the First Deed of Trust, the Court disagreed and stated that the drafters of the UCOIA understood that the Super Priority lien would indeed extinguish all junior liens, including First Deeds of Trust.

In another case in the State of Washington the Supreme Court took a different approach to the Bank’s argument. The bank attempted to argue that the “first in time, first in right” rule was applicable and that the first deed of trust, having been recorded prior to the property owner’s HOA assessments became arrearages, was superior to any rights the HOA might have. The court rejected the bank’s argument and stated that the HOA established its priority to collect unpaid assessments at the time the HOA declaration was recorded, even though it was not enforceable until the property owner defaulted on his or her assessments, and therefore the HOA’s lien had priority over the First Deed of Trust and any redemption statutes.

Despite the recent Nevada Supreme Court ruling, there are still some areas of the law that are not fully settled and nobody can know for certain how the court will rule on all the matters presently before it. Whether you are an HOA considering foreclosure or an individual or investor considering purchasing a foreclosure property, it is highly recommended that you consult with an attorney familiar with the requirements of the statutes and the issues associated with foreclosure sales. The Wright Law Group, P.C. is highly experienced in handling cases involving the sale of properties at HOA foreclosure auctions. Whether representing a Home Owners Association or a purchaser of property at auction, John Wright and his team are well equipped to assist you. Please call us at 702-405-0001 to schedule a consultation.