Super Priority Lien Gives Washington Condo Associations Leverage Over Lenders

The Washington Condominium Act grants condominium associations a super priority lien over mortgage holders. This super priority lien ensures that some delinquent assessments (those that are due during the six months immediately preceding the foreclosure) will be paid by lenders if foreclosures occur. It can also be a powerful weapon if lenders do not respond to associations’ foreclosure actions. In the recent decision of Summerhill Village Homeowners Association v. Roughley, the Washington Court of Appeals held that a mortgage on a unit can be completely eliminated by a condominium association’s foreclosure action if an association has a super priority lien and the lender does not respond.

If a Washington condominium’s declaration was recorded after July 1, 1990, then it automatically has the right to claim the super priority lien contained in the Washington Condominium Act. If a Washington condominium’s declaration was recorded on or before July 1, 1990, then its association can probably not take advantage of the super priority lien until its declaration is amended to include it. All Washington condominium associations that cannot currently claim the super priority lien should strongly consider amending their declarations to give themselves the ability to do so.

A condominium board that wants to amend its declaration should consult with an experienced real estate attorney to ensure that all applicable legal requirements are met. Failing to obtain such legal advice can have dire consequences. In a recent unpublished decision, the Washington Court of Appeals affirmed a trial court’s ruling that an amended set of covenants for a homeowners association was void and unenforceable because it was not properly executed.

Washington Condos Forced to Reconsider Assessment Collection Strategies

The April edition of the King County Bar Bulletin includes the following article that I authored about the difficulties Washington condominiums are facing in the area of delinquent assessment collection. While I hope that the situation described in this article improves soon, many believe that 2011 will also be a challenging year for condos seeking to collect unpaid dues from owners. An experienced condominium attorney can help associations evaluate the best course of action in each matter, collect the maximum amount possible, and avoid options that involve too much expense and risk.

Like the municipalities to which they are sometimes compared, many Washington condominium associations are struggling to maintain appropriate levels of services in the face of declining revenues. More owners are failing to pay the monthly assessments that fund maintenance and repair of buildings and common areas. Collection actions involve more cost and risk than they did a few years ago. Owner bankruptcies and lender foreclosures have become more common. These realities have compelled condominium associations and the attorneys who represent them to find new solutions to the old problem of debt collection.

It is important to note at the outset that liens and personal liability for unpaid assessments are extinguished by operation of the Washington Condominium Act unless proceedings to enforce the liens or collect the debts are instituted within three years after the assessments became due. This places obvious pressure on Washington condominium associations to address delinquencies in a timely manner.

Personal lawsuits involve obtaining judgments against owners and garnishing their wages or assets to satisfy debts. This can result in payment in some instances, but recovery can be thwarted by several factors. Owners may be unemployed and lack significant assets. Associations may be unable to locate owners’ places of employment or assets. Owners may even file for bankruptcy and receive discharges of their personal debts.

Judicial foreclosures involve filing a lawsuit seeking the sale of the condominium unit to satisfy the owner’s debt to the association. Non-judicial foreclosures involve retaining a trustee to sell the property after providing proper notice. Washington condominium associations have the power to initiate judicial foreclosures, but they do not have the power to initiate non-judicial foreclosures without specific authorization in their governing documents.

Foreclosure actions result in payment in some cases, but there are again significant barriers to recovery. Steep declines in property values have reduced owners’ ability to pay through refinancing and, in isolated cases, have even eliminated their desire to continue owning their units. Association foreclosures also do not affect mortgages on units, which are either mostly or wholly superior to association liens in terms of priority. A limited priority lien over mortgages is contained in the Washington Condominium Act, but that lien only includes assessments based on a periodic budget during the six months immediately preceding a foreclosure sale. Condominium associations therefore do not usually receive payments from lenders exceeding that priority lien amount, and lenders can foreclose on units shortly after associations complete foreclosures. Worst of all, associations do not receive any money as a result of their foreclosure sales if there are no third-party buyers due to a lack of equity.

Terminating a unit’s utilities following the provision of proper notice is another collection option, but only if the condominium was created before July 1, 1990 and if the condominium’s declaration specifies that the association has that power. This is effective if the owner has the ability to pay or if the unit is leased by its owner, but it is not helpful if the owner lacks the ability to pay or if the unit is vacant.

Rent can also be intercepted if units are leased. Many condominium declarations give associations authority to demand that tenants submit rent directly to them when the owner is delinquent without taking additional legal action, and in some cases the association may be given the power to evict tenants that fail to submit rent payments as well. However, owners can respond by evicting tenants unless receiverships have been established.

Receiverships can be established over delinquent units during judicial foreclosure actions if the unit in question is not occupied by its owner. Receivers lease units in order to pay unpaid assessments. This collection method has become more common, in part due to the Protecting Tenants at Foreclosure Act. This federal law requires a foreclosing party to provide 90 days’ notice before attempting to evict a tenant. It also allows a tenant under a lease executed before the foreclosure started to remain for the rest of the lease term unless the property is conveyed to a person that intends to occupy it as a primary residence. The Act makes it possible for associations to lease distressed units for lengthy terms and increases the likelihood that receiverships will generate enough income to justify their expense.

In light of the challenges discussed above, some condominium associations are utilizing more creative methods to address delinquencies. Very long payment plans are being approved as an alternative to legal action. Rights to use common areas and amenities, vote on association matters, and serve on the board are being stripped from delinquent owners. Owners are being pursued in different forums like small claims court to minimize legal expenses. Perhaps most radically, a few associations are deciding to do little more than record liens and wait for lenders to foreclose. All of these approaches deserve consideration if traditional collection methods are not working.

In my experience, condominium board members do not relish the thought of suing neighbors to collect unpaid assessments. They proceed with collection actions because they are obligated to act on behalf of all owners and exercise reasonable care in managing association affairs. Delinquent owners should keep in mind that boards are usually willing to suspend collection actions if reasonable payment plans are proposed.

Use It or Lose It - The Three-Year Limitation on Collecting Delinquent Condominium Assessments

The Washington Condominium Act states in part as follows: "A lien for unpaid assessments and the personal liability for payment of assessments is extinguished unless proceedings to enforce the lien or collect the debt are instituted within three years after the amount of the assessments sought to be recovered becomes due." This basically means that a Washington condominium association does not have the right to collect assessments that are more than three years old unless a lawsuit seeking payment or foreclosure is already pending. This law applies to condominiums created before July 1, 1990 as well as newer condominiums.

The three-year limitation on collecting delinquent assessments obligates condominium boards to monitor the length of delinquencies and take legal action to collect them before it is too late. Beginning a personal lawsuit against the owner in small claims or superior court within the three year period will preserve the owner’s obligation to pay the full debt. Beginning a foreclosure lawsuit against the unit within the three year period will preserve the association’s full lien rights. Being proactive in this manner will help to maximize the association’s ability to collect the money it is owed.

Collection of Delinquent Assessments - Understanding Your Options

Martial arts students are taught to hope that they will never need to use their skills to harm others. However, they are also instructed to use those skills quickly and decisively when the situation calls for it. So it is with the collection of delinquent assessments in condominium and homeowners associations. Boards should understand the nature of the collection powers contained in their associations’ governing documents and provided by Washington law, and should use those powers to address delinquencies before they get out of hand.

A foreclosure action against the property is a collection option that is almost always available to community associations. This method can take two forms – judicial and non-judicial. In judicial foreclosure, the association files a lawsuit against the owner and entities that hold liens on the property that seeks a court order that the property must be sold by the county sheriff to satisfy the owner’s debt to the association. Most community associations have the ability to pursue judicial foreclosure. In non-judicial foreclosure, the association directs a trustee to sell the property after providing notice to the owner and to entities that hold liens on the property. Community associations do not have the right to pursue non-judicial foreclosure unless their governing documents specify that they have this power.

A personal lawsuit against the owner is another collection option that is usually available to community associations. This method can be pursued in small claims court (which allows a board member to present the case) or in superior court. If a judgment is obtained against the owner, the association will then need to attempt to garnish the owner’s wages or assets to satisfy the debt.

Terminating the utilities that serve a property following the provision of proper notice is a third collection option that is sometimes available to community associations. However, this method is only available to a condominium association if the condominium was created before July 1, 1990 and if the condominium’s declaration specifies that the association has this power. Condominium associations can not terminate utilities to a unit due to a delinquency if the condominium was created after July 1, 1990. The Washington law governing homeowners associations does not mention termination of utilities in response to past due assessments, and those associations’ governing documents typically do not provide for the use of that power.

Intercepting rent from an owner’s tenant is a fourth collection option that is sometimes available to community associations. The Washington laws governing condominium associations states that they are entitled to the appointment of a receiver to collect rent during foreclosure actions. Many condominium declarations also give the association the authority to demand that tenants submit their rent payments directly to the association when owners are delinquent without taking additional legal action, and in some cases those declarations state that the association may take legal action to evict tenants that fail to submit rent payments as directed. The Washington law governing homeowners associations does not mention rent interception or the appointment of a receiver to collect rent, and those associations’ governing documents are usually silent with regard to those matters as well. Homeowners associations may be able to use the Washington law governing receiverships to collect rent from tenants during foreclosure actions.

Every community association board needs to understand what tools are at its disposal to extract funds from delinquent owners. If the board examines the association’s governing documents and is disappointed that one or more of the options discussed above is not present, then it should consider an attempt to amend those documents to provide for broader collection powers.

Dealing with Delinquent Owners

The recent drumbeat from the media regarding the economy is steady and depressing. Housing construction nationwide plunged to its second-lowest level on record last month. Foreclosure filings in King, Pierce, and Snohomish counties last month were up 25 percent from February and 111 percent from March 2008. The unemployment rate in Washington has risen over the last three months at the fastest rate on record and is currently 9.2%. As a result of the deteriorating economic climate, most condominium and homeowners associations either have a significant delinquency problem or soon will. How should they respond?

Many board members are understandably reluctant to refer one of their neighbors to a collection attorney. They justify inaction by focusing on the owner’s personal misfortunes. The feelings of compassion and community at the root of that reaction are commendable, but they should not be allowed to dominate the board’s decision-making process. Board members must also consider the impact of delinquencies on the other owners and the association as a whole.

The board of directors of a condominium or homeowners association has a legal obligation to exercise reasonable business judgment and act in the best interest of the entire community. The community needs money to maintain and repair the common areas and to ensure that essential services are provided. If an owner is not paying the ongoing assessments, the board should seriously consider taking prompt legal action to attempt to collect the debt. Failing to do so within the first several months of the delinquency substantially reduces the likelihood of recovering the full amount owing, increases the likelihood that the other owners will eventually be forced to pay more, and leaves the board vulnerable to being sued by one or more owners for breach of its duties.

The board should address delinquencies with a mixture of compassion and firmness. The board should attempt to work out a payment arrangement with a delinquent owner before referring the matter to an attorney, and in these difficult times it should consider approving payment plans that are longer than those that have been approved in the past. However, boards need to be prepared to take decisive action to deal with owners that either can not or will not work with them to address their delinquencies. Adopting a uniform collection policy and sticking to it is one way to ensure that the association does not suffer its own financial crisis.