A Look at HOAs, Covenants and Restricts
A declaration of Covenants, Conditions and Restrictions can be an extremely beneficial resource for the maintenance, preservation, and even the possible addition of value to subdivisions. However CC&Rs and the Homeowners Associations that are sometimes formed to enforce the CC&Rs, can also pose difficulties when dealing with real estate transactions.
Some of the issues that will be discussed can arise in any type of real property transaction, but this article will just address a few of the issues that can arise in real estate-owned transactions. Issues that can arise include incorrect amounts for assessments being charged to the REO seller, difficulty in determining whether there are CC&Rs and an HOA associated with the property, as well as difficulty obtaining correct contact information for the HOA so as to be able to obtain information as to assessments and other pertinent information. If there are CC&Rs and an HOA associated with the property, when dealing with an REO transaction, one needs to determine what are the CC&Rs, and whether there are assessments that will need to be paid to an HOA. Unpaid assessments are usually discussed in the CC&Rs and are stated to be continuing liens upon the land.
If assessments are called for in the CC&Rs, one needs to see whether the CC&Rs address assessments and any corresponding lien(s) and the priority of said lien(s) in relation to mortgages on the property.
Many CC&Rs address lien priority and state that HOA assessments and liens are subordinate to purchase money mortgages. Therefore, if the deed of trust foreclosed was a purchase money mortgage, the unpaid assessments and any corresponding liens are extinguished through the foreclosure sale, and only assessments from the foreclosure date forward would be owed.
CC&Rs will sometimes specifically address the above procedure, stating the portion of assessments that would be owed subsequent to the foreclosure. Even though the situation may be addressed in the CC&Rs, this is where problems can still arise. HOAs do not always understand lien priority and request past unpaid assessments that had accrued previously via the foreclosed debtor, to be paid by the REO seller at the REO closing. This is incorrect and can cause delays in closing REO transactions due to said disagreements as to the amount owed to the HOA pursuant to the CC&Rs.
Another difficult situation can be in the actual determination as to whether there are CC&Rs and an HOA. This situation arises more frequently when CC&Rs are not of record in the office of the register of deeds of the county in which the property lies. Not only do unrecorded CC&Rs make it more difficult to determine whether there is an HOA, but it could also allow for arguments to be made that the REO seller, because of having no notice of the CC&Rs (and any HOA assessments), would not necessarily be subject to them.
In Tennessee, the law is well established in that “… an owner of land is not bound by covenants restricting the use of the land by his remote grantor, when such covenants do not appear in the owner’s chain of title and when he had no actual notice of the alleged covenant at the time he acquired title.”
With unrecorded CC&Rs there would need to be actual notice since there would not be constructive notice of the CC&Rs. This could obviously give rise to issues regarding violations of the CC&Rs, including but not limited to the amount of assessments owed to the HOA.
In conclusion, possible solutions to the aforementioned issues could be to mandate CC&Rs to be recorded; create a required HOA registration, in which HOAs need to list what subdivisions/properties fall within their purview as well as current contact information; and finally, more education for HOAs regarding the foreclosure process and the ramifications it has on subordinate liens and helping HOAs to understand what their CC&Rs actually state, along with even more regulation for HOA compliance with their respective CC&Rs.
In the end, there is still likely to be disagreements with regard to the interpretation of the CC&Rs and amounts owed to HOAs, but the above actions may help to reduce research and disagreements and ultimately expedite the closing process. Ted Cummins is the supervising attorney for the Memphis closing department of Wilson & Associates PLLC.