Whereas last week’s post introduced condominium association (“CA”) liens and their priority in title under Indiana law, this week’s post addresses CA liens in connection with a deed-in-lieu of foreclosure (“DIL”). A DIL can be a relatively simple and positive transaction for a secured lender struggling with an unperforming loan. But in cases dealing with a condominium property, lenders need to be careful about inheriting unpaid CA assessments.
Example scenario. My colleague Sierra Bunnell and I recently worked on a foreclosure lawsuit involving a condominium. Settlement discussions led to an agreement for a DIL. Before closing the DIL, our client, the senior lender/mortgagee, learned that there were unpaid and past due CA charges. (The CA had not recorded a formal lien notice.) The question was whether our client could take a DIL without inheriting thousands of dollars owed by its borrower to the CA. (In cases of a recorded CA lien, the foreclosure/settlement analysis would be no different than with any other case involving a recorded lien.) Again, our case dealt with an unrecorded lien – an unusual concept - which we described in last week’s post.
DIL – voluntary. Under both the homeowner’s association (“HOA”) and condominium association statutory regimes in Indiana, a grantee in a voluntary transaction assumes certain liabilities for the subject real estate. The amount assumed by a voluntary grantee for an HOA assessment will be limited to those unpaid assessments for which a notice of lien has been recorded, while the grantee would be liable for all unpaid assessments owed to a CA. See, Indiana Code § 32-25-5-2 (CA) and I.C. § 32-28-14-7 (HOA).
Options. If a lender/mortgagee is considering a DIL in a condo case, it should undertake the following steps vis-à-vis the CA to guard against unwittingly exposing itself to liability for an unrecorded lien:
1. Obtain a payoff letter from the CA and determine whether there are any past due and unpaid charges owed by the borrower. Lenders are entitled to such statements and will not be liable for any unpaid assessments in excess of the stated amount. I.C. § 32-25-5-2. Lenders should then weigh the amount of outstanding assessments against the costs involved with the foreclosure. Remember, a foreclosure and resulting sheriff’s sale (an involuntary transaction) will terminate any lien. Depending upon the amount due, the time and expense of foreclosure may be warranted.
2. One way to avoid foreclosure is to obtain, from the county recorder’s office or a title insurance company, the recorded condominium “declaration,” which is “like the constitution of a condo.” Review the declaration for lien subordination language. Declarations may expressly terminate a CA’s lien on the property (not the debt owed by borrower) in favor of a first mortgagee taking title through a DIL. If that option is available, a lender can avoid liability for the debt altogether. This is what occurred in Sierra’s and my case, and our title company insured the transaction.
Again, I appreciate the assistance of Sierra Bunnell with my last two posts.