In our previous post, we considered one method a Community Association may use to preserve and collect its lien for unpaid assessments: the memorandum of lien.
In this post, we will focus on the process of foreclosing on a Community Association’s memorandum of lien. As we discussed last time, once the memorandum of lien is recorded, it acts as an encumbrance on the property’s title. Once recorded, the memorandum of lien will be valid for a period of 36 months.
So what may a Community Association do with a memorandum of lien to collect delinquent assessments? As we discussed in the previous post, simply recording the memorandum of lien does not necessarily mean that the Community Association will be paid. However, the General Assembly has provided the Community Association with a powerful statutory tool to enforce its memorandum of lien: the nonjudicial foreclosure.
The foreclosure process relating to a memorandum of lien can be particularly effective because it takes place apart from filing a lawsuit. Compared to other collection remedies, the memorandum of lien foreclosure process can be faster and less expensive.
The memorandum of lien foreclosure process is completely statutory, meaning that the Community Association must strictly comply with the applicable statutes. For this reason, it is critical that the Community Association have an experienced attorney assist it with this. Failure to comply with the statutes may invalidate the foreclosure and/or expose the Community Association to civil liability.
The following summary is intended to be a basic overview of the foreclosure process. There are additional requirements that must be followed, of course.
Once the memorandum of lien is recorded, the Community Association’s attorney drafts and provides a notice of foreclosure to the owner of the property. Provided that the owner does not pay the delinquent assessments on the memorandum of lien (plus costs and attorney’s fees incurred in the foreclosure process) within the statutory period of time (60 days), the Community Association may proceed with the non-judicial foreclosure of the property.
It is important to note that the owner has an absolute right to stop the foreclosure process once it starts if the owner pays the total amount included in the memorandum of lien (plus reasonable attorney’s fees and advertising costs). After the 60 day period expires (and assuming payment has not been made), a trustee may be appointed to oversee the sale of the property. The trustee is usually a local lawyer experienced in real estate transactions. The Community Association must provide written notice of the sale to any lienholders of the property as well as advertise the sale in the local newspaper. Once the sale is complete, the trustee has the authority to convey the property to the new buyer. Once the conveyance is completed, the proceeds from the sale are disbursed by statute (with the trustee’s fees and costs of sale being paid first).
It is important to know that in some cases the Community Association may not net any money at the end of the day. However, even if the Community Association does not collect the full amount claimed on its memorandum of lien, a foreclosure may still be worthwhile if the sale brings a new, assessments-paying owner to the property.
Moreover, sometimes foreclosing on a memorandum of lien may not be the best choice to enforce the Community Association’s lien. This is because of the priority of the Community Association’s memorandum of lien is lower than that of a first mortgage. Since any first mortgage is a superior lien to the memorandum of lien, the memorandum of lien foreclosure will not wipe away the first mortgage lender’s lien. Consequently any buyer in a memorandum of lien foreclosure situation will buy the property subject to the first mortgage. For these reasons, trustee may have difficulty finding a buyer for the property in some circumstances.
In determining whether foreclosing on a memorandum of lien is the right course of action in a particular situation, a key issue to consider is how much equity the owner has in the property. This can be difficult information to obtain. However, to get a general idea it may be worthwhile to obtain a title report on the property. If the Community Association thinks that the property is worth much less than the first mortgage’s outstanding balance, then the trustee may have difficulty selling the property. In addition, the Community Association would be unlikely to recover the outstanding amount claimed under its memorandum of lien.
It is important to note also that beginning the foreclosure process can sometimes spur the first mortgage lender to begin its own foreclosure proceedings. This can be a good thing and can help reduce the out of pocket costs of the foreclosure process for the Community Association, as the first mortgage lender would carry the burden in proceeding with the foreclosure.
In some situations a memorandum of lien foreclosure is simply not the appropriate remedy. In particular, if the Community Association holds multiple judgments or memoranda of lien against the property, then may be worth considering another collection remedy, the judgment creditor’s suit, which we will discuss in the next post.