Bulletin: MU000050

Dear Associates:

This Bulletin addresses a recurring issue involving the assignment of assessment liens by Homeowner's Associations to third party assignees.

Background Facts

In most states condominium ownership is recognized as a valid property interest. While the definition of what constitutes a condominium varies by state, the general principle is that condominium ownership consist of individual ownership in a unit, coupled with an interest in the common areas, facilities and buildings which are used by all owners in the common interest community. In this Bulletin, the term "common interest community" will be used and includes condominiums, cooperatives, planned unit developments subdivisions or any other real property where assessments are made. The determining factor on what constitutes a common interest community is whether individual unit owners are responsible for costs associated with other property within the described area. The term "unit" as used herein includes any real property interest held by an owner.

In order to operate, repair and maintain the common areas for the benefit of all owners in the common interest community, homeowner's associations or management committees are formed and given the power to assess fees upon the individual unit owners. In order to aid in the collection of these assessments, state law often gives the owner's association or management committees the right to record a lien for unpaid assessments in the county record. Per existing Stewart Title Guaranty Company guidelines and requirements, if a common interest community has the power to make common assessments or fine individual unit owners, all assessments and fines outstanding prior to the time of a closing must be paid in full or specifically assumed by the purchaser. In addition, if a statement of the assessment lien has been filed in the land records where the property is located, a release of the lien must be recorded. In order to comply with these requirements, agents are expected to request a written statement from the association in which the association states the amount of unpaid assessments and fines levied against the unit.

Because the right to receive money is a right that can be assigned to third parties, owner's associations can and do assign their right to receive assessments to other parties. These assignments may be made by a general assignment of all accounts receivable or by a specific assignment of a lien. We have experienced losses in instances where owner's associations have assigned their right to receive unpaid assessments. When presented with the title company's request for the current status of unpaid assessments, the association supplies only the amounts currently due to the association and fails to mention that they have previously assigned all or a portion of prior assessments to a third party or to set forth amounts owed to the assignee. Relying on the association's statement of the amount due, the closing agent tenders the recited amount. Believing that all assessments have been paid in full, the issuing agent issues policies without taking exception to the prior assessments that are now held by the assignee of the owner's association. Later the assignee becomes known; usually by a demand to be paid off for the lien rights that it purchased from the association and may threaten to foreclose their assessment lien based upon prior amounts owing.

This chain of events seems to be prevalent in regard to properties going into a foreclosure. By purchasing rights to an assessment lien, the assignee also gains the right of redemption in the foreclosure process. It appears that the possibility of obtaining title to the foreclosed property is the underlying motivation to purchase the assessment lien. If the assessment lien purchaser fails to obtain title to the foreclosed property, they seek to recoup the price that they paid to the association to purchase the assessment lien; often by threatening to foreclose and looking to the title insurance company to pay off the assessment.

What you can do to protect yourself

I. When requesting current amounts due for assessments and fines from the owner's association, include a request for all information concerning prior assignments or transfer of assessment liens to others. Insert an affirmative statement from the owner's association that it has not assigned, sold or transferred any liens for assessment to other parties and require that the association check a box yes or no. Create an area on your requests where the association can tell you to whom they assigned the prior assessments, the date assigned and amount due under the lien(s) assigned. If the association provides its own form, make sure the association's form contains the above information or seek a written statement from the association regarding any assignments that it may have made which includes the above information.
If you are aware that an assessment lien has been assigned, either by information received from the owner's association or by a search of the public record, contact the assignee for payoff information for the lien rights held by the assignee.

II. Title commitments should contain the following requirement:

"The Company requires a satisfactory statement from the Association or its agent stating the amount, if any, of the unpaid common or maintenance charges against the land to the date of closing and that no liens or rights to a lien for unpaid common or maintenance charges have been sold, assigned or transferred to other parties. At that time, the Company may make additional requirements or exceptions."

If the proposed insured is taking title specifically subject to outstanding assessments, a separate exception must be added to Schedule B of the commitment and policies to be issued.

III. When preparing Foreclosure Guarantees it is important to consider whether the record discloses an assignment of amounts owing, either a general assignment of accounts receivable or a specific assignment of a lien. If the record does reveal an assignment, the assignee will need to be added as a party to receive notice of the default and notice of trustee sale. This requirement does not apply in Utah where the assignee would have to record a specific request of such notice. In many instances, the rights held by the assessment assignee are subordinate to the first mortgage lender, however if the assessment assignee is not given notice of the trustee's sale as provided by state statute, the company is placed in jeopardy in any subsequent claim.