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Highland Lakes Country Club & Community Association v. Franzino

FORECLOSURE; CONDOMINIUM; LIENS—Even if a condominium association’s lien is cut off by a foreclosure, if the condominium’s organic documents clearly provide for such, a subsequent purchaser of the foreclosed unit is obligated to pay the arrears even if there is no lien.

186 N.J. 99, 892 A.2d 646 (2006); March 6, 2006: Unit owners defaulted on their mortgage and failed to pay their community association dues and common assessment fees. Their mortgagee filed a foreclosure action. Separately, the community association obtained and docketed a judgment for the unpaid dues and fees. The lower court ruled that the mortgagee had priority in payment over the association’s docketed judgment. In its order requiring sale of the property to pay the mortgagee, the lower court also ordered the community association to be “absolutely debarred and foreclosed of and from all equity of redemption” in the property. The writ of execution authorizing the sheriff’s sale did not include any language authorizing payment to the community association in the event of any surplus resulting from the sale of the property for more than the amount owed to the mortgagee. There was no evidence of any surplus available to the community association after the sale of the property and the community association never made application for any surplus.

A new unit owner bought the condominium unit from the prior mortgagee. The community association sought to compel that purchaser to pay its association dues and common assessments as well as the unpaid membership dues and common assessments attributable to the predecessors in title. The association claimed that the recorded covenants in the community’s deeds and bylaws provided adequate notice to the subsequent purchaser that it would be responsible for the arrears. The subsequent purchaser contended that the covenant language was vague and therefore did not provide sufficient notice that it would be responsible for the arrears of the predecessors in title. Further, the subsequent purchaser argued that the mortgage foreclosure, to which the community association was a party, cleared the title of any lien for arrears. The lower court granted summary judgement in favor of the community association, ruling, among other things, that the foreclosure action did not extinguish the community association’s contractual right to collect the assessments of prior owners from the current owner.

The subsequent purchaser appealed and the Appellate Division reversed on two grounds. First, it ruled that a unit owner’s obligation to pay association dues and common assessment fees is based on the association’s restrictive covenants as recorded in the deeds and bylaws. In this case, the bylaws stated that unpaid assessments constituted a lien from the date of recording the lien. Since the association never recorded a lien, the Appellate Division ruled the association could not recover past assessments from the subsequent purchaser. Second, the Appellate Division ruled that the execution of a deed containing covenants compelling compliance with bylaw requirements may create an agreement to pay common assessments and association dues, including arrears of the predecessors in title. However, in this case, the Appellate Division found the recorded covenants to be ambiguous and ruled that the ambiguity did not provide sufficient notice to the subsequent purchaser that property purchased in this community would be conveyed subject to a contractual requirement that the arrears of the predecessors in title were enforceable against the subsequent purchaser.

The association appealed, and the Supreme Court reversed the judgment of the Appellate Division and reinstated the judgment of the lower court. An equitable lien arises when a debt is owed from one person to another, the debt is attached to specific property, and there is either an express or implied intent that the specific property will serve as security for the payment of the debt. For a covenant in the deeds or bylaws of a homeowners’ association to create an equitable lien, the property owner must have adequate notice. Even assuming the association had a lien against the subject property, the Supreme Court ruled that the foreclosure action and subsequent sheriff’s sale extinguished any such lien. Liens created through operation of an association’s recorded deeds and bylaws do not survive a foreclosure action to which the association was a party. But, even though the association’s lien was extinguished by the foreclosure judgment and sheriffs’ sale, the underlying debt was unaffected. Extinguishing a lien does not affect the validity of the underlying debt.

A subsequent purchaser takes title subject to the covenants contained in the recorded deeds and bylaws. Provided the recorded covenants are not ambiguous, the recorded language creates a debt for past and present arrears. Holding the recorded language in the homeowners’ association’s bylaws to be clear and unambiguous, the Court ruled that nothing relieved the subsequent purchaser of its obligation to inquire as to whether there were any arrears. An association may collect a previous owner’s arrears from a subsequent purchaser, based on contract theory, if the recorded covenant language is clear enough to provide notice to the subsequent purchaser of its obligation to pay such arrears, even if the association does not have a lien against the property.

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