Foreclosure Of Assessment Liens

Introduction
1. The Association has a lien for unpaid assessments against each unit in the Association.
  1. A lien against the owner’s unit for unpaid assessments is granted in most Declarations. The time at which the lien attaches depends upon specific wording in the Declaration. For example, the Declaration may state that the lien attaches when the assessment is unpaid, or when notice of the lien is recorded in the real estate records. The owner has notice of this lien because the Declaration is recorded in the public records.
  2. The Colorado Common Interest Ownership Act (CCIOA) also gives associations a lien for all unpaid assessments coming due after CCIOA went into effect on July 1, 1992. Under CCIOA, the Declaration and CCIOA constitute notice of the lien so no recording of a notice of lien is required. However, we recommend that a lien still be recorded as further notice to anyone searching the real estate records of the county. Under CCIOA, the association’s lien goes back to the date the Declaration was recorded and typically it will be senior to all other liens except the lien of a first mortgage and any lien for unpaid taxes and assessments affecting the property.
2. The Association’s lien can be foreclosed just like any other lien encumbering the property.
  1. An association must go through a judicial foreclosure process.
  2. An association cannot use the public trustee foreclosure process which is only available for deeds of trust which name the public trustee as trustee.
3. The association should consider foreclosing its lien if any of the following apply:
  1. The owner is chronically delinquent in paying assessments.
  2. The delinquent assessments cannot be collected by an ordinary county court collection lawsuit. (For example, the owner cannot be located for service, or the owner is judgment-proof.)
  3. There is equity in the property in excess of approximately $15,000.
  4. It is in the association’s best interests to be rid of the perpetually delinquent owner.
  5. The property is not already involved in a foreclosure by the lender.
Overview Of Judicial Foreclosure Process For Assessment Liens
1. The lawsuit.
  1. The Association must have a lien for the delinquent assessments.
  2. A Complaint is filed in the county where the property is located naming the association as plaintiff and all persons who have an interest in the property as defendants. (The defendantsinclude the owner, all occupants, the lender, and anyone else with a lien against the property.)
  3. All defendants are served with a Summons and the Complaint. If we cannot determine the identity of all persons with an interest in the property, they are identified as “unknown persons” in the complaint and are served by publishing notice in a local newspaper weekly for 5 weeks. Additionally, if the owner or any other defendant cannot be located for personal service, they may also be served through the publication notice.
  4. The purpose of the lawsuit is to obtain an order from the court granting the association the right to foreclose its assessment lien.
  5. Following personal service with the Summons and Complaint, the owner has 20 days to file an Answer with the court if served in Colorado; if served out-of-state, the owner has 30 days to file an Answer. If service is through publication, the owner must file an Answer within 30 days of the last date of publication.
  6. Frequently, the owner does not respond to the Summons and Complaint, so an order for foreclosure can be obtained by “default.”
  7. If the owner files an Answer, the judicial foreclosure is considered a “contested matter” and will be set for trial in the same manner as any other lawsuit. The issue at trial will be whether the owner is delinquent and, if so, by how much.
  8. If the owner does file an answer to the complaint, an order for foreclosure can frequently be obtained by “summary judgment” without having to go to trial, if the association can show the default in payment of the assessments and its right to foreclose the assessment lien granted in the Declaration.
2. The Sale
  1. This part of the lien foreclosure process is very similar to the public trustee foreclosure process for mortgages used by lenders.
  2. After the court order is obtained, it is forwarded to the Sheriff of that county.
  3. The Sheriff schedules a sale date, publishes notice of the sale in a local newspaper, and sends notices to all persons who have an interest in the property.
  4. The owner has 110-125 days to “cure” the default prior to sale. In order to cure, the owner must pay the amount that is in default to the foreclosing party. If the owner cures, the foreclosure sale must be withdrawn.
  5. Prior to the time of the sale, we will submit a bid on behalf of the association to the Sheriff. The association does not have to come up with any cash to bid at the sale. The association need only bid the lesser of the debt owed for the assessments (including the attorney fees and costs incurred in the foreclosure) or the value of the property. For example, if the property is worth $100,000, has an $80,000 balance on the first mortgage, and the association is owed $6,000, the association will bid $6,000. If the property is worth $100,000, has a $95,000 balance on the first mortgage, and the association is owed $6,000, the association need only bid $5,000 (the value of the property over and above the first mortgage.)
  6. If the association is outbid at sale, it will be paid in full from the proceeds. If there are no other bidders at the sale, the Association will be given a certificate of purchase from the Sheriff.
  7. Junior lienholders have the right to pay all the amounts owing to the association (i.e. delinquent assessments, attorney fees, and costs incurred in the foreclosure process) to “redeem” the property. Lienholders must file their intent to redeem with the Sheriff within 8 days after sale. The first lienholder must redeem the property within 15-19 days after sale. Each successive lienholder would have an additional 5 days thereafter to redeem.
  8. If no lienholder redeems the property, the Sheriff will issue a deed for the property to the holder of the certificate of purchase (i.e. whoever was the high bidder at sale).
  9. The new owner can then evict the former owner, and either sell or retain the property and lease it to a tenant, keeping the net rental proceeds after paying any mortgage on the property.
  10. Usually, the property will remain subject to the first mortgage. (Most Declarations contain a provision which specifically makes the assessment lien subordinate to the first mortgage).
  11. If the property remains subject to a first mortgage, the new owner must make the mortgage payments or refinance if it wants to keep the property. If the new owner fails to do so, which it may choose to do if there is no equity in the property, the lender may foreclose its lien and the lender would then become the owner. When the property is subject to a mortgage, it is important that a forebearance be negotiated with the lender to allow time to sell the property without the lender foreclosing.
  12. When the new owner obtains the Sheriff’s deed to the property, any liens that may have attached to the property after the lien which was foreclosed will be wiped out or extinguished.
3. General Comments
  1. A receiver can be placed to rent and manage the property while a foreclosure is in process if the criteria for a receivership can be met (i.e. unit is vacant or occupied by a renter).
  2. The owner cannot claim a “homestead exemption” for the property (which in Colorado is $60,000). Typically, the exemption is expressly waived in the Declaration and is also waived under CCIOA.
  3. Attorney fees for judicial foreclosures are billed on an hourly basis. Attorney fees for uncontested foreclosures typically average $3,000-4,000. Additionally, there will be costs of approximately $600-800 for filing the lawsuit, serving the defendants, publishing the required notices in the newspaper (if it is necessary to serve any defendants by publication), title work, and the Sheriff’s charges. The attorney fees for a contested foreclosure may run $7,000 or more depending how vigorously the defendant defends the case.
  4. We have initiated over 800 judicial foreclosures in recent years with excellent results. With the exception of the first mortgage holder foreclosing, the association has received full payment of all amounts and attorney fees.

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