Ok, so you have a delinquent owner that the association wants to foreclose on. It is common knowledge that delinquent assessments give rise to liens which encumber the property for the amounts owed. But what if the association isn’t the only one not being paid? What if there is a lien from a credit card company? Or a tax lien? What’s the impact of a second mortgage?
Generally, liens are given priority in order of the date they are recorded, the oldest being the highest in priority. Association liens are an exception to this rule because of a provision in CCIOA which changes this priority. The statute regarding the Assessment liens, found at C.R.S. 38-33.3-316 (2)(a) says this:
A lien under this section is prior to all other liens and encumbrance on a unit (lot) EXCEPT:
(I) Liens and encumbrances recorded before the recordation of the declaration and, in a cooperative, liens and encumbrances which the association creates, assumes, or takes subject:
(II) A security interest on the unit which has priority over all other security interest on the unit and which was recorded before the date on which the assessment sought to be enforced becomes delinquent, or, in a cooperative, a security interest encumbering only the unit owner’s interest which has priority over all other security interest on the unit and which was perfected before the date on which the assessments sought to be enforced because delinquent; and
(III) Liens for real estate taxes and other government assessments or charges against the unit or cooperative.
Section (II) above refers to the first mortgage. In simple terms, this means that the association’s lien will be second in the priority line in most cases, right behind the first mortgage. There are some exceptions to this general rule:
- Liens for real estate taxes and other government assessments or charges against the unit. Real estate taxes are self explanatory. “Other” government assessments or charges can mean things like City fines, municipal charges imposed, or unpaid water costs.
- Federal tax liens. The Internal Revenue Service relies on the Federal Tax Code to put their lien in a position prior to that of the association.
If an entity holding one of these liens were to foreclose, the association’s lien would be extinguished. This is uncommon because the government liens are typically for nominal amounts. Conversely, if the association were to foreclose its lien, that foreclosure would leave the lien for real estate taxes and/or other government assessments unaffected. Anybody taking title to the property would take it subject to these liens in superior position.
There are several other types of encumbrances that commonly impact a property:
- Transcript of Judgment Liens: these are liens that creditors place on the real property of someone they have a judgment against. This happens most commonly with credit card judgments. Transcripts of Judgment have priority as of the date they are recorded and are below or junior to assessment liens. If the association forecloses its lien, the Transcript of Judgment will be extinguished and will not encumber the property.
- Second mortgages: while the statute gives priority to the first mortgage on a property, no such protection is afforded to a second mortgage. This means that if there is a first mortgage and a second mortgage; the assessment will fall in the line of priority right in between them. This is good news for an association potentially considering foreclosure because foreclosure by the association would wipe out, or extinguish the second mortgage. Many second mortgages are of a substantial enough amount that they will be motivated to stop the foreclosure to protect their lien…. and the only way to do this is to pay the association in full! Any junior lien holder may protect its interest by paying off the higher priority liens.