Jan 2019

The Priority of Homeowner Assessment Liens

Roger Bernhardt

Bear Creek Master Ass’n v Southern Cal. Investors, Inc.

Bear Creek Master Ass’n v Southern Cal. Investors, Inc. (2018) 28 CA5th 809, reported at p 20 of this issue, states an interesting rule of priority, but the facts with which the court of appeal was dealing, the documents it had to interpret, and the language of the opinion are so complicated that the principle it announced may be lost to everyday readers and ordinary real estate practitioners. So a lengthier coverage of the facts is warranted before dealing with the consequences of the decision.

Homeowners in the Bear Creek subdivision had the benefit of using a golf course that was adjacent to but legally not a part of their subdivision. The Declaration of Covenants, Conditions, and Restrictions (CCRs) for the golf course imposed on its owners a burden of maintenance of the grounds. The CCRs for the residential subdivision provided that the homeowners association (BCMA) could keep up the grounds if the golf course owners failed to do so, and then had a right of reimbursement for its costs. (Since the two sets of CCRs referred to each other, from now on I’ll just refer to them as the CCRs.)

With regard to the existence of this right to reimbursement, the CCRs gave BCMA an immediate “claim of lien” for all such unreimbursed future assessments (“an inchoate ‘claim of lien’,” as the court of appeal described it), which became effective as a real lien when and if BCMA incurred such costs and recorded a notice of delinquency.

Regarding the priority of any such HOA assessment lien, the CCRs were considerably more opaque and can be best understood by paring away many of the companion clauses in the documents that cluttered them up. Section 3 of the CCRs recited basically that any assessment lien BCMA obtained would “have priority” over any lien later created “except for certain trust deeds as provided in section 4.” Section 4 recited that such an assessment lien “shall not be subordinate to the lien of any deed of trust ... except ... a first deed of trust.” (I wish the drafters had not said “except ... except” in these sections, or provided that an assessment lien “shall have priority” in §3 while stating it “shall not be subordinate” in §4; was “having priority” the same as being “not subordinate”? But despite the clumsiness, it seems to [9] amount to saying that future assessment liens would have priority over all other later-created liens except first deeds of trust (and the carveout for such firsts does not matter in this case, since the rival lien was a third deed of trust).)

BCMA had an assessment lien, recorded in 2014, and was opposed by SCI, which held a third deed of trust, recorded in 2013. Normally, the SCI lien would have priority over the BCMA lien because it had been recorded first. (The SCI lien had also been created first, thus having priority under the common law first-in-time doctrine.) True, the creating CCRs came first, but the appellate court ruled that they created no lien at that time, only the possibility that one might be later created, which was not enough to give any lien created in accordance with them priority over other liens.

The “future advance priority” statute (CC §2884), which provides “A lien may be created by contract, to take immediate effect, as security for the performance of obligations not then in existence,” was held to be inapplicable because the original CCRs did not purport to create any lien taking “immediate effect.”

All of those principles should have led the court to conclude that the deed of trust had priority over of the assessment lien. Notwithstanding all of the above, the deed of trust lien lost. This was because BCMA had a “subordination” priority based on another clause in the CCRs that provided “an assessment lien shall have priority over all other liens or claims created subsequent to the recordation of this Declaration.” The court said that this provision “modified the otherwise-applicable ‘first in time, first in priority’ rule of lien priorities ... [and] constructively notified SCI that any recorded assessment lien against the golf course would have priority over SCI’s third deed of trust—even if the assessment lien was recorded after the third deed of trust was recorded.” 28 CA5th at 822 (emphasis added). Thus, while the CCRs may not have created any assessment lien in 1982 when those CCRs were recorded, once such a lien was later created (and recorded), it would have priority over other liens (except first deeds of trust), even those recorded before it. Therefore, BCMA’s 2014 assessment lien had priority over SCI’s 2013 deed of trust. The provisions in the CCRs may have failed to create any “presently effective lien securing BCMA’s subsequently incurred costs,” but they would nevertheless create a kind of placeholder for all later-created assessment liens, with a priority equal to the 1982 CCRs. The CCRs thus functioned much like filed financing statements do under Article 9 of the UCC, enabling security interests that may come along later to outrank rival interests.

The Bear Creek court held that the provisions of the CCRs would subordinate other liens to homeowner assessment liens even when those other liens arose before them and would otherwise have recording act priority. The court liked the result that it reached, opining that this would “ensure that the Bear Creek Development homeowners will not have to live near a poorly maintained golf course property with no means of remedying the situation or of adequately securing certain costs incurred by BCMA in maintaining the golf course property.” 28 CA5th at 823.

Normally, we think that a subordination clause is effective only when the party being subordinated has assented to go below the other lienor, but this decision seems not to require such assent. The CCRs were agreements between the residents, so how could they make nonsigning lienors take lower priority rights than the recording acts ordinarily give them? (On the other hand, if the Declarant of those CCRs was a party to them, and so was bound by them from the start, would the lien it gave to SCI not be considered to have the inferiority the CCRs called for?)

In any event, whether the outcome of this case is good priority logic or not, homeowner associations do need effective rights to maintain the common property of their members, which this decision gives them. This outcome may be odd in California when a transaction involves real estate liens rather than security interests under the UCC, but elsewhere the Uniform Common Ownership Act 3–116 converts unpaid assessments into statutory liens automatically and gives such liens statutory priority over–other liens for up to 6 months of assessments. Unlike the UCOA, §5675 of our Davis-Stirling Common Interest Development Act (CC §5675) converts assessments into liens only after a notice of delinquency has been recorded, and §5680 of that Act gives these assessment liens priority over only liens that were recorded subsequent to them. Although Davis-Stirling permits the CCRs to “provide for the subordination thereof to any other liens and encumbrance,” that provision has the opposite effect of allowing other liens to be subordinated to these assessment liens. However, since the court held that Davis-Stirling applied only to properties within the subdivision, not to a golf course outside it, that makes these observations irrelevant.

Whether correct or not, the outcome in Bear Creek means attorneys should warn clients taking a lien on property to look out not only for future advance clauses in mortgages already of record (as they should already be doing), but also for reverse subordination clauses in recorded CCRs that give homeowner association liens placeholder status, even when they come along later. They should also hope that such superpriority liens are somehow limited, so as not to drown their clients’ own liens by their enormity.

 

Reprinted from 42 Real Property Law Reporter 8 (Cal CEB Jan. 2019), copyright 2019 by the Regents of the University of California. Reproduced with the permission of Continuing Education of the Bar - California (CEB). No other republication or external use is allowed without permission of CEB. All rights reserved.  (For information about CEB publications, telephone toll free 1-800-CEB-3444 or visit our website - CEB.com)

 

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