While representing an institutional lender in the making of a loan secured by real property located in Colorado, we came across an increasingly relevant issue regarding properties subject to a homeowner association or similar regime. Homeowner associations generally have the ability to place a lien on a property in the event that the property owner does not pay assessments as required under the association’s governing documents. However, in states that have adopted some form of the Common Interest Ownership Act, homeowner associations are granted a statutory assessment lien that can, in some instances, prime even a first lien security interest in a property.

Although the specifics of an association’s ability to place such “priming liens” or “superliens” on a property vary from state to state, the Common Interest Ownership Act provides that an association’s lien is senior to a first priority mortgage or deed of trust in an amount equal to the amount of assessments which would have become due in the absence of acceleration during the 6 months immediately preceding institution of an action to enforce the lien, plus any associated charges, fees, fines and interest, and such lien will prime even a first lien deed of trust or mortgage that encumbers the property. If a jurisdiction has adopted this priming lien mechanism into its statutory laws governing the activities of homeowner associations, then a lender holding a first lien security interest in a property could potentially lose its interest in the event a homeowner association forecloses upon its superlien.

In our scenario, Colorado law provided for several safeguards that mitigated the risk of the homeowner association placing a priming lien upon the financed property: (1) any person or entity with a subordinate interest in the property must be given notice of a foreclosure sale and (2) any junior lienholder has a right to cure any non-payment of the property owner and avoid a foreclosure sale. Furthermore, some states, including Colorado, require assessment liens to be foreclosed upon through the judicial process (as opposed to non-judicially through a public trustee sale), meaning that a lender having an interest in the property must also be named as a defendant and served in any lawsuit relating to the foreclosure of a community association’s lien. The laws of other jurisdictions, such as Washington D.C., do not provide for such mitigants, and an association’s priming lien may be foreclosed upon without notice to a lender who would otherwise hold a first priority security interest in the property.

The inconsistency in state laws with respect to an association’s ability to place a priming lien on a property is troublesome for real estate lenders looking to make loans secured by properties governed by a homeowner association. As such, particular attention should by paid to the applicable state laws when a client is proposing to take a security interest in a property governed by a homeowner association in order to safeguard the client’s interest in such property.