For the last several years, there has been a tremendous amount of litigation in Nevada arising from residential foreclosure sales conducted by homeowners’ associations (HOA). The main issue in those cases has been whether the HOA’s foreclosure sale extinguishes the first-priority deed of trust or mortgage encumbering the property pursuant to the superpriority provision of NRS 116.3116.
One frequent defense raised by the holders of first-priority deeds of trust or mortgages was that the mortgagee-protection clauses in the HOA’s conditions, covenants and restrictions (CC&R) preserves the lienholder’s priority notwithstanding the superpriority provisions of NRS 116.3116. In SFR Inves. Pool 1, LLC v. U.S. Bank, N.A., 130 Nev. 742, 757-58, 334 P.3d 408, 418-19 (2014), the Nevada Supreme Court rejected that defense by holding that mortgagee-protections clauses were invalid because, under NRS 116.1104, they could not function to alter the provisions of NRS chapter 116 by agreement.
The rule is different, however, in nonresidential property owners’ associations (POA). In Vegas United Investment Series 105, Inc. v. Celtic Bank Corp., 135 Nev. Adv. Op. 61 (2019), Vegas United purchased a property that was in nonresidential POA. Celtic Bank, the holder of the first-priority deed of trust against the property, filed a complaint for judicial foreclosure and Vegas United filed counterclaims for quiet title and slander of title. The basis for the counterclaims was that the mortgagee protection clause in the POA’s CC&Rs violated NRS 116.1104. The trial court ruled that Celtic Bank’s first-priority deed of trust was not extinguished pursuant to the mortgagee protection clause and the Nevada Supreme Court affirmed.
When affirming the trial court’s decision, the Nevada Supreme Court noted that NRS chapter 116 does not automatically apply to nonresidential POAs. In order for NRS chapter 116 to apply to nonresidential POA’s, its CC&R’s must provide that the POA is subject to NRS chapter 116. See NRS 116.12075. There are three ways for a nonresidential POA to be governed by NRS chapter 116. The first is for the declaration to provide that the entirety of NRS chapter 116 applies to the POA. The second is for the declaration to provide that only NRS 116.001 to 116.2122 and 116.3116 to 116.31168 applies to the POA. The third is for the declaration to provide that only the foreclosure provisions of NRS 116.3116 to 116.31168 applies to the POA. Id.
In Vegas United Investments, the POA’s CC&Rs incorporated the third option - application of the foreclosure provisions of NRS 116.3116 to 116.3118. The POA’s CC&Rs did not incorporate NRS 116.1104, which prohibits agreements that vary the provisions of NRS chapter 116. Thus, NRS 116.1104 was inapplicable and the mortgagee protection clause was not rendered invalid by that statute.
When examining the conflict between the mortgagee protection clause and the superpriority provisions of NRS 116.3116, the Nevada Supreme Court noted that only two types of charges and assessments constituted the superpriority – those authorized by NRS 116.310312 and 116.3115. Neither of those charges and assessments applied to the POA because they were not among those statutes incorporated from NRS Chapter 116. Thus, the POA did not foreclose on a superpriority lien and Vegas United acquired the property subject to Celtic Bank’s deed of trust.
Vegas United Investments is good news for lenders with first-priority liens against nonresidential real property. Those lenders may be able to successfully assert that their liens were not extinguished by a POA’s foreclosure sale notwithstanding the superpriority provisions of NRS 116.3116.