Does a First Deed of Trust Survive a Homeowner Association Foreclosure?

Homeowner Associations, or HOAs, assess their members dues. Failure to pay dues in a timely manner results in liens that can lead to a foreclosure action. When a HOA forecloses, a purchaser buys the delinquent property. The standard rule provides that a first deed of trust survives the foreclosure, making the new owner liable for the mortgage debt.

Homeowner Association dues provide money to maintain the common areas of a development. Activities such as landscaping, maintenance and repairs take a major portion of the dues. The HOA saves some dues for capital improvements such as installation of a new fence, or for major repairs like a new pump for the swimming pool. A HOA bases its dues structure on the amount of money needed each year, so the failure of one or more members to pay their dues strains the budget.

Because a HOA cannot afford to carry many delinquent accounts, it generally moves quickly to collect an arrears. The first step normally involves placing a lien in the public record against the delinquent homeowner and his property. If this does not produce payment in full, the HOA files a foreclosure proceeding. At any time up to the actual sale, the homeowner can save the property by paying the dues. The HOA does not want to sell the property, it just wants its money.

Most HOA Declarations, or governing documents, contain a mortgagee protection clause. This provision states that a lender that obtains a first deed of trust position on a home has priority over any claim by the HOA for delinquent dues. This clause encourages lenders to make loans and protects them when they do. The net effect of the mortgagee protection clause is the survival of a first deed of trust when a HOA forecloses.

One question involves delinquent dues when a mortgagee forecloses. The protection clause provides that the purchaser at a lender foreclosure becomes responsible for all dues from the date of the purchase forward. The State of Florida passed laws in 2007 and 2008 attempting to protect HOAs by providing that any purchaser is liable for all delinquent dues of the previous owner, and lenders upon foreclosure become liable for a limited amount of the dues. In Nevada, a different question has arisen where purchasers at HOA foreclosures are contesting the priority of first deeds of trust. Any purchaser at a HOA foreclosure in any state needs legal counsel to sort out the ramifications of the sale and priority of liens.