COLLECTIONS AND FORECLOSURE

LIENS AND FORECLOSURES
“Who is responsibility is it to pay for maintenance violations when a house is in foreclosure? Can the association maintain and bill the bank? Is a hearing required?”

The current owner, whoever that is (the bank or otherwise). The record owner of property is responsible for complying with the CC&Rs, including provisions requiring maintenance. If maintenance is inadequate (for example, if grass dies from lack of water) the CC&Rs may permit the imposition of fines, reimbursement assessments, or self help for expenses incurred by the association in performing the owner's maintenance duties.

“How much investigation should a board do prior to recording a lien or foreclosing on a property? For example, checking title first to see if the owner is upside down or being foreclosed on by their lender, thus avoiding un-recoupable legal fees.”

At least some “investigation” into available equity should be undertaken. The type and cost of an asset investigation depends on many factors. They include the investigation cost, the proposed action (lien, small claims court, superior court foreclosure action, and nonjudicial foreclosures are typical options). At least minimal steps should be taken to identify the amount of senior encumbrances. In some cases, through “short sales” or other arrangements with senior lenders, the association may be able to obtain at least some of the unpaid assessments and collection costs due. In some cases it may be worthwhile to record a lien and/or pursue foreclosure even where equity is less than the value of the property (to protect recovery via a bankruptcy or to force a sale to obtain a paying owner or for other reasons).

“Is it legal for the association (as an owner of a foreclosed property) to rent that property and keep all of the rent money without paying any mortgage payments to the bank holding the 1st? What risks do the directors and/or management face if association keeps all the rent?”

It depends. Claims might be made under California's “rent skimming” statute (Civil Code §890) but likely depends on several factors. Violations of the rent skimming statutes could subject those involved to damage claims. There are ways of reducing the risks and the association's legal counsel should not be consulted.

“Why is a foreclosing lender not required to satisfy the lien for delinquent assessments recorded against the property by the homeowner's association? Shouldn't the lender be required to do this when it sells the property to a new owner?”

Unfortunately for homeowner's associations, a lender foreclosure and sale of the property often results in no money for the association and the association is left to try to collect the money from the prior owner. In California, the rule of priorities is based on the "first in time is first in right" rule (there are a few exceptions to the rule but none that elevates the priority of the association's lien). Because the foreclosing lender recorded its trust deed prior to the association's lien, its interest in the property is senior to the association's interest. Once the lender forecloses and the property is sold at auction (or title reverts to the lender because there is no buyer), all encumbrances junior to the lender are extinguished. This includes the association's lien. (This scenario assumes there are no excess proceeds from the foreclosure and sale of the property.) Lenders, of course, would be much less willing to lend money to purchase property if they could not ensure that they would be first in line to take the collateral in the event of the borrower's default. Additionally, the lender is likely already selling or taking back the property at a loss.