Tax lien sale and HOAs

Started by HughD • 6 replies • 1149 views

💬 Join us to post & get advice from 50,000 HOA & Condo leaders.

⚡ Takes 30 seconds

Already a member? Log in

HughD (Arizona)
Posts: 10

Posted:

Hello all,

I've received some advice on this, and posting here to see if anyone else has any insight. I'm with the BOD for my small hoa in Arizona. Yesterday, the HOA as served with a summons regarding a potential tax lien sale against one of our properties. After research, I learned that the reason the HOA is included is because of our ongoing interest in the property by way of assessment fees. Since a tax lien would wipe out all other liens, we may lose any arrears owed to us. That's not a big deal in this case, so the suit seems more FYI as far as the HOA is concerned.

My question is what happens to deed restrictions as a result of a tax sale. I've read some conflicting things online and Arizona seems not to have fully addressed this. The tax lien sale process destroys the existing title along with all liens on the property and creates a new title. That's why the HOA could lose assessment arrears. Following that logic, the new title may or may not be bound by other restrictions. Apparently some states have said pre existing deed restrictions carry over to the new title and other states have said "no they don't." According to the Interweb (take it for what it's worth), Arizona hasn't fully decided this question. I don't want our little HOA to become case law on the matter. It would make sense that the restrictions carry to the new title, but apparently some states don't see it that way.

I have not talked to our rent-a-lawyer about this since it happened yesterday. Any insight anyone has on Arizona tax lien sales and HOAs is appreciated. In 30 years, this is the first time anything like this has happened--so it's all new for us.

-H

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Someone from Arizona maybe able to answer this for clarity of that state laws. However, I've read from other posters that in the State of Arizona that liens are "automatic" against owners who owe HOA dues/assessments. Thus why your HOA is considered and "Interested party".

That being said, your HOA probably won't get the back dues owed due to priority. Even if the HOA had foreclosed on this property the bank would been paid first and foremost. (Unless in a state that allows for a super-lien. Which just puts HOA and bank on even footing). IF this had been a bank foreclosure and the HOA has a lien, the bank still gets paid first. Any leftover money may go to the HOA but most likely there is no extra money. Now in this situation this is a TAX lien. Which is the government foreclosing to pay off the back tax bill. Which pretty much trumps them all. It usually happens where the bank or HOA has foreclosed but still no one paid the back taxes.

Now that process the similar to a car's title has to be "clean". So they may make a new title for that property in order for it to sell cleanly without prior record of non-payment/tax liens/foreclosure/back dues. Cause once the property has gone that far it's got a clean slate.

As for the HOA restrictions. They aren't going to change. HOA restrictions are public record and recorded. The Title doesn't include HOA information. It's just that you have to follow any filed restrictions there is to the property. It doesn't become "HOA free" when a title clears. If that was the case, many people would be not paying their tax bills to get a clean slate.

Former HOA President

HughD (Arizona)
Posts: 10

Posted:

Thanks for the insight.

This is a tax lien sale in Arizona. Tax lien sales are very different from other type foreclosures in Arizona. It's 100-percent black-letter law that all existing liens even an IRS lien are extinguished in a tax sale. In this case, the HOA has little reason to be concerned about past assessment arrears. There are many references online that indeed the HOA would forfeit any assessment arrears if the sale goes through, but that doesn't apply in our case since any arrears are under the threshold for legal action in Arizona ($1200).

Since the property in question here at our HOA isn't significantly in arrears on our assessments, the HOA/Board has no reason or ability to do anything. According research and the GM-friend at a large Arizona HOA, the HOA could pay the tax lien (if it wanted), but that does not give the HOA the property. It only means the property owner owes the money to the HOA. The first-hand advice I've received says "don't pay the back taxes."

My question is specifically about the CC&R restrictions moving forward. If the tax sale goes through, the existing title--including its 1978 legal description--is destroyed. A new legal restriction is issued in 2017. Normally in a sale or foreclosure, the existing title is preserved and just passes to the new owner. Not so in a tax lien sale. Since the brand new title is seen legally as free and clear of all liens (and potentially other restrictions), it may not be automatic that the brand new title (created in 2017) has restrictions--bound by the CC&Rs.

Here's an interesting link: http://www.jk9.com/foreclosure_sale.htm

Apparently some states do automatically extend the CC&Rs and others do not. According to everything I've read, Arizona has not fully decided this question. So, it's entirely possible a new owner could protest the restrictions and fees. We don't want to be a test case.

At the very least, the CC&Rs would have to be amended to include the new property description when/if created. To be clear, legally the "old" property is destroyed and a "new" property is created through the tax lien process....crazy and confusing.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Hugh,

This is something, as you know, you will need to bring to an attorney versed in property law.

However, this forum does have some good individuals from AZ. Give it a few days and see if they respond.

Tim

JanetB2 (Colorado)
Posts: 4,219

Posted:

I found this website: http://www.shawlines.com/documents/2014-Summary-of-HOA-Law.pdf

Page 19 starts talking about liens and which notes:

"The association has a lien on a unit for any assessment levied against that unit from the time the assessment becomes due. ..."

"An association’s lien arises automatically and is deemed “recorded” as of the recording date of the CC&Rs. However, recording a “Notice of Claim of Lien” when a delinquency arises does not adversely affect the automatic lien and does provide some additional benefits. For instance, recording a “Notice of Claim of Lien” provides notice to title companies insuring transfers of title. Additionally, a recorded ensures that any payoff requests will be supplied to the proper address."

Lien Priority
In Arizona, an association’s lien is second in priority to the following liens:
1. Liens and encumbrances recorded prior to the recordation date of the CC&Rs;
2. Recorded first mortgages or contracts for sale;
3. Liens for real estate taxes and other governmental assessments
directly related to the property; and
4. Property taxes.

Because you have a stake in the property then you should receive notice. Check with your attorney to see if you need to submit documentation regarding HOA assessments due so if property is sold for more ... potentially the HOA can get their money.

The CCR's I would contend would not be affected. I personally am not aware of any state which would disolve CCR's attached to a property via tax lien sales. The tax lien sale work somewhat similar (yet different in its own way) to a mortgage foreclosure. Generally someone pays the taxes and the owner has X amount of time to recoup via payment and interest. If they do not pay then the property can be obtained and transferred to the individual who purchased via the tax lien.

It would not make sense for CCR's to be eliminated. The HOA is set up whereby all properties noted on the Final Plats are subject to the CCR's and costs associated for all the common area properties; therefore, a tax lien cannot in essence eliminate or refile the Final Plat which is part of the CCR's. To eliminate properties from the HOA via tax liens could cause a lot of chaos.

HughD (Arizona)
Posts: 10

Posted:

Janet,

Thank you for helping. Unfortunately that's old info.

Things changed again in Arizona. In the exact situation I'm describing, every lien holder except the tax lien is extinguished. That's the new law in Arizona. Why the legislature did this, IDK.

Specifically, check out https://www.azleg.gov/arsDetail/?title=42

As stated in previous replies, we're not interested in the arrears. Our concern with this new law is what it means for CC&Rs moving forward.

The reason the HOA is also a defendant in because the law gives current lien holds a "right to redeem."

According to the law: " After entering judgment the parties whose rights to redeem the tax lien are thereby foreclosed have no further legal or equitable right, title or interest in the property subject to the right of appeal and stay of execution as in other civil actions."
(ARS 42-18204. Judgment foreclosing right to redeem; effect)

3. According to the same law: "The foreclosure of the right to redeem does not extinguish any easement on or appurtenant to the property."
(ARS 42-18204. Judgment foreclosing right to redeem; effect)

Item 3 excludes easement...which is kinda good...but it specifically does not exclude covenants.

4. Jumping over to Arizona's planned community law: "Planned community" means a real estate development that includes real estate owned and operated by or real estate on which an easement to maintain roadways or a covenant to maintain roadways is held by a nonprofit corporation or unincorporated association of owners, that is created for the purpose of managing, maintaining or improving the property and in which the owners of separately owned lots, parcels or units are mandatory members and are required to pay assessments to the association for these purposes. Planned community does not include a timeshare plan or a timeshare association that is governed by chapter 20 of this title or a condominium that is governed by chapter 9 of this title.
(ARS 33-1802. Definitions)

Item 4 defines a planned community as having either easements and/or covenants. Since Item 3 specifically excludes easements but does not exclude covenants, IDK.

The Interweb folks are arguing both ways, and it doesn't look like there are many/any test cases in Arizona since this is all new.

The long and short of it--this process may adversely affect our ability to collect dues down the road. Probably it doesn't affect it.....but it's enough of a question for me to wonder.

Either way, this is bad news for HOAs.

HughD (Arizona)
Posts: 10

Posted:

Some more FYI: This is the first year where all this comes into play since these changes to the tax code went into effect. Waiting to hear fully from our rent-a-lawyer, but the initial information I received is that none of this has been tested in court as it relates to CC&Rs.

In our case, we supply roads and we supply water. Two obvious cases of easements. As for enforcement of things link paint color and landscaping, it's a huge question since those things aren't easements. Another concern is what this means for our assessment rate. Will we need to create tiered assessments with one rate for just easements and another rate for easements and amenities? That would be crazy. And what about use of amenities? I'm not going to exclude use of the pool to one house because they're no longer "part" of our HOA.

Clearly the legislature did not consider this law's impact on HOAs. Or maybe they did?!?! Arizona has taken an anti-HOA turn lately.

In any event, the only option now is to pay the tax lien ourselves as allowed and defined by law. That would maintain the status quo. We can't afford it--and probably wouldn't even if we could. The feeling of the board is that it isn't our tax bill.

If I get any more info, I'll share. At this point, looks like it's a wait and see game. Of course, the new owners could just voluntarily bind the property similar to the way it was done back in 1978. But given the option, who would want to do that?!? HOAs have a bad rap--time to tune up our sales pitch. :-)

🎯 You've read this entire discussion

Join the conversation with 50,000 HOA & Condo Leaders:

✓ Ask follow-up questions
✓ Share your experience
✓ Get expert advice
✓ Access 350,000 discussions

Create Free Account →

⚡ Takes 30 seconds

Already a member? Log in here