Las Vegas Real Estate Lawyers Await Decision in HOA Super-Priority Lien Cases

If you are a real estate investor in Las Vegas, and unless you have been living under a rock for the last two years, you have heard about HOA Super-Priority Liens.  The implications and ramifications of the super-priority lien to real estate investors in Las Vegas are significant in light of the fact that super-priority liens, when foreclosed, remove all junior liens; including first deeds of trust. 

Before the Las Vegas Real Estate market collapsed, HOA liens and foreclosures on HOAs liens rarely occurred.  However, after the downturn in real estate prices, many Nevadans found themselves severely underwater and as a result, stopped paying the payments on their home loans.  Following suit with stopping payments to the lenders, owners then stopped paying the HOAs the monthly dues.  This placed a substantial burden on HOAs, and with lenders slowing foreclosure efforts, and in some cases stopping foreclosures all together, HOAs were left little choice but to begin foreclosing on their HOA liens.  In many instances, auctions were held and the liens were satisfied by real estate investors; with many paying substantially less than what the property would sell for at a similar foreclosure sale by a typical lender. 

HOA foreclosures are conducted in accordance with Chapter 116 of the Nevada Revised Statutes.  Nevada enacted NRS Chapter 116 in 1991 to codify the Uniform Common-Interest Ownership Act in Nevada; which sets forth a statutory framework for common interest communities such as HOAs.  Essentially, the acts states when the owner of a home in a community governed by Covenants Conditions & Restrictions (commonly referred to as CC&Rs) and a Homeowners Association fails to pay the monthly dues to the HOA, the statutory scheme grants the HOA a lien against the property for any construction penalties, assessment levied against unit or any fines imposed against the unit’s owner.  If the lien is not satisfied, the HOA may foreclose on the lien and sell the property at auction. 

In addition to allowing the HOA to foreclose on its lien, the Common Interest Ownership Act creates a “super-priority” lien, the foreclosure of which extinguishes all subsequent interests; including a first deed of trust.  Pursuant to NRS 116.3116(2), the HOA lien is prior to all other liens on the property except:

(a) Liens and encumbrances recorded before the recordation of the declaration and, in a cooperative, liens and encumbrances which the association creates, assumes or takes subject to;

(b) A first security interest on the unit recorded before the date on which the assessment sought to be enforced became delinquent . . . ; and

(c) Liens for real estate taxes and other governmental assessments or charges against the unit or cooperative.

While it appears Section 116.3116(2)(b) makes a first deed of trust superior to an HOA lien, the last paragraph of Section 116.3116(2) gives what the is referred to as “super priority” status to a portion of the HOA’s lien which is superior to the first deed of trust:

The lien is also prior to all security interests described in paragraph (b) to the extent of any charges incurred by the association on a unit pursuant to NRS 116.310312 and to the extent of the assessments for common expenses based on the periodic budget adopted by the association pursuant to NRS 116.3115 which would have become due in the absence of acceleration during the 9 months immediately preceding institution of an action to enforce the lien, unless federal regulations adopted by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association require a shorter period of priority for the lien. . . . This subsection does not affect the priority of mechanics’ or materialmens’ liens, or the priority of liens for other assessments made by the association.

Therefore, Nevada law states that the super-priority portion of the HOA’s lien is prior to the first deed of trust. The rest of the HOA’s lien, consisting of any charges not contained within the super priority lien, including any assessments unpaid for more than nine months, is junior to the first deed of trust under § 116.3116(2)(b).Well settled foreclosure principals dictate the foreclosure of a superior interest in real property extinguishes all junior interests.  Therefore, upon the foreclosure of the prior in time HOA lien, NRS 116.3116 provides that the security interest held by a lender is extinguished. 

After the HOA foreclosure occurs, typically lenders will then attempt to foreclose on the previously extinguished mortgage (Nevada actually uses deeds of trust rather than mortgages).  This has resulted in a wave of litigation in Nevada Courts. 

Lenders have attempted to revive their extinguished interests by opposing the statutory language with a myriad of creative, but unavailing arguments.  One of the most common arguments by lenders is that for years, whenever a lender foreclosed, it would pay off the HOA’s super-priority lien.  The lenders equate this to standard in the industry and therefore the HOA super-priority lien gives the HOA priority in payment only, and foreclosure on the HOA super priority lien does not extinguish a lender’s security interest based on the first deed of trust. 

Lenders have also argued that if they lose their ability to foreclose, banks will stop lending in Nevada.  Despite the extortionist overtones in such an argument, lending in Nevada will not dry-up.  If anything, banks will become more vigilant, responsive and take better care of their investments; which will benefit Nevada. 

Without the threat of losing its security, a lender is free to sit on its foreclosure rights as long as it wants.  The industry-wide, wanton disregard for protecting security interests by refusing to foreclose, in many instances for years, is exactly what caused the current crisis.  With the threat of losing of its security, banks will be more willing to timely foreclose, resulting in the property being placed in the hands of a new owner, or the foreclosing bank, who will then make the payments to the HOA.  In all of these situations, lending in Nevada will not diminish and Nevada will be better served since HOAs will have the funds needed to survive and offer the services to community members which was the very purpose of having HOAs in Nevada. 

Currently, there are over 100 cases before the Nevada Supreme Court which involve HOA liens and the super-priority lien issue.  On May 9, 2014, the Nevada Supreme Court heard arguments on the first two of these cases and a decision from the Court is anticipated within the coming months.  Since the issue is still to be determined, time will tell whether the extinguishment theory will be upheld by the Court, and whether the investors have made a good, no great, investment in the Las Vegas Real Estate market.