Pursuant to A.R.S. Section 33-1256(B) / 33-1807(B), an HOA lien for assessments, late fees related to assessments and collection fees/attorney fees/costs incurred with respect to assessments has lien priority ahead of all other liens, interests and encumbrances on a lot/unit except: (1) liens and encumbrances recorded before the recordation of the declaration; (2) a recorded first mortgage/first deed of trust on the lot/unit; and (3) liens for real estate taxes and other governmental assessments or charges against the lot/unit.
The most common circumstances where lien priority becomes relevant are:
• Trustee’s Sale: If a first mortgage or first deed of trust notices a trustee’s sale on a lot/unit and the lot/unit is ultimately lost at trustee’s sale, the HOA lien is legally extinguished because the first mortgage or deed of trust has lien priority ahead of the HOA.
- If the lot/unit sells to a third party at the trustee’s sale and excess proceeds are generated, lien priority also becomes relevant, as the remaining lienholders with the highest priority have first claim to the excess proceeds. As such, if excess proceeds are generated, the HOA’s claim would be superior to all other claimants, with the exception of liens/encumbrances recorded before recordation of the declaration and liens for real estates taxes and other governmental assessments or charges against the lot/unit.
- If a second mortgage or deed of trust notices a trustee’s sale on a lot/unit and the lot/unit is ultimately lost at trustee’s sale, the HOA lien would survive the trustee’s sale (i.e. it would not be extinguished) because the HOA has lien priority ahead of a second position mortgage or deed of trust.
• HOA Foreclosure: If the HOA decides to pursue a foreclosure lawsuit, lien priority becomes relevant for two reasons – first, any lienholders who hold inferior positions should be named defendants in the lawsuit so that the HOA can assert its lien priority and extinguish their rights; and second, any lienholders who hold superior positions will survive the foreclosure and could potentially impact the likelihood of the HOA successfully recording its judgment balance pursuant to a sheriff’s sale.
Two potential areas of contention are (a) in the context of a master and sub-association, if both associations have lien further analysis is required to determine which lien is superior, or, if the liens are potentially equal in priority; and (b) in the context of “other governmental assessments or charges against the lot/unit” disputes can arise regarding exactly what type of governing charges are superior / inferior.
• Short Sale: If a lot/unit is being sold pursuant to a short sale, it typically involves some or all lienholders negotiating their debt (i.e. accepting less than the full balance). The higher the HOA is in lien priority relative to the other lienholders, the more leverage the HOA has in negotiations and the higher likelihood of collecting the full balance owed.
• Property Tax Lien Foreclosure: If a tax lien certificate for property taxes is purchased and foreclosed upon by the purchaser after the expiration of the 3-year statutory redemption period, the tax lien is superior to the HOA lien, and therefore, the HOA will not have a valid basis to dispute lien priority.
If an issue arises in your HOA where lien priority is in doubt, or if you have any further questions regarding lien priority, please contact Mulcahy Law Firm, P.C.